Open Banking is changing finance. PISPs and AISPs have already made an impact, but Banking-as-a-Service and Embedded Finance will really shake things up.
Open Banking is becoming increasingly appreciated and understood in everyday UK life.
Not the term itself - it will take years for that to seep into common parlance or, more likely, will never be a phrase people outside of finance are particularly aware of. But this is irrelevant. It’s what Open Banking is bringing to finance that is becoming more and more established. As of January 2021, more than 2.5 million UK customers and businesses use Open Banking for money-management, making payments and accessing credits and loans. Every month, hundreds of thousands more become Open Banking users for the first time.
So do we view Open Banking as an unrelenting, unmitigated success that will transform every single element of finance? Or are we reaching an inevitable plateau of its influence? This is not easy to answer, and one should always approach future predictions with caution, but there are reasonable grounds for thinking that Open Banking is not yet at its peak - far from it, in fact.
But before we look ahead, we need to examine the current situation, reflecting on where Open Banking is right now and how far it has come.
Open Banking refers to certain reforms which force banks to allow third party providers access to your banking data - with your consent. For example, there may be an app (which is the third party provider or ‘TPP’) which enables you to see what kind of credit card you could get based on your transaction history. If you are happy for the app to have this information, you grant it access to your personal account data and it receives the information from the bank via an API call.
Previously the bank would have had no obligation to give the app this information and you’d have to do it yourself, either entering transactions into a spreadsheet manually or sending bank statements to the TPP - both options having huge flaws. But due to the Second Payment Services Directive (PSD2) banks can no longer protect personal account data in this way, with the aim being to make financial services more competitive and ultimately better for the consumer.
Businesses offering Open Banking services can be categorised into Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). AISPs gain access to your banking data, as in the example given above. PISPs are able to make payments directly from your bank account on your behalf, helping you to save, invest and more.
Open Banking is regulated by the Financial Conduct Authority (FCA), so as long as the TPP (such as the app in our example) is regulated, your data and money is completely safe. TPPs can only access financial data that you have consented to and if any fraudulent activity happens on your account, your bank will be obliged to refund you the money (which it will then likely get back from the TPP).
The TPP should make it clear if they are regulated or not (the ones you are likely to come across almost definitely will be) but if you want to be extra safe you can find a full list of regulated providers here. It should also be reiterated that TPPs can only gain access to your personal account data if you have consented to it. This means you will need to log in to your digital banking when using the service. In other words, if you were to have your phone stolen, the thief would not be able to suddenly grant access to your data to nefarious actors.
Open Banking first came into effect in January 2018, so what has happened since then? A huge change in regulation was never going to cause instant disruption, but over the past three and a half years companies have been developing new and innovative ways for people to take more control of their finances.
Here are just three examples of how Open Banking can be used by individuals and businesses alike.
Debt resolution: Open Banking can be used to help customers manage and resolve their debt. Experian partnered with CreditFix to offer an AISP which looks at a customer’s bank account data and assesses their financial circumstances, before providing advice on how to modify their behaviour to reduce their debt.
Before this service was launched, CreditFix advisors would need to interview customers in-person or receive paper bank statements to paint a picture of their financial situation.
This was a not only time-consuming but ineffective process, often resulting in an inaccurate or incomplete version of a customer’s financial status. With Open Banking, the full picture can be learned instantaneously. In the future, it is not hard to imagine AI playing a significant role in this process to make it even faster.
Accounting: Accounting software such as QuickBooks takes advantage of Open Banking by automating accounting processes for small businesses. Another example of an AISP, Quickbooks’ Open Banking integration allows users to categorise all transactions as business or personal and even helps them prepare their Self Assessment for HMRC. This has effectively democratised accountancy, as private accountants are often out of reach financially for new businesses. Business owners not only save their own time, but their reporting is more accurate with the software in place. The ability to manage money more effectively is the exact reason Open Banking was established and new accountancy software is a fitting demonstration of its advantages.
Personal saving: UK app Plum acts as both an AISP and PISP, analysing a user’s bank account information before routinely transferring an appropriate amount to a savings account on their behalf. The amount saved can be tweaked by the user or left to Plum’s AI, and users can set up multiple pots to allow them to save for special events such as holidays.
The automation of this transfer is a huge draw. People have been able to set up separate accounts and savings pots for years, but it is often difficult to know how much to put aside, and even more difficult to bring yourself to do it when potential purchases are catching your eye. A PISP removes this mental barrier and allows you to get on with life without thinking about budgeting. Some PISPs even introduce users to investing their savings through a similar process, again opening up a financial service that many currently don’t feel equipped to take on.
The innovation that Open Banking has enabled is not debated, but this does not mean it’s a golden goose for fintechs. Customers will not scramble to use a service purely because of Open Banking, there are other parameters that should be met in order to achieve success:
Trust and control: It will always be the case that some customers are happy to share more personal information than others. A third party having access to personal account data and being able to move money from bank accounts is still very new to most people. Therefore, your approach needs to be built on trust. Simply stating that you are FCA regulated at the bottom of your website is not going to be sufficient for some.
However, your offering shouldn’t suffer due to differing levels of financial prudence. Ideally you want to create an easy-to-use experience in which users can select the levels of information they are willing to grant access to. Giving them the control instills further trust in your brand and will make it easier for you to grow across different user types.
Value add: When it comes to fintech, a decent alternative to an incumbent provider is very rarely good enough. In fact, even a service which is better than the incumbent offering is often not enough. Too many startups make the mistake of putting their offering and that of an incumbent side-by-side and thinking ‘what we offer is better, therefore we will succeed’.
What needs to be considered is that many people are reluctant to change how they handle their finances. Your product or service needs to not only be better, but considerably better. It has to solve a problem they have. Think about how Open Banking can be used to do that. If you’re adding it in as a gimmick you’re just wasting your time.
