Even though it’s early days for open banking there are already plenty of trailblazers offering new services, writes Huw Davies, CCO at Token.
From forex to rental accommodation, personal identification to loyalty schemes, many customer experiences are starting to be transformed by the effects of Europe’s Second Payment Services Directive (PSD2) just months after it was introduced.
Low-cost travel currency provision, securing a new rental flat, buying goods online and viewing your complete financial position across multiple bank accounts have all become easier thanks to third parties taking advantage of the access the regulation gives them to customer bank details to provide new services. Innovation is alive and kicking and motivation to succeed is high.
For banks, initially concerned that PSD2 would allow others to come between them and their customers, the prize comes in keeping themselves at the centre of their customers’ digital banking experience. This will allow them to continue to collect valuable transaction data that will help them cross-sell and up-sell their own products and services.
For merchants and service providers, open banking promises to remove some of the hassle – known as friction – of registering new customers, recognising existing customers and completing purchases. It could also make it easier to make targeted offers and build loyalty.
Meanwhile, fintechs are hoping that the new services they can provide, such as bank-account aggregation, will capture the public’s imagination, helping them create new businesses.
Payments
The sheer variety and success of those already operating in the payments area proves open banking’s value.
Online property portals are developing open banking services that help both landlords and tenants kick off a new tenancy faster and at a lower cost. Traditionally, the first rental payment is often made by debit card, incurring high processing fees. The alternative is to set up a Bacs payment, which can involve visiting a bank branch and filling in forms. The whole process can take up to 10 days to complete.
For landlords and tenants alike, this can be too long and there’s no guarantee that any payment will ultimately go through. Meanwhile, the landlord may have lost alternative tenants. Savvy online property marketplaces will begin using open banking to take immediate payment directly from the renter’s bank accounts by the end of the year.
This approach not only circumvents the high fees but also cuts the amount of time it takes to make that first payment from days to seconds. Down the line, we expect these portals to incorporate identity and credit checks as well as recurring monthly payments into their solutions, removing further areas of friction.
In travel money and investments, there’s also plenty of activity. Caxton, for example, aims to remove the pain points associated with registering for and using a pre-loaded foreign-exchange card. These include high fees, delays in clearing the first payment from the customer’s bank account and the need to log into both bank and forex provider. Like the property portals, forex providers can take immediate payment directly from bank accounts, cutting the cost and closing the time gap from registration to live accounts.
Online investment services are also looking to offer similar services to streamline account setup and moving funds.
In all these areas, open banking is cutting the hassle and increasing automation, helping to bring down costs and improve the customer experience.
The scope of these services can and will be broadened out as open banking payment services take off and the simple use cases are proven. Expect to see recurring and bulk-payment facilities that will take the strain out of volume transactions, as well as services that offer lending on the back of payments.
Data aggregation
Allowing third-party access to bank data will open up the opportunity for far wider data aggregation than previously possible. Until now customer data was held in silos by different companies – banks, merchants and service providers. Post PSD2, those silos can be connected and the data within them pooled and analysed to create a richer customer picture. This can be used to offer new, relevant services and build loyalty.
There are many fintech and banking propositions that allow customers to view all their bank accounts from different providers in one place. At present, what you can do with the service is limited to views of account information. Soon, a more advanced version will allow customers to unlock the value of these services and act on the information – make payments between accounts held at different banks to pay off an overdraft, for example, or sweep money from a zero-interest current account into a savings account. Users will even be able to set up rules-based parameters around events that will automatically trigger money movement, helping them manage their finances better.
Similarly, loyalty programmes are more effective when they know more about a customer. Many are merchant-specific – think Tesco Clubcard or Boots Advantage. When the retailer can see beyond the customer activity within their own store they can make timely and relevant offers to tempt customers away from rivals to spend more with them. It’s no surprise, then, that we’re starting to see loyalty card providers expand the range of what they collect to include bank data.
Identity and verification
When it comes to identity, verification and authentication, cumbersome processes create friction, which is a huge problem. Passwords are the bane of modern life. But PSD2 promises to change all that. Consent to access relevant customer bank details need only be given once so forms for a car loan, for example, could be filled in automatically by the loan provider. This not only improves the customer experience – less paperwork – but because the data is coming from the bank it has already been checked and verified so the loan can be processed quicker too.
As identification and verification services mature and develop, recurring payments and subscription facilities will be added.
Open banking is a new way of accessing financial services. While today’s offers may be limited in their functionality, their providers have clear road maps for further development. Just as with other revolutionary processes and technologies, it will take time to see how far they will go. But open banking’s capacity to reduce friction, risk and cost as well as make processes faster and more efficient means it will undoubtedly become an important part of our everyday lives. It’s over to the innovators.
A new breed of ‘challenger banks’ has risen up around traditional institutions in the last few years. This catch-all phrase doesn’t capture the breadth of different offerings that have emerged, from mobile only banks such as Atom and Starling, to digital contenders looking to capture even more of the value chain by exploring links between online banking and social networks – Fidor is a great example. With a digital-first mentality, the competitive ace that these technology businesses have to play is their agility. Unencumbered by legacy systems, they are quick to add innovative new products and services, often encouraging open collaboration with customers – as Monzo has done – to develop the product and offering.
