Open Banking and the payments revolution
Banking has been digitised, re-regulated, technologised and invaded by new entrants.
Open banking will deliver remarkable changes in both the way you move money around,
and in the way you store and access information about your money.
It promises to revolutionise how you manage this important resource
Start by watching my introductory video below (click on the bar under the video to read the full text).
Then spend some time on self reflection and further reading.
Open Banking and the payments revolution
HELLO. ITS JEREMY here to welcome you to this months topic which covers Open Banking, the Payments Revolution and Personal Financial Management.
I don’t know if you have heard about OPEN BANKING. Unfortunately, it hasn’t been well publicised and fewer people than might be expected know about it or understand how it is going to change the way we deal with money. Indeed I believe it can change our whole relationship with money.
It appears that the Millennial Generation are more aware of it than the older generations. However, Open Banking will affect everyone in time. It is potentially a sea change in the way we utilise our financial resources so this month I am going to spend some time with you discussing its implications and talking about some of the projects that are already available.
Financial services was always going to be one of the first sectors to react to the DIGITAL REVOLUTION. After all, its all about figures, the easiest data to digitise. Indeed, the industry did react where it suited the main players. However, it has taken a significant piece of legislation from Europe, the Second Payments Services Directive (PSD2) and the UK’s Open Banking project to really unlock the power of the digital revolution in financial services.
LOOK HOW THINGS have changed. Go back 18 years to the turn of the century. Most payments then were by written cheque. Yes, we had the hole in the wall and it gave you money on the back of your card. It might even provide you with a balance and your last five transactions. However, to find out the EXACT STATE OF YOUR FINANCES you had to order a statement or wait for the regular end of month statement.
THATS ALL CHANGED. Today banking has been well and truly digitised, re-regulated, technologised and become a battleground for new entrants. Online banking has delivered remarkable changes in both the way we move money around, and in the way we store and access information about our money.
ONLINE BANKING was always going to be a no brainer for banks. Get the customers to do all the day-to-day branch work online and you can cut branches and headcount. And to be fair it has been a real benefit to account holders. With online banking you can move money at the click of a mouse or swipe of a finger. Non-core payments services such as PayPal enable secure transactions across businesses and continents. Money transfer services handle your cash transfers to friends, family or businesses in any currency. Apps like MoneyWiz can log in to your bank and credit card accounts, extract the information and regurgitate it in a consolidated statement of income and expenditure tracked against your budgets.
Yes, we now have more control over our personal cash. However, the revolution is only just beginning and it is being driven by PSD2 and Open Banking
WHAT ARE PSD2 AND OPEN BANKING?
Open Banking is an initiative driven by the UK COMPETITION AND MARKETS AUTHORITY designed to bring greater competition and innovation to the UK financial services sector. It is closely associated with the SECOND PAYMENTS SERVICES DIRECTIVE, which is a significant piece of European legislation.
Whilst the two are different they have a similar objectives and so there is considerable convergence between them. For the purpose of this article, I am going to refer only to Open Banking on the understanding that there are strong links with the second payments services directive.
OPEN BANKING will provide the technology to enable you to authorise your bank or building society to share your account information with selected, regulated Third Party Providers (TPPs). These TPPs can in turn provide you with sophisticated services utilising your personal and financial data.
For any business, and banks who hold detailed information about your spending habits in particular, personal information is an invaluable marketing and product development resource. Your information shapes the intellectual property of the business that is the foundation of its success. Your data is valuable – to you who want to have unfettered ‘ownership’ of your money, to the banks who own the data and the firms that want to use it in their algorithms to build and sell services based on your data.
Understandably, possibly, banks were reluctant to share this information with anyone else. Ironically, they could not even be bothered to use it themselves. For years banks have had the data and technology to enable their clients to manage their money far more efficiently by providing detailed analysis of spending habits. They chose not to because they were happy for their customers to run out of money before the next payday, so having to make use of expensive overdraft facilities.
This is in marked contrast to the needs of most of their customers who are sensible, responsible people who not only want to avoid overdrafts but actually want to put money aside for savings each month.
That is why it took PSD2 and Open Banking to force banks to open their databanks to third parties who would be able to provide these services. Again unsurprisingly, the banks themselves are rushing to create these services in an attempt to persuade their customers to stick with them.
THE CORE BENEFITS
You may already be thinking about security. You may be asking yourself why, after being told for years never to share financial information, you are now being encouraged to do exactly the opposite! What are the benefits that make it worth your while to authorise an unknown third party to mine your personal banking information.
In short, Open Banking IS BILLED AS ‘the power to revolutionise the way we move, manage and make more of our money.’ It is seen as the way we can CONTROL our money in ways previously unimaginable. Philosophically, it is about the DEMOCRATISATION of financial services and the RETURN OF POWER from the banks to you at home.
