Open Banking: How can customer centricity drive innovation?

Tom Woolf
The current financial system relies heavily on old-school credit scoring.

Firstly, let’s set the scene here. What is ‘Open Banking’?

The Payments Services Directive (PSD2) is a major piece of UK/EU legislation that will ensure that all payment service providers (PSPs) that operate in the single market are subject to rigorous supervision and adhere to the appropriate transformative rules to create a fair, open-banking framework.

The current way that the financial system traditionally works is heavily reliant on old-school credit scoring. This is a model which is typically skewed in favour of the 'haves' rather than the 'have nots'. Homeowners versus renters. Employed versus self-employed. Domestic versus migrant workers. The system to date has left a growing proportion of potential customers behind; forcing them to use payday style products or miss out altogether.

The UK Government together with the European Banking Authority, Payment Service Providers, the Financial Conduct Authority and UK Finance have led the charge in making the PSD2 a reality, particularly as the deadline to comply in January 2018 fast approaches. These entities, alongside the new PSD2, reinforce the UK’s position as the leading global financial services innovator; ensuring the regulatory framework and technology is robust, efficient safe and works for the benefit of customers, not just corporations.

What does open banking mean for customers?

Customers will finally have the ability to control who else (other than their bank) can see their financial information. They will be able to make payments without directly interacting with their bank, banking fees for credit/debit cards will be banned, fraud will be significantly reduced and the barriers to accessing financial services will be reduced dramatically.

In practical terms, a customer will be able sign up for a loan, credit card or a mortgage by using a log-in that looks and feels a little bit like Facebook Connect and authorises the provider to see all of the customer's financial transactions from the previous 36 months. The main gatekeepers and one of the leading innovators in this space are London-based FinTech company TrueLayer. As the go-between between a customer, their bank and the product or service provider, they ensure real-time, secure connectivity of the customer's data.

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The easiest way to think of this process in how it ‘was’ and how it ‘might be’ is to compare it to applying for a job. Normally, an individual applies for a role, sends across a CV and is then subject to all the usual background, race, religion, gender, geographical proximity and network biases. This means that the majority of job applicants do not even manage to get their foot in the door.

However, if a potential employer could securely see the last 36 months of a candidate's working history to see how they really performed, what results they actually achieved, how they went above the call of duty, how diligently they completed their tasks, how efficient they were at catching up after a period of sick-leave, the employer will be better informed as to how a candidate might perform in the workplace, rather than which school they went to or what company they worked at previously.

The same is relevant for financial institutions in making (and pricing) lending decisions. If you swap someone’s real working history in the example above for their real banking history you get a far more accurate picture of how a customer might perform in the future. The greater the clarity and quality of insight into a potential customer, the more accurately and competitively the provider can price their product or service.

Open Banking is providing the regulatory framework with more competition across the entire industry. The future of Open Banking is an incredibly positive one and we encourage all parties to embrace and embolden its mission. It will lead to a democratisation of access to financial services and more customers will be able to monetise and directly benefit from the power of their data.

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