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By Dennis Collet, Business Consultant at BJSS
Britain's decision to implement Open Banking with a single API standard is seen to be a key enabler in lowering the barriers to entry and to also provide a wide-range of financial products. Before debating the impact of Open Banking on the financial services sector, it is important to understand the background, key organisations, scope and intended purpose.
Open Banking has been labelled the single biggest change within the industry for decades, and even the end of banking as we know it. So what is Open Banking exactly? Open Banking isn’t about opening branches on a Sunday. Instead, it is a secure technology that allows consumers to share their transaction data with a third party, and allowing a third party to initiate payments from their account.
Evolution of Open BankinG
In 2016, the Competition and Markets Authority (CMA) conducted a review of the UK Retail Banking market. Concluding that the incumbents operated with an unfair competitive advantage. the Authority proposed a set of rules and directives - including Open Banking – which aimed to increase competition, foster greater innovation and benefit consumers.
In the UK, the Open Banking Implementation Entity (OBIE) is tasked to deliver Open Banking. This organisation is mandated by Government and is funded by the Country’s nine largest banks.
Open Banking is being implemented – in some form - around the world, albeit with different narratives, objectives and standards. In Europe, banks must adhere to the revised Payment Services Directive - Europe’s equivalent to Britain’s Open Banking. Also, whilst a regulatory requirement in the UK and in Europe, the US authorities have chosen to not regulate Open Banking through legislation, but have adopted a commercial-based approach instead.
The UK is seen as a world leader in Open Banking. The country’s decision to implement Open Banking with a single API standard is seen to be a key enabler in lowering the barriers to entry and to also provide a wide-range of financial products. By integrating a single API, FinTech's enjoy ready access to 90% of the market.
In Europe, PSD2 has been linked to GDPR. and it does not mandate the use of a standardised API. This means thousands of banks and FinTech's with thousands of different APIs are now retrospectively trying to find, adopt and establish a common standard.
Open Banking initially focused on the Retail Banking sector and includes Current Accounts, Credit Cards, E-wallets. I believe we have only scratched the surface as a result of including only these parts of the financial services and payments eco-system.
Open Banking is not a product. It is an enabler, a platform, very much like the internet. Consumers do not need to know about Open Banking – this is an industry regulation. But they – and the industry – will benefit from the pace of innovation, new products and services that will be provided.
What does that mean for the Consumer?
From a consumer perspective the key change is that for the first time the banks do not own their financial data. The consumer owns their data and can utilise it to get better and highly-tailored products and services. Open Banking enables hyper-personalised products and services offered to the individual consumer based on their transactional data.
But where are those innovative and game changing products and services? I believe we have only scratched the surface of what’s possible and are still in a stage where convenient services have been introduced.
But the true game changers and “killer apps” are yet to emerge. It’s really a matter of time.