One of the Biggest Moments in Banking History Just Went Unnoticed
April 1, 2018
Did you realize that one of the biggest moments in banking just went almost entirely unnoticed? Don’t worry, you’re not alone if you missed it. We’ve got the scoop, and we’re excited to share it with you. So, what is getting smart investors, entrepreneurs, and savvy bankers really excited? It’s called Open Banking and here’s the rundown:
Personal finance consolidates: Neo-banks or challenger banks, like Monzo, have a great opportunity to allow their users to connect Monzo to all their other bank accounts. With a better product, UX/UI, and modern APIs, some of these players might benefit more quickly than others.
**Finally, there is access for innovators: **Startups can use these APIs and build some amazing experiences on the personal finance management side.
**May the best FinTech win: **Tech startups and retailers might have the best chance in banking history to attack the incumbents and take the customer mindshare.
A bit of history
In late 2015, the European Parliament voted to pass the Payment Services Directive 2 (PSD2). Why? To drive harmonization of the payments landscape to level the playing field between countries (EU) and between payments providers. The hope was that increasing competition would provide the best value for the customer.
What is Open Banking?
In 2016, the Competition and Markets Authority UK (CMA) completed its market investigation of the retail banking sector. Its results will not surprise you.
The CMA found that older, larger banks weren’t having to compete hard enough for customers’ business and, as a result, many people were paying more than they should and weren’t benefitting from new services. To address these problems, the CMA announced a mandate for the nine largest current account providers in the UK to implement Open Banking by early 2018.
**Open Banking is a mandate in the UK that requires banks to build open Application Programming Interfaces (APIs) which will enable customers to securely share their bank data with third parties, ranging from transaction data to instructing payments. **The purpose of these open APIs is to enable customers to securely access other products and services – other than those that their banks provide – should they choose to do so, and as a result have more options and transparency around those choices. These choices can be provided by Payment Initiation Service Providers (PISP), Account Information Service Providers (AISP), the GAFAMs, or the FinTechs.
Open Banking enables new services to be built around this data, notably aggregation services that allow bank products to be easily compared, so consumers have more clarity regarding their options. By enabling customers to have significantly easier access to these third-parties (and easier ways to view and compare products), there would be a natural increase in competition in the market and improve customer’s options – including the banks’ own products!
Saturday, January 13 was the deadline banks had to make access to certain data possible. Some banks have been given an extension due to technical challenges of integrating with legacy bank technology. It has not been an easy ride for the banks, the CMA, or anybody else involved. Lloyds, Danske, and AIB launched their open APIs for retail and SME banking in time for the CBA deadline of January 13. Santander opened its retail bank account APIs by January 13.
In order to see the real impact of Open Banking, it is crucial to understand how banks evaluate this entire scenario. Some short-sighted banks think of Open Banking as an unjust push by the regulators or more compliance overhead. They are hoping for bare minimum compliance with regulatory scrutiny. These banks will find themselves lagging in the race as time passes.
Forward-looking banks will make full use of this opportunity. They will take a step back, understand the complexity, see how this can help them reinvent themselves, and brainstorm on the possibilities on newer business models. (It will take a WHOLE other post to go through the possibilities!)
Another option: It’s quite possible we end up with a winner-take-all scenario. A company with a very good tech team, and that is able to build superlative consumer experiences (UX/UI, workflows) might win in an absolute fashion and command a monopoly. That is a worry, and it might defeat the purpose of increasing churn and removing monopolies. The monopoly will go from Fin to the Tech, some believe. This, however, is very unlikely because of antitrust regulations in Europe emphasizes competition, which is the whole reason for Open Banking.
Opportunity for tech startups
Companies bringing automation in each bucket in the diagram below, along with API services/security/analytics should be the ones to watch out for.
As an example, let’s look at TrueLayer. TrueLayer is a London-based startup that wants to be the middle-man for the Open Banking era. By providing access to the newly opened data streams being released by major banks across the UK (Europe shortly), TrueLayer wants to power FinTech startups looking to build innovative financial applications for users. Just as opening up Transport for London’s data allowed Citymapper to build a best-in-class navigation app for Londoners back in 2012, now a whole host of FinTech startups are looking to do the same with people’s financial data. Use cases included coaching people to better use their money by accessing recent transactions, comparing financial products to get customers a better deal, or offering more seamless payments or lending options.
In this context, it will be good to understand that banks (especially global leaders) are launching open APIs & API gateways to remain a step ahead. They are investing money and resources in setting up App Store-style open API platforms. They are trying to become new-age digital platforms often referred to as Bank-as-a-Platform (BaaP) through which banking services are extended to partners (mainly FinTech companies) using APIs.
With Open Banking, the likes of Facebook, Google, and Amazon have an opportunity in the UK’s financial services space. With their respective payment/wallet services live in several parts of the world, these players have a head start, along with a gigantic user base. Access to transaction/account information through Open Banking will enable them to build a great front-end and disrupt the UK/EU banking landscape.
Banking APIs provide developers with the information needed to create innovative FinTech apps for consumers. While you probably have some use cases in mind, there are a few obvious ones worth mentioning.
