A strange thing happened to me the other day when I opened my Barclays smartphone app. A little pop-up appeared asking whether I had accounts with any other bank and whether I’d like the ability to have access to that account via my Barclays app. This all sounds very convenient and it’s part of something called “Open Banking” and that’s what the Loan Princess team want to tell you about in this article.
Open Banking is something new in financial services, introduced by something called the Payment Services Directive (PSD2). PSD2 is an EU initiative designed to “promote the development and use of innovative online and mobile payments” (source: EU Commission). The UK government, keen to maintain its digital lead over its European counterparts, ordered the nine largest banks in Britain to allow access to their customers’ current accounts and their transactions to licensed start-ups (source: Wired).
And it’s the use of Open Banking that allows Barclays to be able to access your financial details held by other banks as long as they have your permission to do so.
On the 13th January 2018, Open Banking became law so what’s happened because of it in the year or so that’s followed?
Slow take-up
According to Splendid Unlimited and as reported in the Independent, only 9% of people in the UK have used services powered by Open Banking.
There are two reasons behind this slower-than-expected take-up, writes Herbert Leonelli, the Regional Business Development Director at PROFILE Software in BobsGuide – security fears and competition worries.
Because of GDPR (the new data protection laws which were introduced in the EU in May 2018) and worries about authentication (in other words, how does the bank REALLY know that it’s you who’s making a request), banks have been wary of the new rules, many seeing them as a “compliance burden”.
Losing out to smaller, nimbler, more data-savvy firms is also causing headaches for bank leaders. It’s hard to remember that, before 2006, there was no such thing really as fintech apart from PayPal. After that point, hundreds of competitors sprang up offering payday loans, instant acceptance loans, and business loans, all of which used sophisticated data analysis to determine whether someone or a company could afford to pay back a loan. These data analysis tools were far more sophisticated than the ones used by banks at the time and that’s still true today.
These companies were able to steal a march on their longer-established and much-larger rivals because they approached the market in a way that made the processing of loan requests much more efficient and cost-effective. It’s really hard to change the way that a big international bank works quickly and these banks, which had lost out before to their smaller competitors, were afraid that it might happen again.
Deloitte thinks that the big banks might be missing out on another major business opportunity, according to their “Open Banking: How to flourish in an uncertain future” report. Traditional institutions should consider Open Banking as a challenge to regain market share and to innovate in the creation of new markets.
Whether they will, we’ll have to wait and see but there is a slow building of pressure on them to react because, according to OpenBanking, there are now “100 regulated providers made up of 67 third party providers and 33 account providers, with 17 third party providers live with customers”.
Stand-out apps
Dutch bank, ING, a traditional big bank, has embraced Open Banking. It launched a money app called Yolt and Yolt’s 500,000+ users can check “their bank, credit card, savings and investment details using just one app rather than several. It also offers tools to track spending and budget more effectively.” (source: ThisIsMoney).
Money Dashboard is a homegrown, UK version of Yolt with over 200,000 users. Its aim is to allow you to manage all of your accounts so that you can achieve one of four goals – buying a house, paying off debt, savings accumulation, and paying for a holiday.
As I mentioned earlier in this piece, Barclays have started to use Open Banking on their platform allowing users access to bank accounts held at 8 other UK financial institutions, namely Lloyds Banking Group plc, Santander, Danske, HSBC, RBS, Bank of Ireland, Nationwide, and AIBG.
More and more apps are being launched every month – check out Google Play or the App Store for more.
Open Banking and lending
Open Banking means that, now, lenders have access to more information than ever before when making a decision on whether to extend a consumer or a business the finance they need.
Equifax is working with online analytics provider, AccountScore, to make the process of applying for a loan much “smoother” (source: P2P Finance News). Online P2P lender, Zopa, arguably the first in the market, launched an online tool which allows it to access your bank account to provide an additional affordability check (source: P2P Finance News).
Business-to-business lender, Iwoca, recent logged into Lloyds Bank data which allowed it to speed up its decision-making process on loans for up to £200,000 (source: FinExtra). In November 2018, a beauty salon in Kent successfully applied for a £10,000 loan in 1 hour and 23 minutes using Funding Options taking advantage of data supplied to it under the Open Banking protocols (source: P2P Finance News).
What does 2019 hold?
Many in the industry expect the rate of take-up and the variety of services provided to increase in 2019 but that the market is in more of an evolutionary stage than a revolutionary stage where we’ll see mass adoption of the technology by consumers and businesses alike.
Funding Options Managing Director Ryan Edwards-Pritchard told CrowdFundInsider that the challenge in the UK was to help small businesses “understand there are now options available that are much quicker and more personalised. Small businesses should know they no longer need to put up with the status quo.”
Christoph Rieche, co-founder and chief executive of SME lender Iwoca told City AM that “after its disappointing introduction this year, we expect a host of Open Banking apps to launch and go viral among consumers, thanks to the potential to save them thousands of pounds.”