Why is open banking one of the most significant changes in UK’s recent banking history?
Open banking will catalyse competition within the UK’s banking market. It will cause meaningful disruption, and give start-ups and challenger banks the opportunity to compete on a more level playing field with the incumbents. It reduces the barriers to entry and the ideas and apps created by innovative challengers should raise customer expectations. The threat of competition should lead banks to try harder to offer more personalised products, pricing and experience to customers.
How will PSD2 spark innovation in financial services?
PSD2 will act as a catalyst for innovation within the financial services market. It will transform how banks can price and structure their products, and how they display data to their customers. Combined with artificial intelligence, the data from PSD2 will enable banks to offer services akin to those of a private banker to the mass market, offering tailor made products or recommended next actions based on the customer data they hold. For example, the new Emma financial management app will help consumers avoid overdrafts, find and cancel subscriptions, track debt and save money. The onboarding process for customers also will be significantly easier; since banks will have access to third party data, there will be less need for customers to fill in countless number of forms.
As a result of being able to validate customer data from other sources, it will also be easier to identify customers, and thus reduce fraud. This will give more confidence to processes such as KYC (know your customer) and AML (anti-money laundering) and will help with compliance issues.
What impact will have PSD2 have on account information service providers (AISPs)?
An account information service is an online service which offers a consolidated view of the payment accounts customers holds with their payment service providers. It provides a clear overview of an individual’s financial situation, aggregating information from multiple payment accounts and displaying data in a way that is easy to understand. While these services already exist in the UK, PSD2 will bring them within the scope of the regulation. This means that AISPs can receive access to payment accounts, however, they also will be subject to new data security rules to ensure consumers are properly protected.
What are the benefits of PSD2’s open API for banks and customers?
For customers, there are some significant benefits to having financial data aggregated in one place. Financial analysis tools will provide meaningful insights as data from other financial institutions – for example credit card statement data can be integrated alongside current account statements. This aggregated data will be easier to monitor, offering new insights into personal income and expenditures. As a result, customers can more easily compare experiences of ‘other customers like you’ and products from other banks. This means it will be easier than ever for customers to find out what bank account is best for them.
For banks, the initiative will open a number of new opportunities. With customer permission, financial institutions can access customer information held by competitors. Banks can use this to seek out new opportunities and meet customer needs more effectively. PSD2 will also give banks the ability to make more accurate marketing and credit decisions, therefore offering an improved customer service and pricing. Furthermore, with a wider range of customer data, banks can become the relationship hub for customers, and win a greater share of customer wallet – after all, they are already starting from an advantaged position.
What are the risks associated with open API?
First, there is always a risk when sharing data with a third party especially a start-up, they may not have the protocols or security in place to prevent a cyberattack. Another risk is customers may give away data accidentally, by ticking boxes they don’t fully understand, which could lead to unwanted recommendations and offers, with have no idea of how these third parties use their data.
There is also the risk of fraudulent payments being made through the payment initiation service. However, this should be covered by the originating bank as it will own the liability for unauthorised transactions.
Are banks and customers comfortable with screen scraping? Tell us about the issues related to the process.
Banks have never been comfortable with screen scraping as there are a lot of security and technical issues associated. Screen scraping has only ever been a workaround where there is no access to an API. Firs, customers have to provide their password to the aggregator, which is a risk. Either the password is saved in app on the local device, or it has to be held by the aggregator. This process also desensitises customers to sharing passwords, which can increase the risk of phishing attacks.
Second, screen scraping only works if the webpage being scraped stays the same, with all the fields in the same position when the screen scrape was first set-up. If the page were to change, then the customer will receive all the wrong data or no data at all. There can also be latency issues, as multiple pages have to be scraped simultaneously for customers to receive their data all in one place. Finally, screen scraping can discourage customers from changing their passwords, because if the password changes, then the aggregator won’t be able to access the webpage—causing a lot of hassle for customers as they have to change passwords multiple times.
Moving into the evolution of fintechs – how are they at play?
We have started to see some early examples take form. HSBC and its subsidiary First Direct have partnered with Bud, a London-based fintech start-up to test an open banking app. This app will allow a mix of HSBC customers and non-customers to view all their account information. They also can receive transaction notices, money management tips, and product suggestions based on individual needs (even from third parties). For example, the app will trawl databases for the best broadband and energy deals, personalised for each customer. Meanwhile, Emma is building a financial management app for millennials. It has been given Financial Conduct Authority approval. The app will help consumers avoid overdrafts, find and cancel subscriptions, track debt, and save money. Doubtless, there will be many more examples in the future.
How will regulations such as GDPR and new technologies, such those involved in as robo-advice, transform open banking this year?
Robo-advice will be powered by a wide range of artificial intelligence and machine learning technologies. This will form a key part of open banking. The available customer data will feed AI bots to recommend personalised products based on spending habits, credit scores, mortgage repayments, etc., as well as give financial advice on investments and savings based on a customer’s profile. Banks will ultimately be able to offer an automated relationship manager for all customers.
GDPR and PDS2 are very much aligned. PSD2 allows customers to share data, while GDPR allows them to control the data once it is shared. GDPR protects customers in case their data is misused, and outlines the rules for when giving and withdrawing consent.
Overall, what impact will PSD2 have on banks and its customers?
It is still too early to see the impact for customers, but we have started to see banks change their lending processes. By gathering data automatically, lenders can access more accurate and comprehensive data than could otherwise be provided by a customer. This will mean that potential bank lenders will be able to understand as much about new customers as their existing ones. Manually gathered data—especially for income and expenditure, is often inaccurate. By automating this process, PSD2 data sources will reduce the number of manual underwriting referrals and the need to go back to the client for clarifications. In turn, this reduces the cost and turnaround time of the application and improves the customer experience.
In addition, by improving the data quality gathered, banks can more accurately assess the risk of the potential loan. This means the bank can make more informed credit decisions. As a result banks can deploy a more sophisticated pricing model, and offer more competitive loan rates to new customers, which will in turn help to increase applications and provide customers with more choices.
Alex Bray is Assistant Vice-President for consumer banking at Genpact, a global professional services firm focused on digital transformation. He is an expert on omni-channel banking and regularly comments on trends in the industry. Prior to joining Genpact, Alex was global director of retail channels at Misys. He has previously worked at IBM as a Managing Consultant in the Digital Banking practice, and spent 10 years at Lloyds Bank.