The Open Banking Revolution – Where Opportunity Lies, So Does Danger

            The world has moved at a furious pace. A few years ago, most people wouldn’t even want to log onto their own bank accounts online, let alone process payments over the Internet. Now the concept of walking into a bank branch to execute payment or writing and depositing cheques is almost an alien prospect. In fact, when you walk into a branch to process a payment over a certain amount, they most likely will get you to log onto your own online account and just ‘assist’ while you do it.

               Meanwhile most banks have their own ‘banking apps’ enabling you simple access to your account on your phone with entry just through the fingerprint identification on your iPhone. The degrees to which you can perform financial actions will depend on the bank, but at your fingertips on the train to work is the prospect to pay bills, view balances and set up direct debits and standing orders. In our increasingly hyperactive lives the ability to use a spare second to carry out actions which previously required taking time to walk to a physical bank branch is welcome relief. 

                 Additionally, smartphones for several years now have enabled us to make payments using our phones using fingerprint or facial recognition. No longer do we not need to carry much cash, if any, and we now may not even need to carry a wallet at all. Just a phone (and a charger!). Financial decisions and actions are becoming increasingly easy to carry out. You may be forgiven for wondering how much more innovation could improve things. 

But all the above was before ‘Open Banking’ came in. 

Further Details Around Open Banking can be found at https://www.openbanking.org.uk/

           Open Banking was regulation (which came into force in early 2018 in the UK and EU) that required banks to open up their platforms to 3rd party applications ‘safely’. As such it was no longer only each individual bank which was going to be able to provide you digital access to your account and its data. 3rd party ‘fintech’ developers could create applications which hook into each bank’s own API which, with the customer’s permission, would allow you to view details of your account in a separate tool to your Bank’s app, one potentially giving you far more flexibility than that of the bank’s application itself. 

                 The tools developed from it have enabled you to analyse your income and spending on a given account, helping you to bucket expenditure into different categories making it easier than ever to do that budgeting we all find painful to do. Gone were the large excel spreadsheets where you had to download all your account statements to, and attempting to figure out individual payments and the category it should go into. Now you could allocate a given payment to a particular category and your open Banking app will forever allocate similar payments into its given category, allowing you to slice and dice your income & expenditure into different graphs and tables to help you better understand why you’re not saving as much as you thought you should be. 

          But it’s more than that. Because the apps are independent from the financial institutions providing the banking services, they offer the opportunity to connect up to all bank accounts you may have. Suddenly whereas previously you had log into each of your individual accounts with the providers you banked with, now you could view all your accounts in one place - savings and current. Getting an overall view of your finances had never been easier. 

          Separately, whilst not specifically from open banking, other applications began offering services which allowed for an auto allocation of some of your income into a savings account, encouraging generations millennial and Y to save by doing it for them. Some of these worked by using what you spent on a cup of coffee, and putting the change into some form of savings account. That spare change that often got frittered away on nothing was suddenly being used to save for future, sometimes just 25p at a time. 

            As the apps develop and the major financial institutions become forced to provide access, the opportunities it opens up for consumers also increases. Suddenly there is the possibility of being easily able to switch money between accounts, or choose from which account you wish to make a payment from all of them in the one location. The ability to move money around your existing accounts could enable you to optimise the amount you receive on your savings by ensuring you have the majority of your money sitting in the highest earning account at any given time without the need to log into multiple apps or accounts to move it, something which puts off so many people from managing their cash savings effectively. 

             But it has the potential to be so much more than that, a one stop shop for all your financial needs. The opportunity is there for algorithms to be created for the account holder to automatically allocate their savings to the highest interest bearing account, or shift money off a credit card to the one with the best rate ensuring any cash balances for which you get charged interest would be minimised as soon as it appeared. What if not just your bank accounts were connected, but also all your investment platforms – pensions, ISAs, NS&I accounts, share holdings and other investment vehicles – were all not just accessible in the one place, but where you could, despite your provider, shift resources between them in one place. Robo-advisers could not only be programmed to allocate cash between the funds it feels are best placed, but also the money you wish to stay in cash, could be moved to an account with a better savings rate the moment it became available. With the inclusion of a standardised KYC (Know Your Client) across all banks under the same or linked regulatory bodies, there is no reason why automatic account setup couldn’t be done based on information already used to set up accounts in the past. The list of potential for customers is immense, many of whom suffer currently because of the hassles of moving savings accounts or not noticing when the rate they’re getting is much worse than when they signed up for it.