Make it innovative: If you want to get access to peoples’ bank account data, make sure you’re doing something innovative with it. After all, screen scraping has existed for years - as has sharing paper copies of bank statements.
What’s new here is you can access that information instantly through an API call and therefore do interesting things with it within your service. Customers or potential customers won’t appreciate data being requested for the sake of it, show them you deserve it.
We’ve established that the potential of Open Banking is huge, yet it needs to be utilised properly to be truly impactful. So what does this mean for the future of Open Banking? Experian’s partnership with CreditFix offers insight into how Open Banking can be used most effectively - through collaboration.
Examples are starting to appear of fintechs working together to bring Open Banking into new areas of finance, using each other’s capabilities and infrastructures to provide better experiences for customers. Below are some areas where Open Banking is beginning to take hold and where it may well flourish in the near future with further partnerships and collaboration.
Open Banking and cryptocurrency: There was a certain period where Open Banking was seen as a rival to cryptocurrency - or at the very least, an obstacle. Crypto had always been able to position itself as the alternative to a financial system unwilling or unable to change. It was the new, innovative way of sending and managing money.
When Open Banking arrived, it lost that position. Consumers could still access improved, innovative financial services without using blockchain or any kind of cryptographic technology. However, as everyone knows, cryptocurrency is not just ‘new and innovative payments’, it offers many things that Open Banking and any kind of fiat currency cannot. Cryptocurrency keeps your transactions completely private, it enables free and instant borderless transactions and there is no centralised regulation required to keep your money safe.
Therefore instead of considering themselves rivals, Open Banking providers and cryptocurrency companies should be looking at partnerships. Klarna’s collaboration with Swedish cryptocurrency broker Safello is one exciting example. Using Klarna’s Open Banking, Safello’s 180,000 users can purchase cryptocurrency directly from their bank account in a quick, easy and native experience. Innovation such as this will help develop cryptocurrency, not hinder it.
Open Banking and investment: Investment companies can be big beneficiaries of Open Banking. There are certain barriers to entry with investment, particularly amongst young people who feel that they don’t know what they’re doing. Any services that make investment as smooth and easy-to-use as possible will be very advantageous to investment companies and Wealthify’s partnership with Tink is already proving to be successful.
Tink is a PISP which makes transfering funds for investment a far quicker and easier process for Wealthify users. They expect their number of users to double to 100,000 within 12 months and have noted “The customer response has already been brilliant, and our partnership enables us to make more of our customers' money work harder, by maintaining our market-leading low fees.” Open Banking presents a clear advantage for investment firms and in the future we are likely to see many more partnerships of this kind.
Open Banking and remittance: A third area of finance with a promising future for Open Banking is remittance. As the pandemic hit, the need to improve digital banking and the digital transfer of money skyrocketed. Open Banking has provided a way for remittance to excel in the digital space due to a number of factors.
Firstly, it saves costs. Automated processes using PISPs cut operational overhead and human error costs, whilst users avoid additional fees such as amendment fees or other hidden charges. One report suggests Open Banking-powered remittance can cut costs by up to 50%. Secondly, customer experience can be greatly improved, with remittance becoming an all-in-one seamless experience with customers receiving real-time updates on their transfers. Thirdly, remittance payments using Open Banking are usually considerably faster, due to automated forms and quicker transaction finality.
Banks and fintechs that collaborate with Open Banking for remittance will be able to truly change it for the better. It’s something too beneficial not to happen.
These are just a selection of the industries that Open Banking can, and will, benefit in the near future. Its flexibility is likely to mean that changes will occur within finance that no one has yet predicted - which makes this a very exciting time for the sector.
Our final prediction for the future of Open Banking is that it will act as a stepping stone to embedded finance. As Open Banking becomes more and more commonplace, consumers will not only be more accustomed to linking their personal account data to other products and services, but will come to expect it. A native, all-in-one experience that includes their bank (either the account data or payment processing) will become so seamless, having to handle finances separately will start to appear frustrating and antiquated.
Embedded finance takes this approach a step further. Instead of ‘linking’ financial services to other products and services, as seamless as it may be with a single API call, financial services can be embedded within a product. For example, let’s say you are shopping on a clothes website. With embedded finance, the site may decide to offer you the chance to buy an item in instalments. They may even build a loyalty scheme, giving you money off your next purchase after a certain number of purchases.
Crucially, this is all done within the site itself, without needing to partner with multiple providers at high costs. This is exactly the type of service OpenPayd offers and within the next few years we will see an increasing number of businesses become what we now think of as fintechs - the opportunities are just too good for them not to.
When Open Banking was first created, the idea behind it was to make finance more competitive - ending the inherent dominance of incumbent banks and allowing new innovators the chance to improve services for the customer. This has been a success. We have named just a handful of the many ways in which new firms have utilised Open Banking to help people manage their money, but we believe the biggest changes are still yet to come.
Considering that in 2020 there were just under 6 billion Open Banking API calls made, compared to around 66 million two years earlier, it may be surprising to suggest we are still not reaching the peak. However, it will be the increased collaboration between businesses - fintechs and incumbents - which will really take Open Banking to the next level.
In the words of our CEO Iana Dimitrova: “With full integration and collaboration, a smooth transition to the digital economy, the economy of the future, is possible”. As Open Banking becomes further cemented in our daily lives, the short step to embedded finance will undoubtedly follow, causing a genuine shift in finance in the coming years.
If you’d like some more information on how these developments can improve your offering, don’t be afraid to get in touch. We can help you be part of this substantial change, not just watch it happen.
Open Banking has brought down the walls around banking data, now we can use that accessibility to radically improve wealth management.