After a two-year investigation into retail and SME banking, this week the Competition and Markets Authority (CMA) mandated the adoption of Open Banking by early 2018.
Open Banking will be underpinned by secure authorised data gateways called application programming interfaces (APIs), the pipes of modern software technology. Just as our Android or Apple smartphones opened up an ecosystem of useful third-party apps, Open Banking will open an ecosystem of useful new financial services apps that connect to our live bank account data.
This impending financial services revolution has been compared to the Cambrian Explosion, an era half a billion years ago when high oxygen levels led to an unprecedented boom in life on earth. Just as the availability of oxygen led to an explosion of new life forms, rich data from Open Banking APIs will add rocket fuel to innovative fintech firms like alternative finance providers.
For example, some alternative lenders will use read-only access to Open Banking data to make better credit decisions. Ironically, high street banks often have more automated lending approaches than their online peer-to-peer rivals, because traditional banks sit on a treasure-trove of valuable account data. With Open Banking, expect to see peer-to-peer lenders finally compete on equal terms against the dominant banks. Equally, equity crowdfunders may use the same technology to drive better due diligence and transparency.
Some alternative lenders may go further and utilise read-write access to Open Banking data, giving them the ability not just to view bank account payments, but also to initiate them. Imagine a world where an SME can raise an invoice on their mobile phone then immediately finance it at the touch of a button, rather than waiting weeks to get paid. Indeed, in an Open Banking world, SMEs won’t even need to have both online banking and online accounting software – a veritable Battle Royale now beckons for control of business banking.
For banks, the worst case scenario of Open Banking is to become the expensive “dumb pipes” on which other people build great companies. After all, it was telecoms companies that built the hugely expensive infrastructure on which Google built its $500bn market cap business. In the best case scenario, banks will open up huge new revenues from alternative lenders, financing their underserved customers, just as smartphones created fat new revenue shares for Apple and Google from third-party app developers.
The losing banks will be those dragged kicking and screaming into Open Banking by regulators, losing control over strategy. Indeed, some banks employ extraordinary mental gymnastics, on the one hand arguing that Open Banking is impractical, while at the same time already offering the same API technologies elsewhere (such as to preferred accounting software partners). The CMA is rightfully taking a tough line on them.
The next area where disingenuous banks will try to undermine Open Banking is on who gains access to the APIs. Alternative lenders will balk at the cost of meeting arbitrary IT standards, often set by bank middle managers whose technical skills are years out of date. There is an elegant answer here, as the UK government has made great strides in improving SME access to public contracts through consistent and modern procurement standards. One initiative is a Digital Marketplace for authorised government suppliers, another an information security standard called Cyber Essentials Plus.
Last but not least, Open Banking will also support the UK’s post-Brexit leadership in fintech, as similar initiatives arising from the EU’s Revised Directive on Payment Services (PSD2) should lag some way behind. If traditional lenders really are dinosaurs lumbering into inevitable extinction, let’s at least make the UK a fertile environment for the exciting new alt fi creatures that will replace them.