PSD2 and open banking took effect in the UK and the European Union in January 2018. In Australia the timetable for implementation was announced in May 2018 and credit and debit card, transactional and deposit account data will be made available by 1 July 2019, and mortgage accounts by 1 July 2020. A number of other countries such as New Zealand, Singapore and Japan are working towards an open banking framework within their own jurisdictions and we should see regulation implemented in some of these markets in the next few years.
As a consequence of the new regulation, there has been a lot of buzz in the banking and fintech sectors about open banking, what it means for consumers, banks and fintechs and the transformation it will bring to the delivery of financial products and services. UK Finance – the trade association for UK banking and financial services sector – has said they expect open banking will result in the development of products and services that allow customers to optimise the use of their account and transactional data.
The changes could help open up new markets and encourage new market entrants, some of whom will offer services that will assist people who are currently financially excluded. There are a whole host of opportunities that it may not be possible to fully anticipate which could hugely benefit customers.
I expect that over time we will see new payment methods emerge at point of sale or online that compete with card payments by directly debiting bank accounts, services that provide recommendations for banking products based on account and transactional data, and data aggregation services.
Importantly, customer consent will need to be given to any third party wanting access to banking data.
Open banking will provide the opportunity for both banks and new entrants to innovate and offer new products. New business models will emerge, partnerships between banks and fintech’s forged and competition more broadly should be enhanced.
So what’s the rub?
I don’t think there is. There should be upside for all parties, be they incumbent banks, new entrants or consumers as long as there are clear rules for participation, common technical standards and no ability for incumbents to make it difficult for third parties to access customer data. An open banking framework will benefit banks as much as new entrants if open banking is viewed as an opportunity to innovate, strengthen existing customer relationships and attract new customers.
Having said this, the success of open banking will only be realised if there are equal parts innovation and security. Data security and the protection of customer is paramount and every effort must be taken to ensure that there is a robust certification framework for third parties wanting to access data or initiate payments.
In light of recent data breaches such as Facebook, Uber and Walmart, consumers are becoming more aware of how widely their personal and financial data is held, and more concerned about the security of their information. However, if banking data is kept secure, consumers will remain confident in the banking system and innovation will flourish under an open baking framework.
Author: Michael Swannell, Associate Payments Consulting Network.