Where next for open banking?
Guest blog post by Sarah Kocianski, Head of Research at 11:FS
A lot has been written about both Open Banking, the UK legislation, and open banking, the broader concept, in the last three years. I won’t go into the history of either here, as it’s already been widely examined, but if you’re interested in the subject, I recommend you read this report recently written by a colleague of mine.
What I’m going to explore, instead, is what comes next now the groundwork has been laid. In particular, how that could be influenced and inspired by the ways in which firms and regulators in other jurisdictions have interpreted and implemented their own versions of open banking.
The Australian Example
In Australia, the Consumer Data Right (CDR) has been live since July 2019. Partially inspired by the UK’s Open Banking rules, the Australians have gone further and laid out a timetable that will give customers access to a much greater range of their own data than seen in Europe and the UK so far. The plan is for the four major banks to provide access to all financial products by 2020, with mortgages to follow in 2021. Unlike in the UK, where only the 9 largest institutions are covered by Open Banking, smaller institutions in Australia that are licensed as Authorised Deposit-taking Institutions (ADIs) must also comply but on a longer timetable. Additionally, CDR will also apply to the telecoms and utility industries.
The potential for new customer-centric products and services is drastically increased by the availability of different types of data. It can also open the ecosystem up to a much wider range of participants, creating a broader pool from which innovative solutions can emerge. These two factors combined should result in products and solutions that are more useful — it will be far easier to offer holistic financial propositions if you can automatically ingest information on how much a customer spends on their mortgage, their phone bill and the electricity, for example.
Measuring a customer’s financial health in real-time would enable products that benefit both customers and providers
How does the UK get there?
In it’s 2019/2020 business plan the FCA announced it would be setting up an advisory group to ensure the momentum towards a state of “open finance” started by Open Banking would continue. That advisory group now meets regularly to discuss the development of an ecosystem that includes all financial products, along with any barriers that might hinder that development, the practical issues around data sharing, and any related ethical implications. Next, the FCA will issue a Call For Input, inviting contributions from within and without the financial services industry, as to what its strategy around open finance should look like. It has said the Call of Input will come this year.
The regulator will understandably take time to define a strategy that it believes works for both the industry and consumers, and any related rules and regulations will take longer still to come into effect. In the meantime, financial service providers could start to act on their own initiative.
We can look to the US for an example of an industry that has moved towards open banking without any requirement from regulators — major banks have been developing APIs that allow customers to access their data for years without any compulsion to do so. For further evidence, look to the success of Plaid, which has an API infrastructure that enables developers to plug into banks to create their own innovative financial products and services. Its success signals that the financial services industry in the US sees the potential of open banking.
If large incumbents from across the broader UK financial services industry, such as insurers and pension providers, started to build open connections that third parties could access, it would dramatically accelerate the move towards open finance as the FCA terms it. If those incumbents agreed to build those connections to a standard, all the better, as third parties would find it easier to build off the back of them. The end result would be products and services that customers found genuinely useful, spurring their adoption.
What could that look like?
As ecosystems expand to facilitate access to wider ranges of more accurate data, it could transform the credit industry. Lenders could better price risk and so offer credit to a larger and more diverse customer base. Measuring a customer’s financial health in real-time would enable products that benefit both customers and providers — the former could pay off loans early, or negotiate better terms, while the lender could better see defaults coming, and have greater control over liquidity. The benefits the same functionality could offer to the insurance industry are similar.
Digital identities that are accepted industry-wide is another huge opportunity, although arguably harder for one firm to take the lead on.
The point though, is to think outside of the box, or, in this case, the regulation.