These FinTech companies are incredibly nimble, though hanging on to this advantage will depend on how smart they can be as they scale. With a continued focus on innovation and a clear target customer value proposition – whether that’s migrants, freelancers, Millennials or students – there will be some tough decisions to make about which technology to keep in-house, and which to outsource. Will they choose to trade on the value of their proprietary systems? Or take the view that the value lies? in the front-end, and outsource the remainder?
One of the key challenges that traditional banks face is simply understanding the infrastructure that lies under the hood. Systems have been developed over so many years, by so many IT architects, for so many use cases and do not forget all the mergers and acquisitions, that it has become very difficult to untangle the technology wires that link business areas across Operations, Product, Customers and Channels.
The advent of Open Banking has thrown down both a lifeline and an intimidating gauntlet for large banks. A lifeline, assuming they have the opportunity to innovate, drawing on the advantages of trust and large existing customer bases to fend off digital rivals with new appealing product offerings. A challenge, in that they must now open up their systems to third parties, which brings both a competitive threat and a logistical challenge.
No such worry for nimbler challengers. Not only do they have the benefit of operating on new, lean tech stacks, but they have been born into a mentality of collaboration, and business model evolution. High Street Banks, by contrast, haven’t been tested in this regard historically, and are jostling to keep pace.
After a period of immense innovation in the challenger bank sector, the next phase will be a tale of expansion and consolidation – a battle that some will weather more successfully than others. Some have argued that those with in-house back-end tech will experience initial pain in scaling, due to the larger tech code base and infrastructure they must maintain. Others might counter that this will be offset by lower long-term operating costs per customer, and possibly greater flexibility in product development – which could make all the difference in the quest for customer wallets, hearts, and loyalty.
Operational management and innovation do not always sit comfortably next to each other, but young banks have a golden window of opportunity to future-proof their model. Smart, proactive, risk-based decisions will ensure that scale does not hamper the agility that propelled them into the spotlight in the first instance.
It’s more fun to count soaring customer numbers and glamorous media headlines, though, in my view, the winners will be those that take the time to unpick and monitor the systems that underpin their ability to create dynamic, responsive solutions. In this instance, good things will come to those who refuse to wait.
Hans Tesslaar, Executive Director at banking architecture network BIAN
Technology advances have changed every aspect of financial markets. For consumers, this transformation has made financial services more affordable, accessible and tailored to our individual needs. For financial institutions, digital tools, including emerging technologies such as artificial intelligence (AI), robotics and analytics, have delivered huge opportunities to radically improve the efficiency and effectiveness of risk management, while reducing costs and better meeting the needs of customers.
However, these advances have also raised fundamental questions around how regulation should adapt. For an industry still finalizing reforms introduced after the global financial crisis, financial technology and innovation present a new round of challenges. That’s why it’s time for financial institutions and regulators to ask: How can we build a regulatory environment fit for a digital future? Below Kara Cauter, Partner, Financial Services, Advisory Ernst & Young LLP UK, answers the hard question.
Technology’s potential to make financial markets safer
It’s inevitable that new technologies introduce new risks, and new twists on old risks, as well as different ways of working. Systems can fail and undermine market stability; machines can make decisions with unintended consequences that harm customers and markets; and the almost limitless data that is the lifeblood of the digital world can be manipulated, misused, stolen or inadvertently disguise criminal behavior. But new technologies also offer significant opportunities to improve risk management and enhance the efficiency, safety and soundness of markets and convenience to consumers.
As a result, financial services firms are constantly tapping into new tools to improve the customer experience and strengthen risk management and compliance:
- Open banking, enabled by application programming interface (API) platforms, allows multiple firms to interact, access and update data to deliver new customer services.
- A combination of algorithms and natural language processing (NLP) delivers financial advice. These advanced machines can also “read” news and digital information sources to evolve strategies, initiate trades and analyze market and customer activity.
- Distributed ledger technologies (DLT) are underpinning new methods of record-keeping, transacting and new mediums of exchange.
- AI, combined with other tools, is enhancing the scope and effectiveness of monitoring and surveillance tools that seek out fraud, market abuse and money laundering, extending the scope and quality of controls application and testing.
Regulators are also exploring how to use technology in their role:
- Using machine learning to enhance surveillance of market activity and check the validity and accuracy of reports and models that firms submit to them.
- Some are considering how digitization and automation could change the way regulations are written, distributed and complied with, while others (including governments) are incorporating centralized digital records of individual and company identities (i.e. digital passports to accelerate the onboarding of new clients to new services).
- Many regulators are establishing regulatory “sandboxes” – innovation hubs – to test new, technology-led services in safe environments, where possible harm to markets or consumers can be limited.
- New products such as cryptocurrenciesare also being analyzed to determine whether they should be covered by existing regulations for other financial activities or products, or defined as a new asset and subject to new rules.
Time to ask new questions about old risk principles
But despite positive moves to deploy technology to improve the security and efficiency of global financial markets, it’s still early days. Both industry and regulators are struggling with fundamental questions around how to identify and describe the risks posed by new technologies and new ways of doing business.
