Open banking is fuelling a fintech revolution and fostering a wave of apps which give customers more control of their money and insight into their finances. Martin Cooper MBCS interviews Constanza Castro Feijóo, Stakeholder Engagement Manager at the Open Banking Implementation Entity.
Nobody knew how the story would unfold when a 99-year old army veteran called Captain Tom Moore began walking laps of his garden. By the time Captain Tom had completed his 100th circuit, he’d raised nearly £32m for the NHS and generated such momentum that he marched on to become a national treasure. Captain Tom’s story is remarkable for many reasons, including its use of an innovative banking technology behind the scenes, which helped enable the collection of vast amounts of donated money.
As Captain Tom walked, the Just Giving page used in his fundraising effort saw money transferred directly to his charity without the giver having to enter any card details. Rather, anyone wanting to support the walk just clicked a bank transfer button in Just Giving’s app. This might sound trivial but, behind the scenes, a whole regulatory and technical stack - each a long time in the making - aligned and worked in unison.
Along with raising £32m, Captain Tom’s walk might have indirectly brought us closer to a future where we don’t need to carry physical credit and debit cards, just a phone.
The technology in question is, of course, open banking. At its heart is a very GDPR-like notion: our data has value and, as customers, our data is our own - we own it, not the banks. Like our money, they just look after the information.
‘Captain Tom’s fundraising was one of the first high-profile use cases we have for an open banking enabled payment,’ explains Constanza Castro Feijóo, Stakeholder Engagement Manager at the Open Banking Implementation Entity. ‘It was really good news for all of us. But the most important thing is that all payments via open banking were processed smoothly and successfully. There were no queries about the payment method.’
Wasted data, wasted opportunities
Historically, banks haven’t done a huge amount with our information and, to be fair, nor have we, as customers, either. In the pre-digital days of paper, did you keep a rising pile of unopened bank statements? And then, when persuaded, switch over to digital banking and keep a similarly unread stack of monthly PDF reports mouldering in your email inbox?
In practice, open banking means we, as customers, can take control of our financial data and share it with other banks and financial institutions. In practical terms, if you bank with one of the nine biggest banks in the UK, you can, for example, ask it to share your data with another bank or financial services organisation. Open banking’s founding hope was that these third-party fintech firms would use customer data to provide us with more choice and more innovative financial products and services.
Given financial data’s inherent sensitivity and value, this exchange of data is, of course, very highly regulated.
Data is released by banks in a highly secure and structured way, via an API and can only be shared with third parties who have been authorised by the Financial Conduct Authority. These registered third parties can use the information and hopefully fuel a wave of competition.
‘At the end of the day, it’s all about bringing more innovation for consumers and SMEs,’ explains Constanza.
‘I think the opportunities are endless,’ she enthuses. ‘Think about it: as consumers, we will have the opportunity to have tailored solutions to save more, to get better prices, to shop around, to access advice more easily, make payments easily and more securely. It’ll ultimately help us make more of our money - when this technology matures, we’ll be much more empowered about how we engage with our money and be in better control of it. At the end of the day, open banking technology is building the UK’s financial health and wellbeing, helping consumers become more engaged in their finances, make better decisions and get more for their money.
‘I hope that in the future we’ll have a larger range of services and tools that will be consistent and familiar to us to help us understand where our data is and offer protection if something goes wrong providing a great consumer experience with things working smoothly and seamlessly.
‘Account information has been the first iteration of open banking,’ she says. ‘Now, open banking allows payment initiation services and this is where we see huge potential. We could have a small business reducing late payments and increasing security.’
Constanza outlines a possible scenario: an electrician comes to your house, they create an invoice, generate a QR code, you scan it with your phone and your banking app opens with a pre-populated payment form ready for approval. You can just allow the transaction with your thumbprint. Payment is immediate, secure and there are no intermediary costs which are traditionally associated with internet-based payment systems.
What is the OBIE?
It’s unlikely that the OBIE will win any awards for advancing the cause of creative naming conventions but it is very much at the beating heart of a fintech revolution. One, which - if it hasn’t already - may well be coming to a mobile phone near you very soon.
