January 13 marked the second anniversary of the implementation of 'Open Banking' in the UK.
Since Open Banking was introduced by the Competition and Markets Authority (CMA) it has been described as one of the most transformational innovations to impact the financial services industry.
It promises to revolutionise the way individuals and businesses manage their money and open the door to new possibilities. The scope of potential uses resulting from the directive is enormous.
Bill Roberts, the CMA’s Head of Open Banking said he anticipates “this technology will revolutionise how banking operates, and people manage their money in the years ahead” and believes that the UK will be “the global pioneer in Open Banking".
Here we explain what Open Banking is, the impact it has had so far and what to expect in the future.
What is Open Banking?
The catalyst for the inception of Open Banking in 2018 was a piece of pan-European regulatory legislation; the Second Payment Services Directive, more commonly known as ‘PSD2’. It acknowledged the importance of ‘FinTech’ companies in the marketplace and through legislation has sought to create an infrastructure that will generate greater choice and value whilst also delivering enhanced security and strong customer protection.
At its core, Open Banking is the manifestation of a series of reforms which will require all UK banks to share their customers’ financial data with other banks and authorised third parties through the use of Application Programming Interfaces (APIs) - subject to each customer’s express permission. Whilst regulation kick-started this process, the innovations that it has yielded have driven competition and facilitated propositions that offer consumers more insight, greater choice and better outcomes.
What has Open Banking delivered so far?
While many people are still unfamiliar the term ‘Open Banking’, consumers now have a fast-growing number of financial products and services available to them which harness the benefits of the initiative.
Advances in uses of account information
Open Banking authorised ‘Account Information Service Providers’ (AISPs) have harnessed API technology to enable customers to link multiple current accounts under a single mobile app. This provides customers with a more holistic view of their finances and helps them to keep track of their balances and spending in one place.
Frictionless payments providing new opportunities
Open Banking has also seen innovative new products and services launched by ‘Payment Initiation Service Providers’ (PISPs) which are authorised to initiate transfers directly to or from the client’s bank account. Examples of new consumer propositions which utilise this functionality are money management apps such as Revolut which transfer small proportions of their customer’s account balance to a savings account whenever they make a purchase, by rounding up the payment to the nearest whole pound and placing the difference into a deposit account.
For business customers, some banks have integrated their services with cloud-based accounting systems to automatically export transaction data. This enables businesses to reduce administrative burden and streamline processes, saving Finance Directors time and money.
Helping consumers get on the property ladder
The CMA’s reforms have also started a new wave of initiatives driven by social purpose, to improve lives by tapping into the power of Open Banking.
For example, Credit Ladder has partnered with banks using Open Banking technology to help renters get onto the property ladder and support first time buyers with their mortgage applications. Customers are able to use their rent payments to strengthen their credit score and improve their chances of being accepted for a mortgage. Credit Ladder can then also analyse the income and expenditure data of its users and map them against the banks’ mortgage qualification criteria to facilitate a more accurate assessment of eligibility and speed up the application process.
Open Banking is also being leveraged to help consumers earn more interest income on their savings.
Flagstone is an Open Banking authorised PISP and AISP and has developed an API which provides frictionless access to its platform. Revolut, the international digital banking and payment app, last week partnered with Flagstone to enable its clients to benefit from this functionality and the enhanced savings account interest income it will generate for them.
Nik Storonsky, Founder and CEO of Revolut said “Interest rates have been minuscule in recent years and this has directly impacted the options that people have when it comes to saving money. […] We can now offer our UK customers one of the most competitive rates in the country, with complete flexibility and protection.”
What other benefits will Open Banking bring in the future?
The FCA wants to extend Open Banking to other financial services including mortgages, investments and pension funds, as well as general insurers and intermediaries, under a new initiative coined ‘Open Finance’.
This will inevitably have a significant impact on the way that financial services are delivered in the future, and it’s important therefore that financial services providers and advisers understand the challenges and opportunities that this could represent for them and their clients.
The Open Finance revolution will facilitate more relevant, personalised and competitive financial services experiences. Consumer loyalty will no longer be tied to a particular provider because that institution has exclusive access to their data. Almost every kind of financial product will be able to be personalised based on insights into their financial history, current product set and projected needs, while aggregator applications will allow consumers to choose from personalised options from a variety of providers.
For financial advisers and wealth managers, Open Banking - if harnessed through the right tools and platforms – has the potential to deliver ever richer datasets, accessible in real time, providing a more comprehensive and detailed understanding of clients’ finances, enabling them to provide truly holistic advice.
Why Financial Advisers and Wealth Managers should be interested in Open Finance
Greater access to and transferability of financial information will facilitate a host of exciting incremental services and a new, evolving ecosystem of value exchange, intermediation and disintermediation.
Open Finance heralds a financial services revolution, which will be transformative for customer choice, experience and outcomes and has the potential to be hugely beneficial for clients, advisers and providers that embrace it.
Wealth Managers and Financial Advisers will increasingly be able to use API enabled tools and platforms to deliver more choice and flexibility for their clients.
Embrace the future potential of Open Finance
Flagstone’s value proposition for advisers and their clients; providing easy, secure access to hundreds of deposit accounts through a single application; thanks to the technology we’ve developed and ecosystem we’ve built with more than 40 partner banks; is emblematic of the future potential that Open Banking and Open Finance represents.
Flagstone is excited to be part of the Open Banking revolution and was delighted to be nominated by the London Institute of Banking and Finance as provider of the Best Open Banking Initiative in 2019.
To be at the vanguard of this revolution and learn more about how Flagstone can generate value for you, visit flagstoneim.com or contact us at BusinessDevelopment@FlagstoneIM.com.