Delivering regulatory answers fit for a digital future will call on all market participants to revisit old principles, ask new questions and work together. Building a transparent, balanced, and connected risk management ecosystem will require:
- Collaboration in compliance: Scale, consistency and investment create conditions that encourage technological improvements and support market-wide benefits, as well as greater risk management. But scarce resources, limited reach and fragmented processes constrain investment by individual firms. Collaboration across the sector can overcome these issues.
- Standardization to speed the path: Digital tools are built on rules and algorithms, fed by data. But inconsistent and unclear definitions and standards for data are hampering opportunities to deploy new technology where it could be most effective: in providing market-wide services and solutions.
- Rethinking accountability and transparency to share the load: Senior bankers have no doubt that they will be held accountable for their organizations’ failings, large and small. But it’s time to rethink the parameters of accountability. When third parties have access to outsourced services data and when more decisions are made, or influenced by AI, who is responsible for breaches?
- Reassessing risk management to accelerate progress: Traditional risk management is built around quantifiable factors such as market, credit and liquidity risks. However, digitized financial markets require a reimagining of these basic principles now that risks can manifest in milliseconds and multiply exponentially, sometimes outside the control of any single person, firm, or function.
- Governing, not just mining, data: Customers see the benefits of faster, customized services enabled by open access to data, but their wariness of possible abuse is growing, and cloud solutions are adding a new dimension to the data ecosystem. Technology-led solutions to monitor, analyze, and protect data can match the scale and magnitude of these risks and enable their management.
Ultimately, as regulators and market participants navigate the FinTech landscape, they’ll need to consider how to best use and regulate the use of digital tools to deliver effective risk management and compliance – without stifling the innovation that can help deliver better and secure financial services.
When it comes to trading globally, banking access and reconciliation can be remarkably complex. Not only do businesses interact with a range of financial institutions to track funds across multiple bank accounts, they are also required to reconcile accounts receivable and payable transactions throughout the global supply chain. Funds may get lost in transfer and invoices can be difficult to reconcile – forcing valuable personnel to deal with unnecessary complexity rather than driving progress.
Introduced in January, the UK’s Open Banking initiative changes this. The launch of Open Banking is set to radically change the way consumers, businesses and banks pay and get paid, and how they manage their data. The introduction of a unified Application Programming Interface, or API, across financial institutions creates a foundation in which data can be seamlessly and securely shared in real time.
The beginning of an era
While the UK regulations are only mandatory for the top nine banks in the country, the initiative is gaining wider traction. A growing number of UK financial institutions outside the mandated nine banks are volunteering to open their APIs to Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), recognising the open approach will enable them to offer new services and become more competitive pre settlement funding.
In the new world of Open Banking, an AISP can consolidate reams of bank account statement data and deliver it to the customer in a single interface, making it perfect for treasurers of multi-banked organisations. Payment service users – whether they are individuals or businesses – are now able to instruct their banks or payment service providers to share their bank balance and transaction information with regulated AISPs. In addition to displaying this information on a user-friendly dashboard, the AISP can convert all this transaction data into the required format and send it to the customer’s ERP or Treasury Management System.
Similarly, before the introduction of Open Banking, businesses and consumers would have to log into each bank separately to initiate payments, using different workflows and security protocols. With the advent of Open Banking, individuals or businesses are now able to mandate their multiple banks or payment service providers to accept payment instructions via their PISP’s app.
Making things easier for suppliers
Through initiatives such as Open Banking, as well as the New Payments Architecture which aims to modernise the UK payments infrastructure, we’re likely to see the development of modern Inheritance Loans payment services. One innovation to look out for is Request to Pay. This will see the introduction of sophisticated electronic invoicing into the payment system, making it easier to pay and get paid, with more flexible payment options in terms of timings and partial payments.
Instead of a Direct Debit, where money is simply taken from a bank account, the Request to Pay mechanism will issue a request to the payee. They will have the option to pay in full immediately, pay later or arrange a payment plan. Designed partially to accommodate the trend towards more flexible work and the rise in the ’gig economy’, it offers greater flexibility to individuals and is likely to reduce the risk of non-payment or default.
Where cash flow once existed in a complex ecosystem of different financial systems, businesses will now be able to enjoy greater simplicity. The potential for a single dashboard that unifies all accounts in real time while securely and effectively reconciling invoices with seamless, integrated incentives will help maximise supply chain value.
Beyond UK borders
The innovation potential of Open Banking does not stop here. In London, unprecedented levels of collaboration between banks and FinTech providers highlight the mutual benefits of combining a bank’s scale, large customer base and economic muscle with the fast-moving and innovative skills of smaller FinTech firms.
Innovations under way include apps to help consumers find the best investment or borrowing offers in the market, and tools for businesses to manage their cash more efficiently or forecast working capital requirements more effectively. And this is just the start. Competition will intensify with new entrants, offering innovative value propositions and new business models.
Other markets are also directing an API-driven open banking agenda. In Europe, the revised Payment Services Directive, PSD2, was also launched in January 2018 and comes into effect from September 2019. Australia will introduce Open Banking in June 2019 for the country’s Big Four banks. The Hong Kong Monetary Authority has announced an Open API Framework which paves the way for banks to share data with third-party providers. Similarly, Canadian authorities are exploring the introduction of Open Banking soon after the launch of its Real Time Rails programme. The Monetary Authority of Singapore is also encouraging banks to adopt a voluntary transition to Open Banking. And in the US, a number of the large banks already voluntarily offer open APIs to third parties, pre-empting the regulators by using APIs as a competitive advantage, rather than mere compliance with a mandatory change.
