Open banking in its simplest term means the opening up of access to bank account data and enabling innovative means of initiating payments, which have the potential to revolutionise how we interact with banks and financial services providers.
The Open Banking agenda is being driven by regulation: the revised Payment Services Directive (PSD2) and the UK’s Competition and Markets Authority’s retail banking review are both mandating the opening up use of bank data and the creation of common standards for the sharing of data.
It is accepted that open banking will stimulate innovation and increase competition, creating opportunities for banks, other existing financial service providers, and new businesses working to disrupt and transform the ways in which people and business engage with money.
For banks and other lenders, one key opportunity is the potential to make more accurate lending decisions. In response to the financial crisis, regulators have focused on reassessing capital requirements and ring-fencing investment activities from those of retail banking, but far less attention has been paid to the integrity of the lending decision-making process itself.
When banks lend to consumers and small businesses they need to take into account statements of income, spending habits and the credit scores they acquire from third parties. But rarely will this aggregation of information lead to a complete picture of a person or a business’s circumstances.
Any lender that has “real-time” access to every purchasing decision made by a potential customer will be far better equipped to price its decision to lend than one that relies on current practices. For the credit scoring sector, the opportunity is to improve the reliability and trust in their products or be disrupted by innovative businesses that provide greater transparency and granularity.
But open banking is not just about the benefits that come from an increased understanding through analysis of how consumers and businesses save, spend and invest. It is also about enabling competition between payment service options and, properly incentivised, there is good reason for a consumer or a small business to use a direct bank-to-bank transfer for one-off payments instead of a debit card or a credit card.
The opportunity is open, for example, for Amazon to incentivise its customers through discounts or free services, in order to initiate payments itself and bypass the fees charged by banks and credit card companies as part of the process.
Before open banking was mandated, there was nothing preventing banks and other payment account holding institutions from denying other businesses access to their customers’ bank accounts. Many of the current business models that access customer bank data on their behalf or initiate online payments for them, have had to rely on what many consider to be an inadequate workaround – accessing customer accounts without consent or at times knowledge of the bank or other institution that holds the customer’s account.
However, as a result of market inertia, open banking business models may not have yet grown significantly, and it has been recognised that regulatory change is necessary to correct frictions which currently restrict third party businesses from accessing customer data held in bank accounts and to promote customer trust in these models.
This regulatory change has now come but many issues, such as promoting customer trust, ensuring security of data, managing liability and dispute resolution around payments and incentivising customers to share dates, need to be resolved following the starting gun being fired last month. These issues, opportunities and challenges of Open Banking will be debated at a Scottish Financial Enterprise breakfast briefing hosted by Pinsent Masons in Edinburgh on 15 February.
Mhairi Mival, legal director and fintech specialist at law firm Pinsent Masons