When fully operational Open Banking could lead to full service apps that are nothing less that your personal financial assistant.
Here at Living Money we see Open Banking as THE GATEWAY to hugely more efficient and effective management of your key resource – your money. In particular, Open Banking is the genesis of web and app driven PERSONAL FINANCIAL MANAGEMENT tools and a REVOLUTION in the way we make payments.
THE PAYMENTS REVOLUTION
Open Banking provides the mechanism for third parties to initiate payments directly from your bank account. What does this mean? Take Amazon for instance. At the moment you probably use a debit or credit card to pay for goods purchased through Amazon. If you have got the card details stored with Amazon you can even ‘Buy with 1-Click’. However, if you have used a credit card, you then have to transfer money each month to the card from your bank account.
Using Open Banking, Amazon could DIRECTLY ACCESS YOUR BANK ACCOUNT with your permission. Similarly, if you want to send a friend some money you will be able to instant message £10 without having to open up your banking app, log in, find the right recipient etc.
This may sound a little unadventurous. However, the more subtle benefit comes to you, the consumer, in the form of LOWER FEES, GREATER CONTROL of your money and power sucked from the banks. This is because the banks will suddenly loose control of their most valuable resource – your data about your spending.
This will make it more difficult for them to develop their own new added value services. More importantly, it will deprive banks of the data they need to assess and manage consumer risk, data that in turn could become available to third parties through Open Banking and remove the bank’s key competitive advantage.
PERSONAL FINANCIAL MANAGEMENT
Personal Financial Management is, of course, nothing new. THE GEORGIANS and Victorians were scrupulous about keeping their books, tracking cash in and out and managing cash flow.
What has changed is the way it happens. Ledgers and quills have been replaced by COMPUTER APPLICATIONS and calculators.
So what is Personal Financial Management and why is it so important. As a life and financial coach I have been banging on about this for years. Personal financial Management is, in effect, your route to restful nights and fulfilled days. It is having sufficient control over your money, practically and emotionally, to enable it to become your partner in life, the means by which you achieve your aspirations.
In practical terms, Personal Financial Management is a way to manage your income and expenditure, assess the long term impact of immediate decisions, find the most appropriate financial products for your needs, efficiently manage your debt and much more.
Lets explore these in more detail in the context of open banking
IMPROVED CONTROL OVER PERSONAL EXPENDITURE
The trouble with a bank statement is that it is simply raw data. To become fully in control of your finances it is important to have spending plans, monitor how much you spend in each category of your plan and adjust your spending accordingly. Admittedly this is as much an emotional or psychological challenge as a data management challenge. However, Open Banking is already generating mobile apps that can access your bank records, allocate each item to your defined spending category and compare actual spend against your planned spend.
IMPROVED PRODUCT CHOICE
Based on the data your app has just retrieved, the app may then provide you with details of accounts that might suit your needs better, for instance by identifying accounts with better overdraft facilities.
I find very few people have a clear idea of their net worth. Open Banking provides the wherewithal to consolidate information about all your current, savings and borrowing accounts to give you an up-to-date figure of your net worth at any time.
SAVINGS AND INVESTMENT
With access to your accounts, artificial intelligence driven Personal Financial Management apps can now monitor your income and expenditure on a regular basis and identify cash for savings and then, after giving you a couple of days notice, will move surplus income to a savings account.
In Canada users of such an app are reported to have reduced their expenditure by between 4% and 8% per month on average and directed the extra money into savings accounts.
As the technology (and its ability to handle regulatory requirements) improves, Personal Financial Management apps will be able to also move money into higher risk investment portfolios.
This is another area ripe for development through PFM. Apps in this arena will be able to tap into your credit rating, analyse income and expenditure and use the data to obtain better quotes from lenders or suggest more suitable lenders for your circumstances.
TECHNICAL AND SECURITY
You can probably already see the benefits of Open Banking and indeed you may already be taking advantage of Personal Financial Management tools in a different form. MoneyWiz, for instance, asks you to provide them with your account details, password and PIN so they can log in to your account as if they were you to read your transaction details.
Open Banking works in a different way. Information sharing is made possible by Application Programming Interfaces (APIs) that allow different software applications to talk to each other. The Open Banking protocols standardise the way the APIs work to ensure everyone can talk to everyone else (if authorised by the client) via desktop or smartphone.
Because of this there is no need to share sensitive information such as bank account passwords with new providers, leading to better security.
I have highlighted a few examples of apps that are already making use of Open Banking, and I’ll add to these as more come on the market. I would just add that these are not recommendations at the moment. I am more interested in highlighting the potential of open banking.
