Levelling the playing field
Open Banking rules come into force this month with the potential to overhaul banking as we know it. Peer2Peer Finance News investigates what the changes mean for peer-to-peer lenders
IT MAY not yet be well known in the wider world of the consumer and small businesses, but for those in the financial services and fintech communities, Open Banking is one of the hottest of hot topics. With big customer-facing regulatory changes coming into force this month, it’s no wonder, as there really isn’t much time left to get to grips with the idea before it becomes reality.
But what exactly is there to get to grips with: what is Open Banking? How will it work and what impact is it likely to have on banks, peer-to-peer platforms and other lenders? Is it just another government competition wheeze that will end up in the long grass like so many others before it?
Or is it really going to be a step change, the doorway to a bank-anywhere world offering a choice of high-tech services and speed of execution that today’s put-upon bank customers can only dream of?
As is so often the case, the answers you get to these questions depend very much on who you talk to. Nick Harding, co-founder and chief executive of the UKs third-largest consumer P2P platform Lending Works (profiled in our January issue), is an unabashed enthusiast.
“We love Open Banking,” he asserts. “It has the potential to totally level the playing field between all participants in the market. We think we will be ahead of the curve in terms of adoption – I’m not saying that we will be the best but we will be better than the vast majority.”
Lending Works is in the process, he admits, of signing up a tech partner to help deliver its Open Banking ambitions. What is it about the potential that is getting him so excited?
“We think we will get to 90 per cent automation of the borrower acquisition process within the next 24 months,” he says. “We’re currently at around 50 per cent to 60 per cent.”
That will transform the customer experience that Lending Works can offer, he says, giving it an even bigger advantage over traditional high street loan providers and helping the business realise its ambitious 100 per cent annual growth targets. “If you can say to a customer, ‘you’re approved for that loan, the money will be with you in one minute’, that’s a heck of a lot better than ‘wait 24 hours and someone will give you call’,” he adds.
Driven by a series of regulatory changes set in train by the Competition and Markets Authority in the UK and the wider EU authorities, Open Banking is intended to encourage competition in the financial services sector through improved data sharing.
At its heart, as the name suggests, is the principle of openness (not a quality that banks are currently renowned for). It will allow approved third parties – including fintechs and alternative lenders – to have secure access to consumers’ bank account transaction details, surely the gold standard of data in an increasingly data-driven economy.
“Open Banking allows you to connect your bank account directly to fintechs,” says Jeremy Light, head of payment services at Accenture.
“It will completely transform banking in five to 10 years.
“Historically banking has been about bringing customers into the banking environment – the branch or the bank’s own website. Open Banking is about going outside that environment so that you can bank however and wherever you want.”
It’s a change, he says, that mirrors the trend for openness that has already taken root in many other sectors, thanks largely to the increasing use of APIs to sell products on platforms other than the provider’s own. “Take Expedia for example,” he states. “You can buy a BA flight without ever having to go to the BA website itself. Or PayPal – you don’t log onto PayPal to go shopping, you go to Amazon or wherever. PayPal is just there when you need to pay – and it’s a hugely successful business.”
Banks and financial services businesses are late to the party, he adds, partly because of the regulatory environment and partly because of significant customer concerns over security.
A recent survey by Accenture found that 69 per cent of a sample of 2,000 UK consumers would not trust third parties with their bank account information – although Generation Z’ers (those born after 1996) were almost three times as likely to adopt Open Banking payment methods than Baby Boomers (33 per cent compared to 13 per cent). This is despite all data being shared on an anonymous basis, once the account holder has given permission.
Those figures suggest that persuading punters to take part in the Open Banking revolution might be an uphill struggle, but the lessons from the past are that such scepticism can be fairly readily overcome if the new products and services that arise are sufficiently compelling. No-one now gives much thought to using their credit cards to buy products or services online, but back in the early days of e-commerce there were plenty of dire warnings that the practice was too risky to ever catch on.
The largest P2P players are giving Open Banking a generally warm welcome. Zopa’s chief product officer Andrew Lawson told the audience at LendIt Europe back in October that “Open Banking is a really exciting opportunity for 2018”, citing potential improvements in customer validation, fraud checking and loan pricing as some of the main benefits.
(Since the time of writing, it has emerged that Zopa is planning to build its own Open Banking infrastructure and is currently advertising for a technology-focused product manager to lead the initiative.)
Meanwhile, a Funding Circle spokesperson tells Peer2Peer Finance News that having vision of borrowers’ bank transaction data would help the company refine its marketing strategies, obviate the need for borrowers to manually submit bank statements for approval and spot potential delinquencies more quickly.