We are seeing the early stages of a seismic industry migration that will come into full force over the next five years. The emergence of innovations with the potential to drive simplicity and increase flexibility are turning a once complex web of financial institutions into unified tools to maximise value creation. At Bottomline Technologies, we thrive on maximising the benefits of innovation, leveraging the UK’s head start to help our global clients fully realise the immense potential of open banking.
Two years on from the CMA market review which initiated Open Banking, Jake Ranson, banking and financial institution expert and CMO at Equifax, anticipates profound long term impact.
Open Banking was established to encourage competition. It’s well known that current account switching remains low, but this doesn’t reflect the full story. The initiative has been a wake-up call for traditional banks to improve their understanding of their customers and tailor services to their needs. Consumers won’t necessarily have to switch to experience improvements in their banking services.
Since inception two years ago, Open Banking has prompted exciting and much needed product developments to facilitate faster and more effective banking services for consumers. Many providers have applied for Open Banking regulatory permissions, showing the huge appetite to offer new and improved services.
The services that will really take off are the ones that give consumers transparency, control and save them valuable time. Consumers need a compelling reason to share their data, whether it’s faster lending decisions or the ability to access financial products better suited to their needs, and providers must articulate the value clearly in order to succeed.
The potential next steps are vast. We could see services that go beyond banking data, encompassing for example social media information so that consumers can manage their data in one place to gain easier access to tailored services. More and more companies are likely to get involved, potentially including players as varied as online estate agents and debt management companies.
Momentum is building but there’s still a need to educate consumers on how Open Banking can improve their financial lives. Equally important is reassurance that they maintain control of their data, it will only be used with their permission and they can revoke access at any time.
This week Finance Monthly talks to Daniel Kjellén, CEO and Co-founder of Tink on the democratisation of data and what this means for both financial services businesses and consumers.
Open Banking was designed to open the retail banking market by giving everyone access to the data they needed to deliver banking services. Initially viewed as a massive boon for fintechs, and a worrying threat for banks, the mindset of the latter is shifting.
They may have been slow to start, but today the majority of retail banks are waking up to the opportunities offered by Open Banking. Banks are realising that the new battleground is the level of valuable insights and product offerings, tailored to the individual, that can win over consumers. And the key to unlocking this customer value? Data.
But CIOs and product analysts will be only too aware that data was relatively unmanageable until fairly recently. Historically, legacy systems and fragmented technology stacks have meant that getting the right data-sets in one place has been a huge struggle for banks.
What’s more, being able to use these data-sets to create data-driven insights and support data-driven sales has proved even more of a challenge. This means that, until recently, banks and consumers alike have been unable to make full use of the financial data at hand to make better, more informed decisions.
Out-engineered or the opportunity of a lifetime?
Banks might still be grappling with trying to make the best of their consumer’s financial data. But heel-dragging is not an option.
For several years, banks have been under siege from all sides. The technology that allows consumers to grant third parties access to their financial data has existed for some time, and agile fintechs have out-engineered banks in the field.
There’s no question that the advent of Open Banking has widened the data floodgates now that banks have had to open up their APIs. With data more readily accessible, third party providers in all sectors - from finance to insurance - can begin to compete with the traditional banks by introducing innovative new products and services.
What’s more, these challengers have the advantage of being more agile with their time to market; getting new software off the shelf and into people’s pockets in a fraction of the time previously taken.
Banking on the future
Banks have work to do. They’ve been caught napping by these nimble fintechs who have stolen a march.
Regulation is really only the rubber stamp on a technology-led revolution that was already well underway. Banks are now waking up to the same opportunities by partnering with agile industry players that can leverage the financial data at hand.
They need to act now to keep pace with the new market entrants who have already tapped into a world where the access to financial data is democratised, to build newer and better products for consumers. Instead of inventing the wheel once again, banks can choose to invest in the best technology that will provide them with the right data-sets that will both give them a holistic overview over their customer’s finances, and the ability to deliver data-driven sales and insights, tailored at the individual.
Why does this matter?
Open Banking has changed the way consumers can choose to manage their finances. By democratising the access to financial data, consumers are beginning to understand, and take advantage of, the benefits of sharing their financial information with third parties.
Once faithful to traditional banks, people are becoming increasingly fickle - flirting with other providers to find the best deal, service or experience on the market.
It might be intelligent personal finance technology that can predict consumer spending habits and provide advice and recommendations based on these predictive insights. Or it might be a current account platform that allows people to monitor and change their mortgage and savings in the same place, despite using different providers.
Whatever the specific solution, consumers are feeling the benefit of increased flexibility and choice, and demand for new ways to manage money is growing.
It really is win-win-win
Banks must stop viewing the democratisation of data as a zero-sum game - where their loss is a fintech’s or another bank’s gain. Instead, they should see it as an opportunity to gain an advantage by ensuring that their data analytics capabilities keep them one step ahead of their rivals.
