'UK's open banking revolution has lessons for Australia' James Eyers, AFR
There's a revolution going on in British banking. The UK's Competition and Markets Authority (CMA) issued its final order on "open banking" in February. The new regime – on track to come into force next year– is set to have a profound impact on the sector in the coming decades and beyond.
Banks have been told that information such as transaction and loan repayment data does not belong to them, but their customers. Those who want to use that data to access better financial products or services will be able to do so in a safe and secure manner. Delivery will be via application programming interfaces (APIs), software that allows different computer systems to connect, which the UK banks are furiously building and testing.
The impact of open banking – which has also been proposed for Australia by a parliamentary committee – will help even the playing field for fintech start-ups and non-banks entering financial services and improve competition. It will also herald a new data economy; data will have a value and be used to provide better insights into pricing and boost new innovation, according to supporters of the new regulations.
Even though many aspects of the UK open banking regime are still being worked out – including determining where liability for data breaches lies and how to create trust for the new system among customers – banks are considering how they will morph into new roles including data custody and software publishing.
Open banking will allow smartphone-wielding customers to easily search for and switch to more competitive financial services. Glenn Hunt
"I definitely think a new ecosystem will emerge," says Saket Jasoria, head of digital strategy at Lloyds Bank Group. "The short-term impact will take a bit of time to settle down, but the long term will be quite significant, and in five to 10 years we will be in a new ecosystem."
Bradley Rice, a financial services lawyer at Ashursts, says: "It might be three years, but certainly in five to to 10, the whole industry will change on its head."
Australian lawmakers are watching UK developments closely. The second report on the big banks released last week by the House of Representatives economics committee called for customers' transaction history, account balances, credit card usage and mortgage repayments to be made available to competitors via APIs by July next year.
"This data is critical to overcoming the problems of consumer inertia and opaque pricing that exist in the banking sector," said the report.
"Enhancing access to publicly and privately held data has the potential to make a strong contribution to economic growth," said the report of the committee chaired by Liberal MP David Coleman. "The cost of banking products is generally opaque, which increases switching costs for consumers and limits competition. Data sharing, however, can help to overcome these problems." It called on the Australian Securities and Investments Commission to develop a "binding framework" using APIs and appropriate privacy safe guards.
Open banking will allow customers to easily search for and switch into new financial services.
Even if the timeline is overly ambitious, the committee's recommendation has focused the Australian Bankers' Association, which held a high-level session on open data earlier this month, while open banking featured prominently at the Australian Securities and Investments Commission annual forum in March.
Data as an asset
While it remains to be seen how federal Treasury will respond to the calls for open banking in Australia, in Britain customer data is about to become a new asset class.
"We are going to be moving into a data portable world and data will fundamentally become an asset – something of value," says Henry Kuang, a member of the EY global fintech practice and member of the secretariat for the CMA's open banking working group.
Ultimately, it will be up to customers to embrace the scheme and make it a success, but if it does take off, it will liberate a new set of data. "There should be a raft of opportunities we hope will emerge from this," he told a fintech delegation arranged by the Australian British Chamber of Commerce in London last week.
The UK open banking regime allows third parties to issue payment instructions, so payments can be initiated from third-party sites.
All of the large UK banks are currently working with a new implementation entity, created by the CMA, to develop standards that will have to be adapted by 2017-18, under the current timetable. The CMA order is also backed by two pieces of European legislation, GDPR and PSD2. The UK regime puts open APIs at the centre and will create a single taxonomy and classification system.
While timelines remain tight, issues including legal responsibility for data security breaches are still being worked out.
The UK regulations implementing Europe's PSD2 are silent on who has responsibility for a breach by one of the new "account information service providers", which could include fintechs, but say the bank and third party will work that out.
Ashurst's Rice says possibilities include banks writing new clauses in their banking terms and conditions about data liability, establishing a new alternative dispute resolution scheme or more litigation, although few think many fintech start-ups will have sufficient capital or insurance to cover losses in the case of a catastrophic cyber breach.
There are also concerns about whether open banking will be embraced by customers. Bill Roberts, the assistant director at the CMA with responsibility for delivering open banking, says "the biggest risk for open data is that people are afraid of it." Like Australia, UK bank customers have been reluctant to switch banks and have repeatedly been told by the incumbents over decades not to share banking passwords with anyone.
Rice says incumbents also come from a position of strength; he predicts many fintechs will struggle to create the trust necessary to move substantial business away from the banks. "If you're a new fintech start-up, you are going to have a massive obstacle to overcome trying to win brand loyalty and trust – that is where the banks probably still have a big head start," he says.
Lloyds Bank's Jasoria agrees there are many uncertainties which still need to be worked out over the next year to bring the regime to fruition but none of these are roadblocks. "The ultimate purpose of this should be the benefit of the customer," Jasoria says, adding all banks will have to be heavily involved in customer education.
Australian fintechs participating in the British Australian Fintech Forum in London last week say if the Coleman committee recommendations are adopted competition and customer experiences would be improved.
Doug Morris, CEO of Sharesight, which provides portfolio tracking and reporting software for self-investors, said "better access to data and unified sources would go a long way towards customers understanding their investments". Given Sharesight was created to deliver that, the start-up is considering how it will have to adapt to an open data world, he says.
Jack Stevens, CEO co-founder of Edstart, a funding platform helping parents pay private school fees, says: "It's all about data. There is a mass of data there that hasn't been leveraged before in this way and if we can access some of that data it can be used in interesting ways."
The government is yet to release the Productivity Commission's final report into data use and availability, which will recommend customers be given a "comprehensive right" to data. If applied to financial services, such a right will be similar to that granted by the UK open banking reforms.
UK banks are now preparing for a wave of innovation that could take retail banking to another level. The country is seeing the emergence of "challenger banks", such as Starling, Atom and Mondo, which have been built from the mobile phone up to appeal to millennials. All will take advantage of open banking.
And with artificial intelligence technology developing at rapid pace, Rice points to the arrival of the first AI-powered digital personal finance assistant. A customer might ask a computer:
"Am I getting the best rate on my credit card?" By taking advantages of the open APIs to find their transaction history and interest rates offered by alternative providers, the digital finance assistant could scrounge the market for the best refinancing deal. The payments directive could allow customers to switch cards simply by telling the personal assistant to do so.
"That is not going to be too far away," Rice says.
Imran Gulamhuseinwala, global head of fintech at advisory firm EY who has just been appointed as the CMA's "implementation trustee" to oversee the delivery of open banking, says he expects other jurisdictions will follow Britain.
"Most regulators, policy makers and incumbent financial institutions around the world feel open banking is inevitable," he says.
The author travelled to London as a guest of the Australian British Chamber of Commerce.