Is Open Banking Better Banking?
What does the UK’s Open Banking initiative really mean for financial organisations and their customers?
The nine largest banks in the UK – including Barclays, Lloyds, Santander and HSBC – have to comply with a new set of Open Banking regulations set out by the Competition and Markets Authority (CMA). Open Banking refers to the opening up of consumer data via Application Programming Interfaces (APIs). Once a customer has agreed to share their information, it can be accessed by third party providers. In the financial world, it is used to offer targeted, quality services based on individual needs. The CMA’s decision to make this a business requirement reflects the ongoing transition of traditional banking, and the active steps that governments are taking to support it. This is good news for startups and FinTechs, but how will it impact the existing infrastructures of traditional banks?
How will open banking disrupt finance?
The Open Banking initiative is certainly geared towards a higher standard of banking. The new rules were enacted to support the digitalisation of finance, encourage competition between businesses, and diversify the services available to consumers. They are also expected to save current account users an average of £92 a year.
While Open Banking is expected to enhance the UK banking scene, there are a number of potential problems to consider. One concern is that technological laggards will be left behind as companies focus on new strategies that are only relevant to the digitally savvy.
Another is an increase in security risks – if more services are digitalised, then there is greater chance of digital infiltration. Security concerns are almost unavoidable, but digitally illiterate customers won’t necessarily be pushed aside by the financial shake up. Bricks and mortar advisors and staff members will still be able to apply the tools enabled by open APIs when advising clients. Even so, conforming to changing regulations is proving easier said than done. Five of the nine major banks have already found that they need more time to comply, and expect to do so by March.
The wider impact of Open Banking
Prior to Open Banking, startups had to ask for an individual’s banking password and username, and then use unsophisticated screen scraping techniques to harvest banking data. With APIs, these startups won’t have to negotiate with banks, therefore enjoying greater freedom and utility. Having to comply with Open Banking standards will make all financial companies – and not just big banks – think differently about data. Although the requirements have been initially placed on the nine biggest banks, less prominent businesses should be prepared to deal with similar laws in future.
Regardless of their size, financial companies will no longer be one stop shops. Instead of confining customers to one provider, shared personal information is aimed at giving a wider choice of relevant and personalised services. It is also likely to streamline financial processes, for instance applying for a loan. Applicants wouldn’t have to manually submit statements as they would be readily available, allowing the company to make an instantaneous decision. And, if all financial organisations can use this personal information, incumbents will have to work even harder to improve customer retention. This will increase healthy competition to the benefit of consumers.
Currently, Open Banking rules are only in effect in the UK and for a handful of providers. However, government recognition of the transformation of banking could signal the beginning of an international movement. This is supported by general, EU wide efforts to open up consumer data. The next task will be convincing consumers to agree to share their data. As the value of data becomes more apparent, this could become a difficult task.
Government initiatives are bringing yet more disruption to the tumultuous financial sector, but this is clearly positive from a consumer perspective. For businesses, Open Banking is a double edged sword – yes, it will mean parting with jealously guarded data, but it could also be the catalyst for a revolution that helps shake up the image of traditional banks. It could even be argued that traditional banks, after navigating so much disruption, will no longer exist. Whether or not this is true, the UK’s push for Open Banking could set the ball rolling for global industrial change.
Is Open Banking a blessing or a curse for incumbent banks? Will digital financial services leave digitally illiterate customers by the wayside? What particular financial services could benefit from open APIs, and how? Comment with your opinions.