【News】To change how you use money, Open Banking must break banks

Rune Fisker

Banking is boring. For most people this might seem instinctively true – in the United Kingdom it is an objective statement of fact. Here, five big banks – Barclays, HSBC, Lloyds, Santander and Royal Bank of Scotland – control over 80 per cent of the current account market, offering opaque variations on near-identical products. People pick a bank more or less at random (parents bank there; they have a branch nearby; they gave me a free young person’s railcard), then, once they’ve chosen, stick with it for life. Since 2013, only 3.5 million of an estimated 70 million UK account holders have changed bank. By comparison, in the same period, 44 per cent of marriages ended in divorce.

Now, this is about to change. In August 2016, the Competition and Markets Authority (CMA) issued a ruling ordering the nine biggest UK banks to allow licensed startups direct access to their data, right down to the level of current account transactions. Account holders must approve any exchange. If they do, then the data lying dormant in bank accounts – electricity bills; mortgage payments; weekly spend on cappuccinos – will become as easy to exploit as personal details online.

This is a potentially scary prospect – but if what you want is innovation, nothing could be more welcome. From the combination of maps and location data, Travis Kalanick invented Uber. With names, ages and universities, Mark Zuckerberg created Facebook. What could finance startups (or Amazon, or Google) make with the authoritative record of a lifetime’s spending, shopping and borrowing? “It’s a treasure trove,” says Conrad Ford, CEO of lending comparison site Funding Options. “It could upend the whole industry,” says Tom Blomfield, founder of banking app Monzo. The CMA gave it the name Open Banking.

As soon as the measure was announced, a 115-strong team was assembled to build the technology. But with powerful political and commercial interests vying to dictate its shape, the project has been fraught with difficulties. The current head fired most of the senior team after six months. Doubts remain whether it will work as promised.

There’s another worry. In other sectors – newspapers, television, retail – digitisation has splintered institutions by breaking up their bundle of services and products and allowing consumers to pay only for the bits they want. If Open Banking brings that kind of disruption to banking, are we ready for the consequences? “My vision of this, and I think it's not uncommon, is that where banks make their money at the moment just fizzles out,” says Andy Reiss, co-author of the initial investigation into Open Banking. “Will RBS – and there's probably a reason why I pick on that one – be the one that fails to move with the times and collapses?” A recent McKinsey report estimated that digitisation and a weak economy could cost UK banks between 31 and 45 per cent of their profits by 2020.

Open Banking comes into force on January 13, 2018. In less than three months, banking will become exciting. The question is: is that a good idea?

Open Banking: what you need to know

Government-ordered
After concluding there was too little competition in UK banking, the Competition and Markets Authority ordered the UK’s nine biggest banks to open up their data to third parties.
Open data
The first step is to release data about the location of branches and ATMs, and about different products. This means that product comparison sites will be able properly to show different accounts and loans for the first time.
Open APIs
Open Banking also lets account holders share their transaction data securely with other banks and third parties, through the use of APIs. But what will startups make with this treasure trove of digital gold?

To understand the way banks currently use data, it helps to begin with a simple question. Why isn’t it possible to see transactions from different banks in a single app? There’s no technical reason: it’s all just entries on a spreadsheet, after all. But, like Apple and Microsoft during the PC-Mac wars of the 1990s, the banks don’t allow it. This incompatibility is what Open Banking is designed to correct.

To do this, Open Banking Limited, the non-profit set up to deliver Open Banking, is building APIs, or Application Programme Interfaces, protocols that transfer data automatically from one piece of software to another. (The name makes more sense backwards, because APIs are Interfaces used by Programmes to interact with Applications: a plug socket, for instance, is an API for electricity.) What makes APIs so powerful is their open-endedness: they expose something useful, then let developers make what they want with it. When you watch your Uber crawling round the nearby streets, you’re seeing the Google Maps API in action; sift through city centre flats on AirBnb and it’s the same API, just in a different context.

Being able to see several bank accounts at once might not sound that interesting. But then, most APIs don’t, until someone comes along and finds a use for them. The idea behind Open Banking is to let transaction data out into the wild in the hope that startups will turn it into innovative products – even, says Tom Blomfield, “a new type of bank”.

Blomfield, a gingery 32-year-old, is referring to Monzo, the startup he founded in 2015 – one of several smartphone-only “challenger banks” attempting to remake banking for the digital age. The name is a misnomer, because Monzo doesn’t do mortgages, loans or any of the other things you’d associate with a bank (including, of course, physical branches). Instead, it collects and organises information. “Basically,” Blomfield explains, “it’s this financial control centre that pulls in all of the data from all your different bank accounts and shows you an aggregated view of all your money in one place.”