While aggregation is just one part of the puzzle, the democratisation of data opens up a wealth of opportunities for banks. Data-driven banking will allow banks to make better commercial decisions based on their customers behaviour, while PFM (personal finance management platforms) will help banks give their customers a better experience.
There is a huge opportunity for banks to successfully monetise Open Banking through identifying where they can offer customers a better deal to meet their needs and targeting them accordingly with a personalised offer.
In this brave new world of banking, the winners will be those who decide what their unique offer to consumers will be and focus on doing it better than anyone else in the market. This might be providing the smoothest UX, the best predictive personal finance management platform, or the slickest analysis and insights tools. Or it might be offering the best products in one particular area - for example the most competitive rates on mortgages or loans
Unlocking this opportunity might require developing new customer centric platforms in house or buying technology of the shelf by partnering with fintechs to take advantage of their technology solutions.
But one thing’s for certain. Far from sounding the death knell for the banking industry, the democratisation of data will become the smart bank’s secret weapon for winning their segment.
PSD2 had been previously described as a game changer for the financial industry, that was set to have a substantial impact on how mobile payments are conducted and authorised. Along with the challenges that face the mobile payments industry, there are also sizeable advantages to the new payment services directive that offer increased security for its users and a level playing field for payment providers. Shane Leahy, CEO of Tola Mobile, explains for Finance Monthly.
Since its inception in January 2018, many businesses which already operate within this space have argued that PSD2 hasn’t made an immediate and significant impact within their processes like they thought it would. Having said that, it is clear that PSD2 has bought a whole host of benefits and opportunities for new players to enter the market and produce a strong, customer-centric offering.
Whilst it was initially reported to be disruptive, the new regulation update has allowed for a real opportunity to move out of digital services and into a new era of payment services. PSD2 is helping to standardise and improve payment efficiency across the EU fintech industry, all whilst promoting innovation and competition between banks and new payment service providers.
PSD2 not only encourages the emergence of new payment methods in the market, it also creates a level playing field for new and existing service providers to innovate, create and ultimately give customers increased choice and availability. It puts the customer back in charge and offers a secure protection of data regulations that merchants will have to abide by.
One of the biggest impacts for mobile payment providers has been the imposition of spending limits on the Mobile Phone Network Operators (MNOs). For them, and companies who are operating under the PSD2 exemption, the maximum transaction amount a subscriber can be charged is £240 per month. This is all for voice, SMS, data and third party products either offered and available to the subscriber.
Another impact has been the requirement for a two-factor authentication process on every payment, and the restriction on the ‘billing identifier’ being taken by the payment provider from the network. In this instance, the billing identifier is the mobile phone number, and this has to be provided by the subscriber during the discovery phase of the acquisition of the mobile payment. This aligns the process more closely to credit card payment acquisition. By having a two-factor authentication, a new level of payment authorisation and transparency not previously seen in mobile payments has been discovered. This brings new levels of trust that is more commonly associated with credit cards, but with more ease of use and convenience of using your mobile phone number to make purchases for goods and services.
Some banks within the industry have grasped PSD2 with both hands, including Dutch client bank, RaboBank. RaboBank is creating its own mobile ecosystem around mobile payments with a rich choice of value-added services, as it looks to move its customers from a SIM-based mobile payments model into the cloud - and becomes one of the first banks to tap into what PSD2 allows banks to do.
Recent reports from MobileSquared have seen that ticketing could be one of the biggest industries to be affected by PSD2, with a third of customers in the UK being keen to start using charge to mobile to buy low-value tickets such as bus fares and train tickets. PSD2 opens up the market to a full transformation that will allow big ticket items to be sold using direct carrier billing. This brings a whole host of benefits for ticketing merchants and its customers, that can benefit from a seamless payment system, quicker processing times and easily accessible.
With the continued effects of the new directive set to be felt across the next 24 months, payment providers in the European Union must ensure they are compliant with the regulations of this well anticipated update.
The customer is at the core of PSD2, and banks, merchants and new payment providers will be looking to become completely compliant with the changes to suit a more customer-centric offering. Payments via any IoT devices will become a more popular method for customers and merchants will look to push more mobile payments due to lower processing fees, subsequently empowering the customer even more. As the industry sets to move towards a more open and intelligent banking ecosystem, financial institutions and fintech companies should embrace the impact PSD2 is having and understand that it will continue to have an ongoing significant impact on their offering throughout 2018.
The Cambridge Analytica revelations have put the issue of data privacy front and centre in the minds of consumers, policy-makers and businesses. Facebook has taken up much of the media’s attention but with other recent and notable data breaches involving many millions of customer credentials, companies are being scrutinised for their data-handling practices like never before. Below Finance Monthly gains expert insight from Nick Caley, VP of Financial Services and Regulatory at ForgeRock, who delves deep into the implications of the data scandal on open banking.
In this era of heightened privacy awareness, it’s clear that there will be implications for businesses across all sectors.
This all raises significant questions for the financial sector. At a time when the banking industry is seeking to open up and encourage data sharing as part of the Open Banking initiative how should banks react to growing concerns from consumers about the risks and realities of online data sharing?
Firstly, UK banks need to prepare for their data management capabilities to be put under extra scrutiny. Banks are already well underway with their preparations for the EU General Data Protection Regulation, which comes into effect in May, and this provides them a solid foundation to work from.
