As the former governor of the Bank of England, Meryvn King, has eloquently pointed out, banks are institutions that pre-date modern capitalism and “owe much to the technologies of an earlier age” (The End of Alchemy, 2016). There is no reason to expect them to continue in this form under the technological, regulatory, social and business pressures for change that are about to overwhelm them. If that sounds like waffle futurism that does not need to be taken seriously, you could not be more wrong. In the UK, those changes are going to begin in January when the world of “open banking” is created by the implementation of the Competition and Markets Authority (CMA) “remedies”. That is, the nine largest banks are compelled to provide Application Programming Interfaces (APIs) for third-party applications to access bank accounts, a milestone in a long journey to bring a revolutionary degree of competition to the sector.
This all rooted in the frustration of the regulators to see more competition. They tried forcing the banks to spend a billion or so quid on an account switching services and that didn’t work, so they decided that they had to look to more radical solutions.
The CMA reports a study by one of the very few new entrants, Tesco Bank, which found that a clear majority of account holders agreed with the statement “I cannot be bothered to switch accounts as I do not believe I would get better service/value for money elsewhere”.
[From John Kay - Competition in banking does not necessarily benefit consumers]
In the UK, the regulators’ determination to change this situations means that we are about to see major disruption in the space. I called this before a “crossing of the streams” (in an hommage to Ghostbusters!) because there are three different initiatives coming together.
The first stream is the PSD2 provisions for access to payment accounts. As you may recall, these include a set of proposals that are due to come into force in 2018. A group of those proposals are what we in the business call “XS2A”, the proposals which force banks to open up to permit the initiation of credit transfer (“push payments”) and account information queries. Even at a pure compliance level these PSD2 regulations pose significant questions for the structure of the existing payments industry. While PSD2 does not mandate APIs (I think - it’s all gotten a bit complicated but as far as I know the screen-scrapers have fought d a decent rearguard action) an open banking API is the obvious way to implement the PSD2 provisions.
The second stream is Her Majesty’s Treasury’s push for more competition in retail banking. This led to the creation of the Open Banking Working Group (OBWG), which published its report in 2016. It set out was a four part framework, comprising:
- A data model (so that everyone knows what “account", "amount", "account holder" etc means);
- An API standard.
- A security standard.
- A governance model.
The third stream is the CMA report that triggered the remedies mentioned above. This envisages APIs to improve competition in retail banking by focusing on the use of APIs to obtain access to personal data that can be shared with third-parties to obtain better, more cost-effective services. These streams are coming together to create an environment of what is now called Open Banking. And it’s a big deal.
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.
From To change how you use money, Open Banking must break banks | WIRED UK
I think the use of Amazon in this example is far more disruptive than the author may have intended. Amazon Payments is, in my opinion, precisely the kind of business that will benefit from open banking. It won’t be fintech startups who eviscerate the existing payments industry, it will be the heavy hitters who are able to gain access to the bank account and merge that ability with their colossal resources and gigantic data reservoirs to create a new customer experience. Indeed, in that Wired article, Rowland Manthorpe says plainly that open banking is a new way of dealing with the twenty-first century’s most sought-after resource, personal data. This point was recently echoed by the Dave McKey, the CEO of RBC, who said “data is the battleground for banks that will determine the future success of financial institutions”.
All of which reinforces my opinion that banks need get into the business of identity, reputation and trust pretty quickly.
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