Open Banking opens the floodgates for alternative finance
This week the Competition & Markets Authority (CMA) mandated the adoption of Open Banking by early 2018, after a two-year investigation into SME and retail banking.
It’s big news because it opens the door for a new ecosystem of useful financial services apps that can connect to our live bank account data.
Open Banking will be based on APIs (application programming interfaces), which are already a cornerstone of modern software development and facilitate the rapid collaboration of third-party technology teams.
We expect Open Banking APIs to be the catalyst for rapid innovation, because now agile startups and challenger banks will have access to the same data that the established banks have had to themselves until now. You could even say that a financial services revolution is on the horizon.
For the incumbent banks, the worst case scenario is that new companies instantly take advantage of this previously unavailable data. I’m reminded of Google, who used existing telecoms infrastructure to great effect without taking on much cost themselves.
Conrad Ford, founder and chief executive of Funding Options, gives his thoughts on the Open Banking mandate:
"Open Banking will force the dominant banks to compete on a level playing field with alternative lenders — for example, with Open Banking alternative lenders could use read-only access to banking data to make better and faster lending decisions. At the moment, high street banks often have more technology-led credit approaches than their supposedly ‘fintech’ rivals — because the big banks are the guardians of a huge amount of account data that their rivals don’t have.
"Some alternative finance providers could go further than read-only too — giving pre-agreed third parties read-write privileges would allow them to not only view account data, but also create it. The implications in this small distinction are huge.
"With data creation access, a whole world of financial services becomes possible — accounting, lending and banking could all be performed by one piece of software. Or even better, imagine a business owner being able to raise an invoice, finance a different one, and transfer funds to a supplier all from one smartphone app. API theoretically allows all of these kinds of functions — which will surely lead to a technology gold rush for control of the business banking sector.
"Overall, it’s a good thing that the CMA is taking a tough line on the banks. Many of them have claimed that Open Banking is impractical, even though they already offer such API technologies to a select group of partners. The banks are odds-on to continue trying to undermine Open Banking, by setting arbitrary and out-of-date IT standards that alternative lenders will struggle to meet."
Open Banking should also support the UK’s fintech leadership post-Brexit, because although PSD2, the EU’s revised Directive on Payment Services, will offer similar initiatives, it is likely to lag well behind.
Whatever happens next, we’re certain to see lots of exciting development in financial services over the next few years.Contact Us Now