A powerful combination of technology change and regulatory action is planned to deliver “common open data standards” in banking within the next two years. For those outside of the industry this dry terminology may detract from the scale of competitive force and disruptive innovation that could result. This bulletin describes the changes that are happening and explores what could follow.
The language of market-watchers and regulators of financial services has changed. Where once there were concerns about ‘branch networks’, ‘challenger banks’, ‘financial illiteracy’ and ‘transparent APRs’, now there is talk of ‘data standards’, ‘third party access’, ‘user experience’ and ‘APIs’. New regulations at EC and UK level, plus the recent outcome of the Competition and Market Authority’s (CMA) three-year investigation into retail banking, will bring changes that could dramatically change the competitive environment for retail banks in the UK and the way that everyone uses their services.
The big shift will be allowing third-party businesses to gain access to banking data and payments mechanisms. Regulators and policy-makers are hoping that this will kick-start innovation and invigorate retail competition through new digital services and new business models. But since any such access will be dependent on customers granting permission to use their data, it will be vital for new services to win customers over.
At the end of 2015, the European Council passed the second Payment Services Directive (PSD2), giving member states two years to implement requirements for third party access to banking data and standard by which it is presented. The principles have already been embraced by HM Treasury, which started its own work on Open Data in Banking back in 2014, leading to the formation of the Open Banking Working Group. So while the imminent prospect of Brexit looms over the status of EC legislation in the UK, the reality is that a shift to open banking standards is unlikely to be derailed.
Adding to this are the recently-published conclusions of the CMA’s three-year inquiry into competition for retail and small business current accounts and overdrafts. The remedies include an order to the largest banks in GB and NI to develop and adopt an open banking ‘API’ standard by early 2018, with first implementation required as early as March 2017.
There will be a progressive opening up of banking information that was previously private or difficult to access, via open Application Programming Interfaces (APIs). APIs provide a set of protocols that allow one system to talk to another and share data. It’s APIs that let you share a newspaper article on Facebook or read reviews of nearby restaurants on your phone. And when you look at the integrated functions of an app like CityMapper (which combines your location with street and transport mapping, plus real-time data on trains, traffic and car services to give you a simple menu of transport options from A to B), then the potential for using APIs to offer new services starts to become clear.
Banks will have to provide open APIs that, subject to appropriate permission from an individual customer, will enable third parties to:
Timetable for Open Banking.
Trying to predict the path of innovation is never easy. But by extrapolating from some of the services that are already in use, it’s clear that the introduction of open banking standards could rapidly result in a rash of new products and services.
Innovation along these lines – and more radical ones that are hard to foresee – have the power to dramatically change customer behaviour and transform the way that people access and use financial services. And given the existence of a vibrant, creative and well-funded FinTech community in London, the pace of change could be rapid. The challenge for existing banks is whether they can ride the wave rather than be disintermediated as products are unbundled.
 Competition and Markets Authority (2016): Retail Banking market investigation – Final Report, 9 August 2016