However, the flurry of headlines around data protection and privacy will certainly make consumers more nervous about how and where their data is being used and, as a result, banks must be extra vigilant in order to maintain and grow customers’ trust.
For those already familiar with these issues, the reaction to the Cambridge Analytica story will not have come as a surprise. In a survey commissioned by ForgeRock before the Facebook revelations, only a third (36%) of UK consumers said they would be happy to share data in order to get a more personalised service. Yet over half (53%) said they would not be comfortable for their personal information to be shared with a third party under any circumstances at all. At the same time,
57% of UK consumers said they were worried about how much personal data they have shared online and 63% admitted that they know little or nothing about their rights regarding their own data.
Although this presents a challenge, incumbent banks do hold a considerable advantage over fintech companies and challenger banks when it comes to asking customers to share data: they are already trusted entities with a long track record of safely storing and managing customer data. As such, the demands of securing API access to high value customer data has been the focus of most Bank’s security teams for years. Investment in security expertise, well defined security operations and the latest technologies being tested ‘under fire’ and ‘at scale’ on a continuous basis lead to much greater levels of assurance. Standards such as OAuth 2, Open ID Connect and User Managed Access, which authenticate and authorize only trusted third parties, reinforce this access control model.
Our research shows that consumers do tend to trust banks and financial services companies to handle their personal data responsibly, especially when compared to more digitally native companies. ForgeRock’s survey found that banks and credit card companies were amongst the most trusted holders of personal data, with over 80% of UK consumers saying they trusted banks and credit card companies to store and use their data responsibly. In comparison, just 63% said they would trust social networks with the same data. This is very positive news for the UK banking sector particularly at a time when Open Banking is set to unleash a new wave of competition from digital-first competitors.
Why are banks considered trustworthy? Our research revealed a clear correlation between how in control of their data consumers feel, and how much they trust companies. Banks and credit card companies were ranked among the organisations that gave users most control over their data. This suggests that, particularly at a time when attention is being paid to data policies and privacy controls, banks must continue to invest in systems and processes that put control over data firmly in the hands of users.
The management of customer consent must be central to this strategy as it will only be possible to maintain and build trust if customers know they can turn data sharing on and off at their convenience. Putting consumers more in control of their data through consent and giving users transparency and control over how and under what circumstances their information can be used will allow banks to not only ensure compliance with Open Banking and GDPR, but also establish a basis on which they can build trusted relationships with their customers. They will then be well-placed to offer additional, more personalised services to their existing customers, allowing them to add valuable real time, context-based insights and offers for users, that in turn will create new revenue opportunities.
The Cambridge Analytica scandal combined with the regulatory changes that GDPR and Open Banking will bring appears to mark a turning point in how businesses approach issues around data sharing. The good news for banks is that they are already starting from a strong position as trusted holder of personal data. They now have a real opportunity to build on this and become true leaders in the next era of digital finance - by giving customers greater visibility, choice and control over their own data.
By Mark Jackson, Head of Financial Services, at Collinson Group – a global leader in influencing customer behavior to drive revenue and value for clients.
2018 is set to be a game changer for the relationship between banks and their customers. Driven by the European Commission’s second Payment Service Directive (PSD2), which has now been rolled out across the financial services industry, banks that operate in the EU are now obliged to provide open access to account data and payments, to correctly authorised third parties based on the consumer’s consent. Although not yet mandated within PSD2, the means of providing open access in this way will come from the wide-spread adoption of secure Application Programming Interfaces (APIs).
PSD2 is designed to encourage greater competition and innovation amidst banking and payments across the EU. Combined with Open Banking in the UK – which is the UK Treasury and CMA’s own slant on PSD2 which goes further and faster – PSD2 has the potential to fundamentally change the financial services industry, for customers and service providers alike.
Switching rates amongst current account holders are incredibly low, with just 3% of UK customers shopping around for a better deal[1]. Improved engagement, facilitated by Open Banking, could help banks attract new customers and increase the proportion of people looking to switch.
Some traditional banks have been slow to facilitate use of APIs. However, other banks on the continent are already starting to see opportunities from collaboration with FinTechs and other players in a wider banking and payments ecosystem to improve the customer experience and better integrate themselves into the channels customers want to use more regularly.
One example is Brazil’s Banco Bradesco Facebook app, which allows customers to conduct day-to-day banking via Facebook. Meanwhile, Capital One and Liberty Mutual have capitalised on the popularity of Amazon’s Alexa, enabling customers to check balances and pay bills through the voice-activated personal assistant.
- Provides greater customer choice
Open Banking creates opportunities for banks to share banking and payment data, meaning that customer relationships are essentially ripe for the picking. Any company can compete for customers, from incumbent and retail banks, to fintechs and tech giants such as Google and WeChat. Increasing this consumer choice will shift the balance of power to customers who increasingly demand a smarter, more rewarding digital experience.
Reports suggest that a leading social media company sees its average user spend approximately 50 minutes every day on its platform[2]. In stark comparison, a leading global retail bank spends a mere 54 seconds per day engaging with the typical customer.
Banks must maximise the time given to customers by utilising the wealth of knowledge about them made available by Open Banking. The winners will be those companies that combine payment and banking information with behavioural and lifestyle data to offer new, more personalised services. The resulting experience can help secure customer loyalty and differentiate from competitors.