‘OBIE stands for the Open Banking Implementation Entity and OBIE was established in 2016 by the Competition and Markets Authority,’ explains Constanza.
Five years ago, the CMA published its report on the state of the UK’s retail banking market. The report found that older and larger banks do not have to work hard enough to win and retain customers. As a result, it’s difficult for new and smaller banks to grow. The report’s proposals included changes to help consumers and microbusinesses find a better deal. The report also urged a quicker adoption of open banking.
‘We were mandated by the CMA to bring more competition and innovation to retail banking,’ Constanza explains. ‘We are the standards body responsible for delivering and implementing open banking, making sure the CMA9 (the nine largest banks in the UK) implement the APIs in the right way. The OBIE’s role is to ensure the standards are implemented to a high level of performance and availability. All of the fintech’s within our ecosystem are regulated by Financial Conduct Authority (FCA).’
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Critically, Constanza explains that, in the UK, there is one single standard. Across Europe there are several open banking standards and, across the world, even more. But, in the UK, our biggest banks have standardised on one approach and API.
‘I think that’s very important,’ she asserts. ‘The UK's progression means that we are serving as a blueprint for open banking implementation globally. Setting up the OBIE and mandating that the banks should [participate], has created a very simple plug and play type scenario, whereby a fintech knows exactly how to access data from a specific bank. In the UK, there is one [API] and, by working with the [CMA] nine, we are covering at least 85% of UK current accounts.’
So, how did the CMA9 banks react to the advent of open banking? It’s easy to imagine a clash of cultures: staid and august bricks-and-mortar institutions faced with an external transformational force.
‘Initially, the traditional banking sector was understandably sceptical,’ Constanza recalls. ‘It was awkward. They had to fund us, but we were challenging them - we are bringing more competitors to their market. But I think that’s what’s fascinating about the UK’s implementation. I listen to banks now and they say, for the first time, open banking is enabling positive collaborations. Now we’re seeing fintechs launch products - not for consumers – but ones which can directly help retail banks.’
Money for good
From a customer’s perspective then, our mobiles are becoming a gateway to a world of new services which will let us receive, spend, share, manage, grow and move our money more easily. But, what can the technology do to help foster financial inclusion? There are around 1.2m people in the UK who are 'unbanked' - meaning they have no bank account. Without access to a bank account, these people miss out on discounts, deals and cheaper services and, as a result, end up paying more. Britons without a bank account, the Guardian wrote, pay a ‘£485 poverty premium’ each year.
Constanza continues, ‘When it comes to financial inclusion, not everyone has access to credit cards and the ability to make payments. In the UK, having a card isn’t a privilege but it isn’t something that everyone is entitled to have, whereas many people have access to a phone, so open banking raises the opportunity for inclusivity. Open Banking enables financial inclusion like never before, the barrier now is digital access.’
Beyond making access to saving, lending and transferring money more accessible, open banking’s data sharing ethos is being used to help people achieve financial stability. The Big Issue’s social investment arm, Big Issue Invest, has launched a new financial inclusion tool that uses open banking data to give customers and debt advisors a fairer, better understanding of an individual’s financial position.
The Big View tool is a collaboration with Castlight Financial. The platform will sort a customer’s transactions into over 180 categories of income, debt, discretionary and non-discretionary spending. The transactional data is then automatically merged with credit performance data to create a report on the extent of the debt issues, precisely how they have arisen and what and when clients can afford to pay the debt back.
John Montague, managing director of group operations at The Big Issue, said the tool will be used to ‘address squeezed, struggling and debt-laden individuals experiencing problems with debt and help put them back on the path to financial health and back to the lives they want to lead. [Through the use of data], if debt is an ongoing problem for a client, the tool will be able to identify patterns of complex financial behaviour which need to be addressed.’
Far from being a proof-of-concept technology that is in the making, open banking is here and it’s working. The OBIE has developed a thriving ecosystem of over 300 regulated providers and there are now well over 100 apps employing open banking API employing open banking API, which are currently used by over three million customers in the UK. As economic disparity rises, it will be paramount to continue the exploration and development of solutions like open banking, which increase financial cohesion, stability, and accessibility.