In less than six months, open banking sets sail. We do not want open banking to be like Twelfth Night: a shipwreck. As Shakespeare’s extraordinary play unfolds, it slips into a environment similar to today’s. The production may be magical, but there is also the presence of a wise fool (Feste) and a whistling regulator (Malvolio).
Here are three rules to help you maintain smooth sailing with open banking:
1. Third parties can, with client approval, access data, and make payments
You may have noticed that some credit score companies or financial services providers are now offering free credit scores. Why would a service that used to cost consumers now be provided for free?
Starting in January, companies that provide loans can ask to see the actual amount of money coming into the bank account of the person or organisation requesting the loan. The regulatory question of affordability of any given loan will be clear and more importantly, visible to any regulatory review, as bank account balances will be actual figures, not estimates.
The third parties can be any supplier, not necessary another bank or even one with financial attachments to the bank that holds the bank account. They can be independent of the bank account provider.
2. Banks must ensure that third parties operate securely
The bank that holds the client’s bank account must make certain that all third parties operate in as secure an environment as the bank does, and that it will continue to do so going forward. The third party must meet security standards required by the banking industry and must link electronically to the banks through open APIs.
3. Clients must be informed of third-party data or transaction requests
The bank is responsible for ensuring that their client, if taking advantage of the third party’s offerings, is continuously informed of any requests, of the response to those requests, and of any data or transactions made between the bank and the third party. This puts even more pressure on banks to respond in real time to their clients.
Banking is changing
Hold on a minute, you might be saying, the bank must do all this to let in third parties for a share in their clients’ wallets? Yes, it is part of the ongoing regulations to create greater competition.
One of the items highlighted by regulators was the £1.2 billion per annum generated by the banks for fees on unapproved overdrafts on current accounts. Fees charged often exceed payday loan companies for similar amounts of credit. This recent FCA report on high-cost short-term credit shows that the average overdraft line is £120, whereas the average outstanding is £130; a mismatch in the banks’ favour. Malvolio would approve, as the computer software (which was probably written in Cobol in the 1990s) charges from a central fee file anyone who is overdrawn at the close of the day.
While banks can easily manage cash flows avoiding costly unauthorised overdrafts in the private banking, large corporate, and wealth sectors, few have tried this across current accounts in general. Third parties can now offer solutions across multiple banks that help people and companies avoid overdrafts.
Doing nothing is not an option
Banks must be compliant with this, and the work must be done regardless, so let’s look at the opportunities. The key is to provide a secure data path to the cloud.
Once in the cloud, third parties (which can be the banks) can offer:
- Active wealth money management services using AI/bot technology for all
- Multi-bank services to better service our increasingly global footprint in both retail and commercial banking
- Ongoing improvement of digital services for you or your business, including sharing foreign-exchange margins and same-day international payments
Who better to do this than the banks themselves?
The rules are set. The key question is, how will the retail and corporate banking markets react to third-party solutions? Shakespeare might offer this advice for banks planning to go beyond compliance and compete with third parties: “Be not afraid of greatness.”
For more on open banking, see Open Banking: The Fuzzy Period.