FinTechs working with the banks can also reap rewards, gaining access to an entirely new customer base. Many of these digital companies are in their infancy, so partnerships with large financial institutions offer scale, scope and opportunity not otherwise achievable.
- Delivers a more rewarding digital experience
In an ever-changing digital world, customers expect an intuitive, user-friendly and flawless banking experience. Faster payment options, such as mobile wallets from technology brands like Apple and Samsung, mean that customers have become accustomed to an experience based on convenience. This represents a paradigm shift in customer expectations for rewarding loyalty. People want everything to be delivered ‘on the go’ via apps on their smartphones and other connected devices, slotting in seamlessly to their busy lives.
However, some banks are still falling short of customer expectation, not investing enough in technology infrastructure, and seeing customer satisfaction drop as a result. With the provision of open APIs, banks can encourage collaboration with innovative, agile third parties to create new customer-centric, digital propositions. Rather than only seeing FinTechs as competitors, banks should look for opportunities to collaborate and integrate with them as an extension of their own service, offering customers a more fluid approach to their finances.
- Improves engagement through personalised offers
Customers are typically choice-rich and time-poor, so offers need to be individually tailored. The last thing they want is to be bombarded with irrelevant offers, or spend hours searching online for offers that suit them. A poorly targeted offer is more likely to drive customers away than increase brand loyalty.
Leveraging the power of mobile and data from open APIs, banks can better understand customer preferences and offer tailored rewards, sent in the right place at the right time – giving the personalised experience customers demand.
In addition to customer loyalty, providing compelling, timely and contextually-relevant offers will enable banks to create new revenue streams by upselling at optimum moments in the customer’s decision-making cycle.
Customer behaviour won’t change overnight. Two thirds of consumers in the UK say they won’t share their financial data with a third party[3], but with better education around the issue, customers will soon see the potential.
Open Banking should be embraced, not feared. This long-awaited shake-up places the customer at the centre of the experience, with a focus on engagement and brand loyalty. It could also serve to retain and grow a bank’s customer base, so long as they engage with them in the right way. Whether or not they are impacted directly by EU regulations, those that embrace the opportunities provided by Open Banking will be able to offer customers a greater choice of personalised offers and rewards, delivered ‘on the go’ via apps.
[1] https://www.gov.uk/government/news/bank-switching-to-be-overhauled
[2] https://thefinancialbrand.com/69877/digital-banks-platform-economy-trneds-open-banking-api-psd2/
[3] https://newsroom.accenture.com/news/accenture-research-finds-lack-of-trust-in-third-party-providers-creates-major-opportunity-for-banks-as-open-banking-set-to-roll-out-across-europe.htm
The financial services industry has changed significantly over the past years, and technology has been at the heart of that change. Heightened competition and rapid progress in disruptive technologies have brought about a paradigm shift in the banking experience which has accelerated in 2018.
Banks that don't invest in technology risk falling behind, as new regulation continues to level the playing field with new innovative players. Last year, many of the banks appealed to the CMA for an extension for the Open Banking initiative[1][1]. A number of banks are reaching the end of their extension period which obliges them to give banking customers more control over their financial data by allowing them to share it with challenger banks and FinTech firms.
The introduction of the open banking initiative across Europe opens the floodgates to competition - as PSD2 balances the scales between banks and digital players, banks are directing resources towards digitally transforming their operations and services.
Lloyds Banking Group recently launched a £3bn investment in a three-year strategy to strengthen its digital capabilities. It aims to slash costs to less than £8bn by 2020 and transform the banking experience for their end-customers.[2][2] The bank is driving capital towards technology and its staff to compete against mounting pressure from other traditional banks, challenger banks and FinTechs.[3][3]
Talent and human capital provide the best value and return on investment for banks looking to diversify their digital offerings. Investment in talent and digital skills goes hand-in-hand with investment in technology solutions to help banks become more fluid and responsive to changing customer behaviours.
In a world where everything is accessible at the click of a button, customer expectations need to be matched by the experiences created by banks. Earlier this year, USB found that online banking has overtaken visiting branches for the first time. The study found 52% of all consumer transactions are now done online, making it the primary method of banking.[4][4]
Bank branches are expensive with most retail bank branches costing banks between 40-60 % of total operating costs.[5][5] The cost savings from a reduced number of branches can be redirected towards investments into creating digital banking experiences that accommodate evolving customer habits.
With introduction of new financial technologies, the way in which people manage their money has shifted dramatically. However, the current potential of the UK financial services industry is restricted by the lack of tech and digital talent available. Firms are spending record amounts, with 85% of business executives allocating up to a quarter of their total budget to digital transformation in 2018.[6][6]
Digital Transformation goes beyond moving traditional banking to a digital world. A digital strategy is no longer limited to the IT department. In the current business environment, it transcends every aspect of a business and drives long-term success. In order to digitally transform, banks need to adopt a digital mindset. This means fostering a culture of innovation. It’s about going beyond the hype of digital trends and the latest buzz words and identifying the business impact on operations and service delivery.
