Open banking: nothing personal

Open banking: nothing personal

Financial authorities globally are promoting open banking. While it represents a shift in the mindset of traditional banks, Heather McKenzie, editor of Daily News at Sibos, finds they may be up to the challenge.

In September, Australia’s Macquarie Bank launched a pilot of an open banking platform for customers to transfer data to approved third-party applications. Any third-party provider that meets the bank’s open platform standards and security criteria can connect. In launching the pilot, Macquarie attracted plenty of attention as it was seen to be stealing a march on Australia’s “big four” banks.

Macquarie Bank obtained an Australian banking licence in 1985, having operated as a wholly-owned subsidiary of UK merchant bank Hill Samuel since 1969. The bank’s retail banking and financial services business recorded net profit of AU$513 million in the year to 31 March 2017. It has more than one million customers and holds a AU$28.7 billion mortgage portfolio – about 2% of the Australian mortgage market. During the year it launched Apple Pay as part of its digital banking programme.

The open banking platform features Macquarie devXchange, an open developer portal with a “sandbox” to help third-party developers to create and test new features in a safe environment. Customers will be given the option to securely connect their personal banking data such as transactions and home loan balances, as well as their business and wealth information, into third party applications, such as budgeting and accounting solutions, to create personalised banking.

“Open platforms allow for a secure free flow of connectivity,” says Wayne Lipschitz, open platforms product owner in Macquarie’s banking and financial services group. “The same necessary rules around client data security still apply, but as long as they meet that criteria, any third-party provider can securely connect through an open API.”

His colleague, head of personal banking Ben Perham, adds: “Our customers have been telling us they want to securely connect their information into their favourite accounting software, budgeting app and other innovative services they’re interested in.” APIs are being used by leading digital companies such as Amazon and Google to transform consumer experiences, and Macquarie believes it can do the same in financial services.

Macquarie describes open banking as a “mindset shift” away from proprietary control, which was traditionally driven by commercial demands.

As in many other countries, regulators and financial authorities are pushing the concept of open banking in Australia. The country’s House of Representatives Standing Committee on Economics, issued its second report into the country’s four main banks in April 2017. Referring to the proposal contained in the first report to “empower consumers” by forcing deposit product providers to open access to customer and small business data by July 2018, the second report stated: “All four banks noted general support for data sharing. However, the banks are conflicted on this issue, as the process of opening up data means that an asset which is currently proprietary to the banks will be non-proprietary in the future. For this reason, it is critical that the banks are not allowed to control the process or set the rules by which consumer data is opened. An independent body must lead the change and be responsible for implementation.” The committee suggested that the Australian Securities and Investments Commission develop a data sharing framework for Australia’s banking sector.

In Europe, the big push towards open banking has come via the European Commission’s revised Payment Services Directive (PSD2). “The most impactful element of PSD2 – that banks must open their customers’ accounts to third-party payment and information requests – is paving the way for an entirely new end-user experience in digital financial services, one in which the customer will call all the shots,” says Maikki Frisk, executive director at Mobey Forum, an independent industry association focused on digital financial services. “It may not happen overnight, but it’s coming.”

A good way to imagine the post-PSD2 era of open banking, she adds, is to think of it in terms of apps and platforms. This approach brings it all into focus, principally because it has happened before. “The development of this space is starting to look a great deal like the advent of the smartphone.”

Frisk points up that before the app and android revolution took hold, a mobile phone’s functionality was native to its manufacturer. There was one SMS application, one address book and so on. The arrival of the touch-screen smartphone turned this on its head, making the operating system (OS) into a platform upon which third parties could introduce new apps, widgets and services. “This gave end-users massive choice, very quickly. Users could continue to use the device’s native apps, of course, or they could adopt apps and functionalities from elsewhere in their OS ecosystem. The same is about to happen in banking.”

Matt Williamson, global head of payments at Finastra, agrees. “Open banking signals the dawn of a new payments era. Banks and payments services providers [PSPs] will have the ability to move between payment markets, building analytics around their client base as adoption rates increase. These in turn will determine additional value-add and services yet to be considered.”

Cross-border PSPs will be able to leverage a better rate for payments based on volumes within the markets. So, if a provider is sending a significant number of payments to one region monthly, they can command a lower fee as a result, he adds.

