Open banking: life-changing tech or data gathering nightmare?

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Promoted by The ID Co

James Varga explains to David Lee why open banking is a boon to customers but is not really a revolution for his company

At a time when the entire fintech industry is grappling with big issues of trust and security, the ID Co looks increasingly like a perfect business for our times.

Its website says: “At the ID Co, our mission is to help businesses onboard customers in seconds.”

James Varga, chief executive and founder of the Edinburgh-based data and identity specialist, says: “The heart of the ID Co’s success is understanding consumers and how to unlock the value of their bank identity and data in a positive, beneficial way.

“Consumers are motivated by very few things.

“They do not want the car loan, they want the car; they don’t want the mortgage, they want the house. It’s not about the dating website, it’s about the person you meet.

“Everyone wants to get through these processes as easily and quickly as possible.

“There are so many things that stop businesses from making this easy.

“From KYC and AML through to fraud protection, regulation requirements and even answering simple questions like, ‘Can you afford the loan payments?’

“If we lived in a trusted, transparent world, we would be OK – but a lot of things get in the way of businesses delivering convenience to consumers.

“As a company, we started to break down those barriers.

“The whole online trust problem isn’t a technical problem, it’s a behavioural issue.

“You have to understand what would make the difference, what motivates consumers to change the way they would normally do something.”

The new open banking regulations gave the ID Co an opportunity to break down the barriers and to let consumers use the identity and data they already had to allow businesses to address those painful experiences – and allow them to access products in seconds.

“There is fantastic value in people’s online profiles and bank account data and if consumers can use that data securely, their whole world can change,” says Varga.

“We are in a broken world where, to get credit, you need to have had credit.

“But if you can prove you pay your rent every month and that you have a job and your bank account shows that you are financially responsible, why shouldn’t you have credit?”

Canadian-born Varga, who has lived in Scotland for 22 years, makes a clear distinction between the Facebook/Cambridge Analytica scandal and the use of open banking data.

“It all depends how consumer data is shared and why.

“We are seeing with the recent stories the advertising-driven side of that, where data is purchased without consumer consent or control.

“All of our consent is explicit and used for the consumer, by the consumer.

“It’s everything that GDPR [General Data Protection Regulation] is talking about.

“GDPR is great for us because we have always been consumer-driven.

“It makes total sense; it’s not about buying data, it’s putting the customer in control of it.”

As a business, Varga says, the ID Co sits at the crossroads between GDPR and open banking. Which is about opening up access to data: “Our experience is that consumers are absolutely fine with their data being used if they can benefit and see that it is used securely.”

Varga says of the open banking revolution: “We have been working with bank data since 2011 so it’s not revolutionary because it’s what we have always done.

“The big change is that a regulatory framework [open banking] has been wrapped around people opening up the value of their bank identity and data.

“Two years ago, we often had to argue, debate and defend the use of that data. Now we just say, ‘This is what we are doing’.

“Open banking has been fantastic in giving value to that data for consumers.”

The ID Co launched in 2011 so people could do more things in a simple way online using their identity and personal data.

Alongside the ID Co’s proposition to consumers, it also offers a DirectID
product to businesses.

“We realised we were a little too early for the market [with miiCard] and pivoted to DirectID about three years ago.

“That has developed at a fair pace. We are doubling revenues every year and we have 30 customers on the platforms with 30k transactions per month.

“We have been able to climb the fintech ladder – starting with the smaller banks or financial services, then with the medium-sized banks and then the larger ones.

“We have really built our banking customer base.”

The proposition from the ID Co is all about customer on-boarding – making the contact between customer and bank “as easy and frictionless as possible”, says Varga.

“We want to be able to do it at 10pm or whenever suits us, in a minute or two. That removes the consumer pain.”

Where the ID Co hits the sweet spot is delivering this better customer experience while making better use of the data for the banks.

“Financial services businesses are starting to get it.

“They have always held a lot of this data themselves but they have not been using it across their business. In the last two years, the UK has been focused on providing access to the data, by implementing PSD2 (Payment Services Directive) and open banking.

“Now we are moving to a place where it’s not just about the banks providing the data, but understanding how to use it.

“We have been working in this area since 2011 and we have a lot of ideas how this data can be used – and the banks don’t.

“They are still trying to figure out where the change is coming from and need support in understanding how to leverage that data.

“For example, when it comes to the on-boarding process, companies like us can explain how to analyse the data to improve the experience.

“It’s never just about the data, it’s always about how you use the data and what it tells you. And the more data we have, the more we have to work to make sense of it.”

Varga, who co-chaired the data sub-group of the Open Banking Working Group, adds: “Places like North America were quicker to understand how to use the data but it’s a rapidly changing environment and across the world, everyone is talking about open banking.

“As a result of the open banking regulations, the UK is now regarded as a global leader.”

Edinburgh has capitalised on this by setting up an Open Banking Excellence forum, which meets every month, with companies like the ID Co and Money Dashboard as well as FinTech Scotland involved.

“It’s about how we can showcase the real value of data for fintech,” Varga explains.

He is very motivated by the idea of financial institutions making better decisions based on real-life data.

One of the businesses the ID Co is working with is Fair Finance, which gives credit to people who have had distress or difficult situations in their lives.

“It’s all about understanding the individual,” Varga explains.

“Why do they need credit, what have been their problems in the past, what is their situation now?

“It’s about using real, relevant information.

“Your name, address and date of birth don’t really prove anything and many of the questions asked when you are looking for credit are what we would call negative datasets – have you had criminal convictions, been involved in money-laundering, etc?

“It is much more useful to know if someone has a job, what they earn and how they spend that money. Fundamental questions like this are still not being used widely, even though we have more and more data being uploaded every week.

“We need to keep asking what can we use this data for to help make better decisions. There are lots of opportunities.”

MAKING A DIFFERENCE

James Varga highlights five areas where greater access to data can improve the operations of banks and the experience of customers:

Know your customer

“Being able to identify people are who they say they are even when they have a thin credit file or are new to the country.”

Anti-money laundering

“Verifying the source of funds, monitoring transactions and behaviours and verifying the financial accounts for payments.”

Credit risk and affordability

“Fundamental questions like, ‘Can the person afford the loan?’, ‘Are they employed?’, ‘Are they applying for the right reasons?’, can all be answered through bank statement data even when they have never taken credit before.”

Fraud and suspicious transactions

“Identifying patterns of activities, verifying identities and preventing impersonations without relying on a name, address and date of birth based check.”

Emerging financial distress

“Identifying individuals who are showing signs of financial distress such as gambling habits, life events or other key factors.”

We must use our collective strength

The ID Co employs 26 people at its base in Norloch House in Edinburgh, with an ambition to have close to 40 staff by the end of the year. Why is its HQ in Edinburgh, not London?

James Varga says: “Edinburgh has a huge pedigree in financial services (and great expertise and understanding) and lots of people in fintechs who have been inside banks and know how they work.

“It also has excellent universities, strong support services for fintech that don’t exist anywhere else in the UK outside London and a great standard of living.

“It’s cheaper to be here and it’s commutable to London. I’m down there every week.”

The ID Co has a small office in London and plans to reopen a base in New York, with a hub-and-spoke model based around Edinburgh.

Varga says: “We need to understand local and regional regulations and have a small sales and marketing team in different cities; that’s our model.”

He also thinks Scotland needs to shout about itself a bit more.

“We need to use our collective strength to put us on the map, to build awareness globally that we have the financial services pedigree, the skills and the fintech start-ups,” he says.

For more information about the ID Co, visit their website