Account Aggregation can be a great space for startups. For many years, PFM apps have struggled because bank APIs were not available, and they were stuck with using sub-optimal methods like SMS and screen scraping. If companies can get access to bank data of users through APIs in a consent-based framework, these can be strong dashboards of financial metrics such as net worth and savings across multiple accounts
Analysis and recommendations for better money management
Recommendation of products and deals based on monthly statements
From an investor perspective, I would be thinking about building this as a long-term investment theme – looking at companies that are planning to use or already using banking APIs, those that are looking to provide aggregation services to their customers based on open APIs, as well as, companies that are involved in Full Lifecycle API Management that help to build and deliver modern applications fast (both B2B and B2C play). Here are some examples:
Bud: An app that aggregates bank accounts and finances from different sources in one place
Coconut: A current account aimed at freelancers, which includes tax and expense features for the self-employed.
Fluidly: Uses artificial intelligence to analyze cash flow.
Fractal Labs: An AI-powered financial assistant bot.
MEDICI (formerly Let’s Talk Payments) reported on this in 2014.
Before we go ahead, let me talk a little bit about our work in the past. We were the first ones to start looking at FinTech from a TechFin perspective. Back in 2014, we published a piece on how products could be built faster by new companies using APIs built by others and published an article on 25 FinTech APIs in FinTech. That was a big hit, so we followed up with some more.
75 API uses (this one was a smash hit)
Open banking and PSD2 (covered by us in various articles)
The value of an idea lies in using it. – Edison
It was not reasonable to expect that something initiated on January 13 would find the Open APIs from banks working and suddenly launch Open Banking into action. Not true. Open Banking isn’t an app or a product in its own right; it is a way of facilitating data sharing. As they say, If it works, no one will even know it’s there.
In January, the journey started with actual regulation in action and startups/tech companies applying to be cleared for access to the APIs. Yes, you will need FCA clearing before you can start using those bank APIs and customer banking data.
Not many banks have published their APIs yet. They had 18 months to prepare for this, but we know that it is seen as a tight deadline.
What about the fear of a monopoly?
As I have mentioned above, somebody with a very good tech team and an ability to create modern interfaces (UX/UI, workflows) might win in an absolute fashion and command a monopoly, and this worries some analysts. Among a variety of concerns, it could defeat the important purpose of opening up access to bank accounts and information via APIs – which is to increase churn, reduce monopolies, and offer more choices to customers.
Some believe the monopoly will go from Fin to the Tech. Somebody like Monzo and N26. E.g., using Monzo, you can freeze (easy) and unfreeze your card on the app (after the cancellation of the card you had to call and wait for a few days for the courier to come). In Monzo, all the transactions come with the logo of merchants for visual recognition and even has emojis based on behavior. You can change the ATM PIN on the fly and so on. And then there is more serious stuff like a single API to connect to third parties.
N26, for example, didn’t rebuild an *entire *suite of banking products and services. They leveraged APIs to connect various third parties to integrate financial services collaboratively ay. N26 customers can buy insurance, remittance, and investment products and services, all driven by APIs from partners connecting to N26.
At the heart of monopoly, anxieties might simply be FUD (fear, uncertainty, and doubt) at this moment, but it is a great movement and a great step forward. The excitement should rub off on the rest of the world as well.
What does it mean for consumers?
Open Banking provides several unique benefits to consumers that haven’t been seen before:
The ability to consolidate all accounts in one place with continued protection under their product terms and conditions.
The choice of the most convenient internet or app interface to check their bank account details.
**Direct integration of their bank account with merchant acquiring sites, **which is both convenient and practical.
Amidst the benefits, one challenge hangs: there’s a lack of clarity around the responsibility between PISPs (merchants) and the ASPSPs (banks) in the event of a loss.
Some hope that the UK, as one of the first countries to create technical standards for Open Banking, can set the standard beyond its own shores. And we are not just talking about Europe.
I am thinking of the US and Asia as well. Some of it has already started:
Bank of America Merrill Lynch launched its API gateway on January 24, which includes a connect to ERP and Treasury Management services.
OCBC Bank was the first bank in Southeast Asia to launch an open application programming interface (API) platform with the rollout of its own developer portal, Connect2OCBC.
BNY Mellon developed NEXEN, a financial services platform that features a web application, APIs, and data analytics tools to allow finserv clients to access BNY Mellon’s services, such as asset custody, broker-dealer services, and alternative investment services.
The UK, as one of the first countries to create technical standards for Open Banking, can set the standard beyond its own shores. Adoption of Open Banking is now spreading to not only Europe but also Asia and the US.
HKMA issued a consultation paper setting out its intended approach to Open APIs on January 11, including recommending various sets of industry best-practice architecture and security standards, consistent with those proposed in Japan, Singapore, and the United Kingdom.
The Financial Industry API register was launched in Singapore on January 18 to serve as the initial landing site for open APIs available in the Singapore financial industry.
In Singapore, MAS has an API handbook in place, which provides standardized, common guidelines for banks to identify and develop open APIs. Singapore boasts of more than 270 open APIs by its financial institutions, over 40% of which are transactional APIs.
And as of this writing, many banks are opening APIs and going the way of the app store model. It is clear to see that this is a global phenomenon.
The business models of the Open Banking era for innovative tech companies would be prefaced on providing simple, secure, and regulated access to core infrastructure through a best-in-class API, charging a small fee every time it is called. Essentially, the companies will allow startups to outsource a huge chunk of their technical and regulatory requirements to a commoditized API. It is a huge opportunity which is about to change the world of financial services.
As always, we here at MEDICI will look forward to bringing you all the leading insights in Open Banking and all things FinTech. Stay tuned!