             With every new innovation comes the potential dangers associated with it. Fraud, and especially cyber fraud and theft are increasing year on year. As we move to a more digital society, criminals are looking for more ways in which they can take advantage, be it via identity theft and setting up accounts in your name to accumulate huge debts with, or through direct theft from your accounts by getting access to your account or convincing you to transfer money to an incorrect account than you intended. Push payment fraud alone last year in the UK resulted in £354m of people’s and businesses’ money being tricked into transferring to a wrong account. One such fraud involves criminals sending an email pretending to be your conveyancer at the time of house completion and inserting their account details for the solicitors. While this fraud falls into the more basic category of persuading you to transfer money to a fraudulent account, the bigger risk with the new apps will come through the ever more complex methods by which hackers seek to steal the details of your account to divert funds to themselves. 

            The regulations applied by the Financial Conduct Authority (FCA), and similar European authorities via PSD2, are supposed to mean that your details (security details, login etc.) remain on the bank’s database itself, and that apps have no access to your security details. But if hackers were to gain access to just an app itself which enabled the transferring, payment or setting up of new accounts then there could be a risk they wouldn’t need your individual account details. Many of us are extremely lax when it comes to protecting our own cyber identities, working on the assumption that the institutions providing us with the services have adequate security in place to protect us from all eventualities. Simultaneously we bemoan increased security features which make things increasingly difficult for us to access or do simple items in our own accounts, with attempts to make passwords increasingly more complex one such feature which tests our memories and patience to the limit. As the speed of innovation shows no signs of abating, and the pressure remains on financial institutions to accommodate their clients at the same speed, there is a risk that the servicing of these new Open Banking apps may come at a greater speed than their ability to protect clients from inventive new cyber fraud.

            Additional questions arise over the use of the data consumed by the 3^rd party applications. As with all digital products these days, many companies seek to use the data that flow through their applications for a variety of purposes. Big data is big business and the ability to have millions of financial transactions flowing through your application opens up additional doors for the fintech to build on the data itself for additional revenues. Be it for the use of targeted advertising of financial or commercial products to users, or of allowing marketing companies a deep dive into the data to better understand consumer or saver behaviour, having reams of financial data on tap is where the real benefit lies for the app providers.  Whilst anonymising the data is an obvious first step to help make users feel secure, one suspects more will need to be done to make people fully trust that their data won’t be misused. The Facebook/Cambridge Analytica scandal is still fresh in people’s minds  and any kind of similar scandal with financial data could delay the progression of such applications by years.

          A final consideration is the potential impact on financial institutions themselves. As they seek to keep pace with the 3^rd party applications on offer, it is possible, with their initial larger resources, they may seek to push their own applications to the forefront. Whilst this could promote better quality of apps, and also apps with much better security, it may also be less beneficial for consumers. An app promoted by one financial institution, whilst it could provide the same services in terms of access to all accounts from any other institution, it may also seek to promote its own accounts and investments above others, which may not be in the best interest of the consumer. Additionally there’s the potential impact on the ability of banks to offer good rates for the same amount of time they currently do. In the current climate, banks often offer new “attractive” savings rates to bring customers onto their books. Many of these offers stand only for a limited period until a certain number of customers have signed up, after which it no longer becomes viable to offer such an attractive interest rate to more clients. In some cases these offers may last for only several months or even weeks. In a situation where applications are using AI to determine the best account for savers and automatically moving thousands of client’s money from the previous better account to the new “star” account, these offers may only last a matter of minutes, never mind months. Separately an inadvertent bank run could be a possibility if some banks’ least attractive accounts are suddenly drained by robo investors switching the money from these accounts to those offering a better rate. If this were to take place in great enough numbers, the speed and size of the withdrawals could put smaller banks liquidity at risk.

          There’s many exciting potential benefits which are likely to occur from the shift to open banking. As with everything we’ve seen so far in the ongoing digital revolution, there is likely to be applications to this new era in accessing our own financial data the likes of which we won’t even have contemplated yet. The trick as always, will be to ensure that we balance that ever growing wish for greater financial flexibility with the increasing need for thorough and safe financial cyber security.

I'd be interested to hear your thoughts on the opportunities and risks of Open Banking:

• Any thoughts on what sort of features would like to have in an app that would better help to manage your finances?
• Would you be open to a robo-investor moving your money around and opening new accounts based on preferences you may have selected?
• What concerns you most about the access to information that 3rd party apps may have and the risk to you?