Despite acquiring a banking licence, which gives it the legal right to host current accounts, in April 2017, Monzo’s distinctive coral-pink bank card only functions as a prepaid debit card, which users top-up from their existing bank account. Even with this limitation, however, it has attracted more than 400,000 users, with a further 50,000 on the waiting list, growth that shows strong interest in aggregation, according to Paul Barnes of app tracker App Annie. “Aggregators just provide better ease of use,” says Barnes, who connects French app Bankin' to his First Direct account. “The rate of growth is 50 per cent faster than in traditional banks.”

Usability is one advantage aggregators have over their older rivals. Another is visibility: you get to see everything laid out in front of you, like Post-its on a pinboard. That won’t mean much if you can’t bring yourself to look – but aggregation can also help with that, because if the data is one place, then startups can add the algorithmic tips and filters familiar from other apps. Monzo automatically sorts every purchase into spending breakdowns by category; Coconut and Solo does the same thing for freelancers, incorporating time tracking, invoicing and tax returns. Ex-Googler Nick Heller’s Fractal Labs provides automated cash flow advice for small businesses.

With APIs, data analysis is just the beginning. When your Uber arrives and you get an alert on the app, there’s no-one in Uber headquarters tapping out a message – instead, the system uses an API for text messages built by a company called Twilio. Open Banking creates a similar system for payments. At present, when you buy your niece a Minions doll on Amazon, the retailer contacts an “acquirer”’, such as WorldPay or Global Payments, which gets in touch with Visa or MasterCard to take the payment from your account. By opening up banks’ data, Open Banking makes it possible to pay with lightning speed directly from a bank account – in effect, creating an Amazon “One Click” for the entire internet.

For shoppers, this will put an end to fumbling around for cards – and, since the various middlemen each charge for their service, it should lead to cheaper products. (Visa and Mastercard are among the many established firms threatened by Open Banking.) It also lets a “control centre” such as Monzo not only make money visible, but actually move it around.

“The great thing about opening up data via APIs,” Blomfield says, “is that you can just automate away so many of life's annoyances. You can use software to start optimising your life: auto-switching your gas or electricity or making sure you're always on the best insurance policy.”

This kind of automation is how Open Banking Limited hopes to eliminate one of the great unfairnesses of the existing banking system: charges for exceeding your overdraft limit. Over half (51 per cent) of overdraft users find themselves paying a myriad of expensive daily, monthly and transaction fees, according to the CMA, usually when they are struggling financially. (To give one indication: if you go over your overdraft, you get charged £10 to £25 for every transaction, whether or not it actually goes through.) The Financial Conduct Authority said recently the system gave it “significant concerns”.

Open Banking makes it possible to create automatic systems that monitor your account and step in when you go into debt. If it can’t move money from another account, it will take out just the right amount of credit from the lender with the lowest rate of interest, without fees, and without even needing to ask for permission. “We expect that to become automated,” says Miles Cheetham, head of customer engagement at Open Banking Limited.

For banks, this is a problem. Overdraft fees – often from apparently free accounts: a classic case of, if you’re not paying for it, you are the product – provide around a third of bank revenues, according to the CMA. But the larger danger is that, like other incumbents before them, banks find themselves sidelined by digital platforms. “Look at what happened 10-15 years ago to Vodafone,” says Barnes. “They owned the network, the portal and the content. Then the App Store came in and that became where people went. The huge threat for banks is that they become plumbing for the financial sector, rather than having a direct relationship with the consumer.”

This has been the vision of Open Banking since the very beginning. “This is how I pitched it to Treasury,” says John Gibson. “I told them, it would be like the App Store but for banking.” Gibson was working in the Prime Minister’s policy unit when he first came across the idea of APIs for banks. He moved to a competition advisory firm, Fingleton, but stayed in touch with his old colleagues – so when the Treasury started investigating the area in 2013, he went to tell them what to do.

The result was the Fingleton Report, the first formal investigation into Open Banking, which Gibson co-wrote with Andy Reiss in 2014. (“I like to think,” says Reiss, “that John is to traditional retail banking what Charles Darwin and Richard Dawkins are to religion”.) Then, the following year, the CMA started to explore the area. “I have to be careful what I say about this, because the CMA’s an independent regulator,” says Gibson. “But in the course of discussions the Treasury and others will have suggested things they thought were worth including.” The plan to disrupt banking was underway. Best of all: the banks themselves would be required to deliver it.

 

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