WHAT DOES THE FUTURE HOLD?
Sadly, Open Banking has not been backed by a public awareness campaign so many remain unaware of the benefits at best, and fearful and confused at worst. Finance and the security of financial data are deeply sensitive issues amongst consumers and this may well slow down the development of Open Banking technologies.
As with all technologies, its taking far longer to implement. The fact that five out of the top eight banks, who were supposed to be fully ready for Open Banking by January 18, were unable to make the deadline is possibly indicative of the development challenges ahead.
In addition, the Open Banking only includes current accounts at the moment. Credit card companies and other payment services have a further two years to prepare.
There are widely differing views on the impact of Open Banking on the market. Some pundits foresee the downfall of big retail banks, outclassed and outgunned by the putative Google, Amazon and Apple banks. Whilst these are possible, the barriers to entry to the banking sector remain incredibly high because of regulation and capital adequacy requirements.
In contrast, others see Open Banking being suffocated by the incumbent banks, and potential disruption of the banking sector grinding to a halt.
I thought it would be interesting to hear the views of a few of the people closely involved in the Open Banking Revolution in this short video produced by the Open Banking Organisation.
You probably will not be surprised to hear that I really rate the comments of Leon Muis, the Chief Operating Officer of Yolt in the last clip. And you can find all the full interviews on the Insight page of the Open Banking website.
Banks have a lot of thinking to do about their future in an Open Banking world. They may elect to pull up their socks and build their brand around personal service, trust and authenticity. The alternative is they simply become low value commoditised conduits for the transactions between you and the tech giants.
Open Banking is driven by the Competition and Markets Authority, which is a powerful government body in the UK and unlikely to let this initiative slip. With rising consumer demand for more control of personal finances and rapidly developing technology pushing hard I see significant disruption ahead, but taking longer to establish than technology did for the music industry, say. However, many people are totally unaware of the possibilities, and public education will be an important factor in getting the project off the ground.
Open Banking is billed as ‘the power to revolutionise the way we move, manage and make more of our money.’ It probably is; it might just take a while before we get there.
Thank you for listening. Please keep an eye on this page as I’ll be adding new developments as they occur.
More about open banking
Open Banking is a UK Government initiative. It is being managed and implemented by Open Banking Ltd which has an informative website, worth looking at. below is a repeat of the selected interviews included in our introductory video
We have picked a few examples of companies already working with the Open Banking API.
We have selected these to give you an idea of the scope of Open Banking.
As usch, they are NOT recommendations and should not be treated as such.
As Open Banking businesses and technology develop, and we start to use these
here at Living Money we will add recommendations to this page and the Resources section.
Yolt has been developed by ING Bank and describes itself as ‘The Smart Thinking Money App’. It enables you to ‘View your UK bank accounts and credit cards together, understand your spending, see upcoming debits, create easy budgets, monitor bills and subscriptions and look for better energy deals’
Yolt supports 25 banks and institutions, which are probably the main ones used by 90% of us. Yolt does offer to connect others if requested. It does not seem to include mortgage accounts, a surprise since the mortgage is often the largest and most troubling element of family finances.
It allows you to analyse your spending by merchant and category and to see your spending history going back three months. The app includes a facility to set and track budgets, monitor bills and subscriptions and track renewal dates and to transfer money abroad.
Flux is starting out to address the real problem of expenditure control, budgeting and financial planning. If you are going to do it properly, you need a fairly detailed picture of where you money is going. That means categorising your expenditure item by item.
Not a problem when you buy from Pret, say. Pret only provides one thing and in my own categorisation system any Pret purchase is automatically categorised as Daily Living>Food on the move.
When I buy from a larger store, whether it be a bricks and mortar supermarket or local Co-op, or an online superstore such as Amazon, my purchases run across a whole range of deeply diverse categories. I can buy virtually anything I need from Amazon, from AAA Batteries to mousetraps to a zero gravity chair. And of course I can rent video and music, not forgetting those books that Amazon was founded upon.
However, as far as my bank statement is concerned, its simply a purchase from Amazon or Sainsbury’s or the Co-op. To accurately categorise my expenditure and manage my spending plans I need to manually categorise every item, often from a paper receipt, as I enter into MoneyWiz, the household finance app I use.
Flus begins to address this by at least enabling the upload of a receipt onto your phone. However, at the moment it appears to be London based, has only a very few participating stores and requires a dedicated credit card.
It may be limited at the moment, but I have high hopes for Flux and its likes. One day it will, I am sure, evolve into an end to end system that categorises every item in a transaction, not just the transaction itself, and adds this high value data into a Personal Financial Management app to give an automatic and detailed analysis of your expenditure.