After being proposed in 2016, open banking has arrived. But is the financial services shake-up exactly what startups need or is it too drastic?
Hearing the words ‘open’ and ‘banking’ side-by-side will sound like an oxymoron for many entrepreneurs. In their search for finance, just how many of them have had banks slam their doors rather than welcoming them with open arms? Luckily, this began to change with the rise of challenger banks designed to meet the needs of startups and consumers that large traditional institutions couldn’t or wouldn’t.
That has the potential for change with the introduction of open banking, which will ensure financial giants have nowhere to hide. Proposed by the Competition and Markets Authority (CMA) in 2016, open banking is a way of levelling the UK’s financial playing field. Just 4% of business customers change bank-account providers in a given year, so the idea is that banking behemoths won’t simply win customers because of their size and longevity.
As part of open banking, banks will be required to actively communicate with customers to explain any changes to services, quality of products and so on. Meanwhile, customers – businesses and consumers alike – can share their data with other banking-service providers, such as fintech startups, to get the best deals. This will give users the ability to weigh up financial needs against what’s on offer and make informed decisions about their accounts, whether that’s trusting the traditional or checking out challengers.
With the CMA in charge of open banking as it seeks to breathe new life into the financial-services market, the initiative is funded by Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS and Santander – the nine largest banks and building societies in the UK. With banks having started testing in January 2018, March brought about the ability for customers to harness open banking.
In a position to benefit is challenger Monese, the mobile-banking app. As VP of partnerships for Monese, Marcus Exall is prepared for the open banking opportunity but he’s also well aware that study is required before charging in full steam ahead. “It’s a good thing to be making banking easier to understand, cheaper and more transparent for customers,” he says. “But what we need to consider for the consumer is ‘what are the things that will be most useful?’ We don’t really understand that yet.”
While open banking is at the forefront of conversation for fintech enterprises, their customers have yet to acknowledge the banking breakthrough. Exall explained a grand total of “zero” enquiries have been made by Monese customers about what open banking means for them. He believes that it will remain industry terminology rather than something consumers use in conversation, with open banking itself being broken down into a series of smaller segments that customers will have more understanding of.
Supporting his comments, a Which? survey of 4,000 people in autumn last year showed an overwhelming 92% of the public said they hadn’t heard of open banking. Furthermore, 51% added they would be unlikely to share their data for the scheme – a figure that may well have spiked in the wake of the Facebook-Cambridge Analytica data breach.
“Open banking has mostly permeated businesses and the financial services industry from a discussion point and everyone’s watching but technical standards are yet to be fully formed,” Exall details. “We’ve got ideas and they’ll form part of our roadmap as we go forward but we’re taking a look at the possibilities right now rather than going hell for leather building products.”
While Monese is taking a considered approach to the industry shake-up, Jens Bader, co-founder of MuchBetter, the payments and fintech startup, is worried about the companies that won’t be as careful. In fact, he’s not sure open banking will be straightforward at all, despite the well-placed ambitions to advance financial services. “Open banking is a good concept with the right intention,” he says. “However, it’s highly complex as it involves opening up and, to a certain extent, changing a very traditional industry quite radically. With the complexity of the open banking concept and the many stakeholders involved, I expect a cycle of initial confusion and diverse interpretation of the rules and standards, early failures leading to data breaches.”
From a business standpoint, MuchBetter is in a similar position to Monese in that it’s working out the logistics of open banking and how the business will be impacted. That said, having traded for just a year, Bader is confident it will be able to get up to speed at pace – and he’s not sure banks will be in the same position.
“The major point for me here is that the banks are pressured to change and break out of their set ways,” he says. “This will lead to an inevitable change of the financial services industry. Opening sensitive data sources, whilst at the same time introducing GDPR, makes it somewhat difficult to fathom.”
While admitting there are undoubtedly hurdles to overcome, Naaman Tammuz, chief product officer at DueDil, the company information platform, thinks SMEs are purpose-built for open banking and have the chance to strike gold. He believes that a funding gap can be bridged, so that growth companies have all the possible outcomes displayed before them when looking to get into bed with the mainstream or alternative lenders.
“By incorporating open banking data, we can enable lenders to extract previously unavailable insights and an up-to-date, holistic overview of a company’s financial health,” says Tammuz. In his mind this will facilitate faster and more tailored lending appropriate for businesses specifically, rather than tarring everyone with the same brush.
“In comparison to major banks and more established financial institutions, startups have been working towards open banking for some time in order for it to complement, rather than disrupt, their business models,” he concludes. “It’s likely that the initiative will encourage banks to work more cooperatively with startups as they look to learn from best practice in an increasingly digital and customer-focused sector.”
As the saying goes, ‘no risk, no reward’. So while there are undoubtedly a number of risks surrounding open banking, we know where they have the potential to lead to.