The launch of "open banking" has been hailed as the biggest shake-up of the financial services sector in history, putting consumers in control of their finances, triggering the launch of personalised products, paving the way for increased competition, and opening up a raft of new opportunities for the data industry.
Driving the reforms is a piece of European legislation, the second payments service directive (PSD2), although UK authorities - including the Competition & Markets Authority, The Bank of England and the Financial Conduct Authority - have jumped firmly on board.
By January next year, Britain’s nine largest lenders must have developed application programme interfaces (APIs) that allow third parties to access their customers’ data (with permission). Customers will be able to control how their financial data is shared digitally and provide a deeper picture of the way they manage their money. Instead of doing all of their banking through one or two firms, customers could have their current account with one provider and then bolt on other financial services, like an insurance policy, ISA, mortgage and investments through other providers, all under the user interface of their choice.
At the heart of the issue are the huge swathes of transactional data which will be made available to third-party developers and data aggregators. With consumers' permission, they will be able to see exactly what customers have been buying and from whom and then develop personalised financial products for individuals.
On the surface, the traditional banks have the most to lose from the shake-up. The "big four" - Royal Bank of Scotland, Lloyds Banking Group, Barclays and HSBC - have dominated the UK market for years and generate £8 billion a year of revenues from personal current accounts and £2 billion a year from small business accounts. They still have 85% market share.
Digital challenger brands like Monzo and Atom could be well placed to thrive in this new open banking environment. Atom has said the company's intention is to provide basic banking products for its customers - like current accounts, mortgages and small business loans - and present them on an open platform.
Meanwhile, Monzo released its APIs to third parties in February. At the time, chief technology officer Jonas Huckestein said: “We’ll allow developers to build applications that can request access to other customers’ data on an individual basis. For example, in the future you could make an accounting app that connects to Monzo and customers could authorise you to access their account to extract their expenses.”
But challenger banks are only the tip of the iceberg, with predictions that everyone from Tesco, John Lewis and Marks & Spencer to Facebook, Amazon and Google will be looking for a slice of the action. Whether they will be able to do this on their own is another matter - most of the brands which already offer financial services do this through partnerships with established companies.
Last year, for instance, Amazon signed a deal with Capital One to launch a new feature for the Amazon Alexa virtual assistant called, “How much did I spend?” Using any Amazon Alexa-enabled device, Capital One customers can now summon Alexa for their recent spending history.
In the future, with Amazon moving into the grocery market, consumers could simply ask Alexa to check their bank balances and then do their weekly shop.
"We can't rely on the fact that bank accounts are 'sticky' and that customers tend to stay for life."
Yet traditional banks are certainly talking a good game. Marion King, director of payments at RBS, said: "More competition means more challenges and more risk that we are going to lose business. We have a lot to lose, but we also have a lot to gain. We can't rely on the fact that bank accounts are 'sticky' and that customers tend to stay for life, if not for a very long period of time. Over time that will change, inevitably, as new generations come through.
"So we have to be on our mettle in terms of customer service, being number one in customer service and adequacy is going to be more important than ever before and to make sure our brands remain significant in people's minds so they associate our bank and our brands with safety, security, simplicity, and certainty around everything they do in their financial management."
Not everyone is convinced, however, arguing that traditional banks, more renowned for their lumbering legacy systems than for their fleet of foot, will struggle to cope, and, initially at least, will do just enough to meet the regulations. Raoul van Engelshoven, VP for banking and financial markets in Europe at IBM, says the challenges should not be under-estimated and details a three-step approach. The first step being to ensure their IT infrastructure is “data-centric” by being able to efficiently organise vast amounts of structured and unstructured data.
He adds: "Second, they will need real-time analytics that can derive valuable insights from this data. After all, what use is data without insight? With advanced data analytics and, now, with machine learning tools available to augment this, data can be analysed at speed to drive better decision making and improved personalisation. Third, secure and open APIs will be needed to seamlessly integrated with and tap into a broader ecosystem of partners – whether that is developed in-house or with a third party.”