And Ratesetter’s co-founder and chief operating officer Peter Behrens says: “Open Banking can unlock how financial products are distributed. It could lead to a big change in the next three years.”
It will also encourage investment and activity from those beyond the financial services and fintech sectors – with open data sharing there is little to stop the likes of Amazon and Facebook getting in on the lending act should they wish to.
But the P2P sector is a broad church and not everyone in it is singing from the same hymn book when it comes to Open Banking. For platforms with smaller customer bases, larger individual loan values and fewer processes that are amenable to automation, the upside is less obvious.
“Our model relies on human service and I don’t want to dilute or outsource that,” says Giles Cross, chief executive at Folk2Folk, a West Country-headquartered lender specialising in loans to local businesses secured against property. As well as an online platform, it has bricks and mortar offices for those who prefer a face-to-face experience.
And while he concedes that it has the potential to improve credit checking and simplify payments, for the time being it is not high on his ‘to do’ list. “Has the customer asked for it? Will Open Banking help me create a best-loved brand in UK finance? I don’t think so. It’s not a focus for me until customers start to ask for it.”
While there are plenty of opportunities presented by Open Banking, what about the threats? On the face of it the high street banks face the largest risk, as third parties could use the data to improve their offering and attract the banks’ customers.
That ultimately leads to the prospect of established banks becoming infrastructure businesses, the financial equivalent of broadband services, maintaining back end access to common systems which facilitate products and services offered by other providers.
“Look at what happened to the telcos when they were deregulated. They are now utilities, they provide the infrastructure and security layer,” says Caroline Plumb, a successful London-based entrepreneur whose current business, Fluidly, is a fintech start-up aiming to use Open Banking data to offer intelligent cashflow management services to small- and medium-sized enterprises.
To counter this risk, banks have innovation teams whose task it is to identify promising fintech providers and partner with them, she says, HSBC-owned retail bank First Direct’s partnership with Bud being a good example. This involves 2,000 customers trialling a new app that enables them to link accounts from all their different banks, as well as offering money management tips.
The big question will be how far and how fast these products become mainstream, says Plumb.
“Banks are quite risk averse and slow,” she asserts. “Their innovation teams are good at delivering the proof of concept, the challenge is getting those proofs of concept into the wider business. How many are really scaling?”
But some industry- watchers think that this time, the banks are on to it, too. “I have a sense that the banks have embraced Open Banking, it’s an idea whose time has come and they are ready for it,” says Tom Bull, director at accountancy firm EY.
“Fintechs are innovative and quick, but they can struggle to get to a customer base. Banks already have the customers and the trusted brands, so partnerships will be enabled.
“Remember that it was the competition regulator that implemented this remedy, and banks have become very good at responding to changes in regulation.”
So at the very least, Open Banking ought to result in faster, better processes for P2P platforms and borrowers, and consequently more consistent returns for investors.
Will it go further, and usher in the fintech revolution that its supporters promise? That depends not only on persuading bank customers that it’s safe to allow access to their transaction records, but also that the products and services on offer from third parties are good enough to make it worth taking the risk.
What is Open Banking?
Open Banking is an initiative led in the UK by the Competition and Markets Authority (CMA), born out of the same desire to increase diversity and competition in the UK banking sector that has led to the rise of challenger banks and P2P lenders.
It mirrors an EU-wide initiative driven by the second payments services directive, PSD2, whose staged rulings are already underway. The new laws will compel all EU banks to grant access to account transaction data to external providers such as fintechs and alternative lenders. Data will only be shared with approved third parties, and only subject to explicit permission from individual account holders.
Access to bank transaction data should allow those third parties to improve the quality of their lending decisions and processes, as well as – in theory at least – permitting a wide range of new products and services to emerge, and make them easier to access for consumers.
The vision is that banking will become a more modular and mobile affair, with the bank providing the account infrastructure to which customers can ‘bolt on’ services from a range of third-party providers.
The CMA’s delivery body – the snappily titled Open Banking Implementation Entity – provides the technical standards for the APIs that will be used to deliver Open Banking data sharing. Some data – such as cashpoint locations – has already been released. The next major milestone comes on 13 January 2018, when the UK’s nine major banks must open up their APIs to permit access to transaction data and alerts when an account is about to go overdrawn, for example.
The impact of similar APIs in other industries has been dramatic – Uber would not exist if it weren’t for the Google Maps API, nor would CityMapper without APIs from city transport authorities like TfL. So Open Banking has the potential to be the biggest shake-up in retail banking for a generation.
But as adoption is dependent on individual account holders granting access rights to specific third parties, it is likely to be held up by lack of awareness amongst bank customers as well as security concerns over sharing such sensitive data.
This article featured in the January edition of Peer2Peer Finance News, now available to read online.