Most banks still run on core systems installed in the 1970s and 1980s.[7][7] These enterprise structure are made up of a patchwork of systems with limited functionality for the current digital landscape. Fintech and challenger banks are not hindered by these systems, and have the agility to keep pace with customer expectations, which means banks are turning their attention to their business critical function and how they can re-engineer it to become more flexible.
Smart banks are taking advantage of cloud-based systems to enable staff to better communicate and interact with customers across multiple channels to accommodate all customers.
Banks definitely need to push forward with their digital strategy, but they must do so wisely, supported by a reliable digital partner. Technology is beginning to encompass all aspects of bank operations. Working with a single-source supplier that integrates digital into the DNA of the bank – from the talent to the technology solutions – is key to adopting a digital mind-set, which will support a bank’s digital transformation journey end-to-end.
[1][1] http://www.cityam.com/277814/five-uk-banks-given-open-banking-deadline-extension-cma
[2][2] https://www.fnlondon.com/articles/lloyds-puts-digital-banking-at-heart-of-three-year-strategy-20180221
[3][3] http://www.bbc.co.uk/news/business-43138764
[4][4] https://www.telegraph.co.uk/business/2018/01/10/digital-banking-overtakes-branch-use-may-fuel-closures-warns/
[5][5] http://www.economist.com/node/21554746
[6][6] http://www.digitaljournal.com/tech-and-science/technology/59-of-businesses-find-their-digital-transformation-falls-flat/article/504386
[7][7] https://www.euromoney.com/article/b143rj4dz3cd92/technology-investments-drive-up-banks-costs
One in two UK consumers would be happy to share transaction data with third parties if offered a more personalised service, whilst one in three would be happy to use banking services from technology companies, because of the personalisation they offer.
UK Banks that missed last month’s Open Banking deadline are facing up to the end of their extension period. Next week sees HSBC and Nationwide’s deadline to implement compliant payments functionality.
Until now, established financial services providers have been able to rely on large, mostly static customer bases. But once Open Banking gets into full swing, customers will be able to permit third-party access to their accounts and financial data, allowing tech companies to offer direct financial services, and giving increased visibility to consumers.
Open Banking will change the previously rigid rules of the game. It will make the financial services market more transparent, and put new and established providers on an equal footing. While new players will be looking to poach customers by offering them better deals and ultra-personalized service, traditional providers will have to prove that they are making efficient use of the data they already hold, by communicating in an increasingly personalised way.
Under Open Banking, financial institutions will have to adopt customer loyalty solutions in order to stay strategically ahead of competition. Only smart and precise communication could create such a relationship between a bank and its clients.
Pini Yakuel, CEO of relationship marketing platform Optimove, comments: “Banks and financial services providers will have to focus on giving the best possible value to the customer, to stop them switching to their competitors. Offering highly tailored communications will be key to this. Financial services firms will be looking at their existing data to find out what value means to each person, and adapting marketing strategies in an emotionally-intelligent way to make every customer feel special.
“Consumers are likely to see an increasingly personalised experience, as old and new financial companies move to distinguish their brand with promotions and rewards tailored to each individual, like retailers.”
(Source: Optimove)
Attempts have been underway in Parliament recently to help tenants improve their creditworthiness. This includes new legislation to make lenders give rental payments the same weight as mortgage premiums, including most recently Big Issue founder Lord Bird’s draft Creditworthiness Assessment Bill.
Open Banking - ahead of any future legislation - offers tenants the potential to achieve improved creditworthiness at no extra cost.
The launch of Open Banking in the UK last month, backed by nine key UK banks, is now enabling renters who want to get a mortgage to improve their creditworthiness with an ease that would have been unimaginable only a year ago, says CreditLadder.co.uk.
Instead of onerous paperwork or agent/landlord permissions - as has been the case in the past - tenants are now able to report their rental payments via mobile/online platforms simply, quickly and for free.
Tenants tell their bank they want the platform to ‘read’ their rental payments and pass this information on to a credit reference agency, such as Experian.
“When we launched our Open Banking service last month we were acutely aware that the take up maybe held back given the newness of the technology,” says CreditLadder CEO Sheraz Dar.
“But so far Open Banking is proving popular with our customers. The number of people signing up to our service has doubled and last week 80% of those applying to join our service now do so via Open Banking.
“Many of the UK’s 11 million private renters are finding it harder and harder to get on the property ladder, so it’s no surprise that a service like ours which gives them a leg-up is proving popular.
Case study
Civil Servant Ian Cuthbertson, 33, from Norwich is the first person in the UK to sign up and register his rental payments with a credit agency using CreditLadder’s Open Banking service, which is provided through an FCA-regulated partner.
Ian pays £700-a-month for a two-bedroom barn conversion he shares with his partner on the outskirts of Norwich, payments that are now being added to his credit history via CreditLadder.
“My partner and I are planning to buy a home in a few years’ time so I’ve been realising more and more that I need to improve my chances of getting a mortgage,” he says.
“So I’ve been looking at how I manage my credit cards and trying to make little tweaks here and there to my finances so that I present myself as trustworthy to lenders.
“I was thinking to myself that I pay the rent on time every month and wondered if that could count towards my credit score. And then I saw an article on MoneySavingExpert.com about CreditLadder so I decided to sign up.
(Source: CreditLadder)
