• Francesco Simoneschi, CEO and Co-founder at TrueLayer


• 06.06.2018 08:30 am
undisclosed

At times the financial industry can seem like one of those immutable pillars of the economy. Its not like the retail industry, which in little more than a decade, has radically changed its focus from bricks and mortar to digital – with all the logistical and marketing issues associated with it. Nor, is it like travel and hospitality which has been forced to reform due to price comparison sites, peer review, and convenient booking platforms. Save for sporadic innovations like ATMs, chip and PIN and online banking, the fundamentals of banking remain reasonably unchanged. Of course, many of you would be quick to point out that below the surface data science, customer service and marketing automation, and digital transformation projects are radically altering the fabric of many financial institutions. Others too, will shout about how investment banking is almost unrecognisable thanks to complex algorithms and other fancy techniques. However, for the man and woman on the street, the way banking seems to work has remained largely constant.

That perception is going to change very soon. The reason? Open Banking and PSD2.

Open Banking came into force in the UK in mid-January. The regulations are designed to increase competition and choice in the financial industry by enabling consumers to share their personal financial data, currently held by banks, with approved and regulated third parties. 

What, on the face of it may sound like a peripheral technical change, is stating a revolution that will unleash an incredible range of innovative financial services and products, and profoundly change the financial and tech industry. This is because Open Banking and PSD2 removes hurdles that have held back fintech innovation. For many years fintech companies have been severely restricted by the power banks have over access to customers. Data sources have been restricted or denied, integration was complex and slow, and there was no universal regime for security and compliance. In short, all the deck was stacked in favour of financial institutions – they could push exclusive arrangements or buy any solution perceived as a threat at a very early stage. As a result, innovation has been largely restricted to international payment processing, automation, peer-to-peer lending and accounting software. Scaling a consumer focused fintech solution that seeks to do a core banking service better or cheaper has been incredibly difficult to pull off. Open Banking turns this situation on its head.

Businesses and consumers will gain access to products that will make their life a lot easier. Consumers and businesses will finally have the freedom to immediately and accurately compare the rates of current and business accounts and mortgages. This will lead to services that vastly increase access to financial products - going far beyond what is currently available today. More complex finance management tools will also be built. People will soon have all of their financial information collated onto easy to manage dashboards - including utility bills, loans, insurance, loyalty cards and current accounts. Printing out bank statements to prove your identity or earnings will soon seem quaint and arcane as companies can simply confirm these details with a click of a button. 

Undoubtedly, by creating new opportunities for direct bank payments, competition and consumer choice will increase, especially in the credit card market. Credit in general will be disrupted as credit bureaus and banks face stiff competition. The result should be a substantial increase in the availability of finance, especially for those who have been traditionally locked out of financial markets. 

Artificial intelligence will also be used to analyse cashflow or create a new range of financial assistant bots or data insights for SMEs. We may soon see AI driving financial recommendation engines generating personalised loan, investment and insurance products for consumers. By linking with tools such as Google Calendar, Amazon Echo, or Facebook Messenger, banks will be able to better serve their customers by sending notifications to remind users of payments or charges.

Innovation will take place on the granular and macro level. Organisations could develop radical solutions to specific problems, for example, charitable organisations could create applications that monitor the financial health of at risk individuals and then set up mechanisms to intervene before serious problems occur. On a grand scale, the collection and analysis of financial data could be used to better predict trends for specific industries and the entire economy. 

Of course, as with any revolution, Open Banking will not be without incident. Currently, there is some scepticism about the security and utility of Open Banking – especially among consumers. The vast majority of this concern is misplaced and largely fuelled by media coverage that does not fully get to grip with the purpose of Open Banking or the safeguards that have been created. As more solutions with clear benefits get created and launched, adoption will rapidly increase and apprehension will dissipate. It’s worth noting that Open Banking and PSD2 creates a security framework that, if applied to other data-heavy tech sectors such as social media, would make hacks and breaches an exceedingly rare occurrence. 

With more and more people taking advantage of Open Banking, the fintech and banking industry will change. Funding and talent will flow at an even greater pace into the industry and we’re likely to see large tech companies take a more active role, for example by seeking to consolidate a range of startups into one solution. 

For banks, the outlook is more complex. On one hand, the growth of challenger banks and bespoke solutions is likely to spur competition and innovation – lowering the price of some services and increasing the acquisition or in-house development of new technology. On the other hand, it could completely change the role of banks in the financial sector. It is not inconceivable that financial institutions could simply become the pipes through which financial data flows. Perhaps they will become hubs for innovation – platforms on which startups are encouraged to build solutions.

Exactly how Open Banking will unfold is very difficult to predict, but what is clear is that an environment has been created to radically alter the financial industry. It is not hyperbole to say that this change will be just as far reaching as anything that has impacted the retail or travel industry. For everyone involved in financial services there is a clear incentive to understand and embrace Open Banking. The alternative is to be left behind.