According to van Engelshoven, “with the introduction of open banking, businesses are seeing a win-win situation for banks and customers alike. It’s driving innovation for banks and encouraging the development of additional and improved services for customers. It is certain to drive competition and ensure banks remain relevant in an increasingly digital world. But, before banks can truly take advantage of this new model, they will first need to ensure that their operational data warehouses are in order.”
This is where Alessandro Hatami, founder of digital innovation specialists The Pacemakers, believes the data industry will come into its own. He explains: "As every bank will by-and-large have their own API, talking to all of them will be complicated. Some banks may decide to link up to the different banks APIs on their own, but most other will use intermediaries. There will be an abundance of data suddenly generated by theses APIs. This will not only need to be extracted, it will also need to be stored, analysed and kept safe."
Hatami forsees a proliferation of new business: API aggregators will act as hubs to provide one-stop-shops to entities wishing to link with all the banks’ APIs; data management providers will enable the creation of efficient and scalable data silos; and big data analysis providers that will tap into the already scarce data analytics talent pools to help companies make sense of the data.
There are still major challenges to widescale adoption, however, none more so than in changing consumer attitudes. Research from Equifax recently revealed that 90% of Brits have not heard of the open banking initiative, with 45% of respondents then going on to say that they are not likely to use open banking when it becomes available.
When asked about sharing personal data through open banking, 60% said they would not consent to this. Consumers’ concerns about data being shared included security (67%), and that third parties would be able to contact them (62%). Perhaps unsurprisingly, given their penchant for everything digital, 25-34 year olds are most accepting of the scheme, with 41% stating they are likely to use open banking (compared to 27% nationally). In this age group, 35% are also likely to consent to their personal data being shared (compared to 24% nationally).
When asked about sharing personal data through open banking, 60% said they would not consent to this.
Equifax UK banking and financial institutions director, Jake Ranson, said: “It’s concerning that such a high number of the population are unaware of Open Banking, something the industry needs to remedy for all parties to reap the full benefits. Not only will the initiative transform the customer banking experience by enabling consumers to compare and save on current accounts, it will also help them look for mortgages more easily and access better terms for loans.
“More needs to be done to educate customers of how they can personally gain from Open Banking. By working with customers to help them better understand how it works, banks can help their customers realise the advantages, especially when searching for the most suitable financial products for their individual needs.” No wonder then, that some are predicting it could at least a decade for open banking to hit the mainstream.
Another area of concern is data security. Hatami said: "Regulators will have to realise that data is now a new commodity that needs to be regulated and protected. The upcoming EU General Data Protection Regulation provides an initial framework for this from the data privacy perspective. More regulation will be necessary to protect data from a financial perspective."
He highlights that the big risk with APIs is that they create new entry points to the armies of hackers worldwide. Even though APIs are going to be overwhelmingly good for customers, their wide adoption can generate its fare share of cybersecurity issues, Hatami maintains. "With banks creating backdoor access to their data, it will be almost inevitable that some banks as well as some of the API aggregators will eventually be breached. The banks, the API services firms, technology providers and regulators will have to up their games considerably to address these risks."
Ultimately, though, who are likely to be the big winners in this brave new world? Rob Manning, group strategy director and US vice-president of Jacob Bailey Group, is in little doubt. He says: "Banks are doing this begrudgingly and are trying to work out how to do the bare minimum to comply. But, privately, at least, they don't believe Facebook, Google and Amazon will be willing to open up their books to the level of scrutiny needed to get access to the APIs. Meanwhile, the likes of Atom and Monzo do not have resources to invest in the technology.”
Said Manning: ”Fintechs and data companies will certainly come out well from the changes. Pressure will grow on banks to develop new products and services and they are unlikely to be able to do this internally. But they are the only ones which have the financial clout to acquire the businesses which will."
Banks already have the relationships, they already have the trust, but, if nothing else, they will have to embrace a new ethos of giving customers exactly what they want or face the prospect of being nothing more than a commodity.