Tom Durkin, head of digital channels at Bank of America Merrill Lynch global transaction services, says PSD2, the push for APIs and the notion of open banking will possibly deliver a licence for fintechs, vendors and other non-banks to disintermediate banks from their own customer base in terms of maintaining the relationship at the front end. “But banks have customer data on their side,” he says. “It is incumbent upon the successful bank to shift its status, in the eyes of its clients, from one of mere assistant to that of valued advisor. A bank should be able to understand more about its clients’ financial flows than perhaps even its clients do.”

The fintechs focus on payments niches; they will not tackle the entire spectrum of corporate activity, he adds. Forward-thinking banks will not dismiss the fintechs but will instead seek to partner or collaborate with those that have the open banking best solutions. Seeing the competition as a collaborative opportunity could even change the way the traditional partner-bank approach is modelled. Multibank payments will be easier when bilateral agreements are eliminated, and multibank reporting will be timelier when banks can reach directly into partner bank systems.

“With better APIs and improved integration, instead of sending MT 940s over the Swift network, networks could be expanded to deliver considerable efficiency upsides for all parties. Even Swift has an opportunity to support API progress: its GPI project is all about interaction with to pull reference information or connect via an API,” says Durkin.

Dr Louise Beaumont, strategic advisor at SapientRazorfish, a digital branding consultancy, and co-chair of the UK’s Open Banking Working Group, says combining data through APIs will allow banks to improve customer experience “hugely” for processes such as account opening, AML checks and product application processes, where personal information can be pre-populated and information verified from official sources.

“We are also likely to see competitors emerge to the standard bank overdraft. Once payments services providers have access to transaction data, they will be able to anticipate when customers are likely to need a short-term line of credit and offer their service as an alternative.” Similarly, it is likely that providers will help customers earn a higher return on their money by automatically switching large credit balances from current accounts to interest bearing accounts. Automated services that help customers manage their money between several accounts, for example to avoid going into overdraft when they are in credit elsewhere, is an obvious extension of this idea.

Speaking at the SAP Financial Services Forum in London earlier this year, Kevin Hanley, director of innovation at RBS, said of the trend towards open banking: “Customers are demanding it, technology is enabling it, and regulators are enforcing it. Financial services will become more collaborative, open, competitive and customer-focused. As a result, we will unbundle and re-bundle our offerings. Production and consumption in financial services are changing.”

Hanley said RBS’s aim was to become a much better-connected bank, to its customers, through “compelling digital interfaces” and to other stakeholders in the ecosystem. “We believe future success will be through a combination of our assets and capabilities with those of others. If we can do that and put customers at the heart of it, we believe that is part of our success. We recognise today that we need to be technically able and culturally willing. Technically means better connected; culturally means in everything we do we have to be a radically different organisation than we have been historically.”

Also at the event, Jarkko Turunen, head of open banking at Nordea, said open banking was not solely about technology, but was also about culture. “This means we have to work outside our financial services walls and incorporate different cultures. I see technology as the ‘easy’ part of open banking.”

Hanley agreed: “The winners in the future will be better-connected banks that transform from being traditional providers into end to end services aggregators of other entities’ offerings. This will also involve having the courage to leverage the distribution capabilities of others. Financial services in an increasingly networked world will be a much broader proposition.”

Williamson points out that until PSD2 comes fully into operation in January 2018, the exact requirements for banks are unknown. “This puts immense pressure on banks who are unable to move as quickly as their PSP counterparts. It also reinforces the importance of collaboration between these parties.”

Damian Richardson, head of innovation and strategic initiatives at NatWest, says banks and fintechs have successfully worked with each other for decades. “These symbiotic relationships enable each party to focus on its strengths, such as scale, AML expertise or software engineering. Open banking means the banking and payments ecosystem will evolve to become more collaborative, with all parties adapting and thriving to better serve customers.”

However, Mobey Forum’s Frisk reckons that large banks stand to gain from open banking as it will give them access to the new open data market. “Here, it’s worth asking a question: who is the end-user likely to trust the most to deliver the next wave of payment and aggregation services – the bank they have trusted for years, or an app developer they have never heard of?”

This article is also featured in the Daily News at Sibos 2017 – Day 3 edition. 
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