Opinion Digital Banking

Open Banking – predictably unpredictable disruption?

Francesco Simoneschi, CEO and Co-Founder of TrueLayer considers whether the predictions about which verticals Open Banking would disrupt have come to fruition and what the future holds for Open Banking

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Francesco Simoneschi is CEO and Co-Founder of TrueLayer.

Niels Bohr once said, "Prediction is very difficult, especially if it's about the future."

Despite this warning from arguably one of the smartest people who has ever lived, there was no shortage of forecasts on the impact of Open Banking on various sectors ahead of its implementation. I also wrote my fair share of prognostications. Now, more than a year and a half after its launch, it is a pretty good time to look at what has happened, what we have learned and what it might tell us about the future development of Open Banking. 

Writing in January 2018, I imagined that comparison tools, financial management platforms that collate items such as utility bills, loans, insurance, loyalty card etc, and AI-driven financial assistants bots will be among the first wave of technology on the market. The sector most ‘at risk’ of disruption would be consumer credit and the major beneficiaries were going to be digital banks. These views were largely in line with the majority of other commentators. Some also forecast that improved risk assessments due to better access to data would reduce the fees on loans, more financial forecasting products and major improvements to accounting software. However, a significant minority predicted that Open Banking would fizzle and flop due to a combination of intransigence by the banks (facilitated by weak regulation) and a lack of understanding/apathy from consumers and businesses.

Thankfully the pessimists have been proven wrong. As expected, Open Banking did have a slow start, but now all the indicators point unequivocally towards a booming sector with growing momentum. Scores of great startups have been founded, investment is flowing, companies large and small are implementing Open Banking technology and consumers are reaping the benefits of new apps and services.

Generally, I am happy to say, the predictions of how Open Banking would initially develop have also been proven correct. However, it’s difficult to determine if we’ve yet seen a marked reduction in the cost of credit and financial products. 

Looking more closely at who the ‘winners’ are, it’s clear the likes of Starling Bank,Monzo and Revolut are making a sizeable impact with impressive customer growth figures. The speed at which Starling and Monzo, in particular, embraced Open Banking enabled their progressive customers to use a range of new third-party financial products and apps. Not only did this help the nascent Open Banking industry prove its worth, but it also assisted in reducing fears that consumers would be put off by sharing their financial data.

Looking specifically at which verticals and industries have seen the most disruption, it’s notable how successful financial assistance and administration apps like ANNA Money, Emma and Plum have been. The financial freedom and insight these services provide are proving incredibly popular with consumers. Perhaps the most surprising industry benefiting from Open Banking is property. There has also been a lot of innovation with Canopy developing a range of services for renters and one of the UK’s largest lettings software companies Goodlord integrating new Open Banking-based features. CreditLadder is tackling the other side of the property market, allowing renters to increase its credit rating using lettings payments. Add blockchain into the mix and there’s real potential that the property industry will be unrecognisable in ten years.

So the question naturally turns to what will happen next? With the risk of tempting fate by making more predictions, my money is going to be on major disruption to payments. 

PSD2 (the EU’s companion piece of legislation) enables ‘payments initiation’ - essentially a new form of payments that is more secure, faster and cheaper than a lot of alternatives. Interestingly, PSD2 also mandates Strong Customer Authentication (SCA) - which in reality means a form of two-step identity confirmation process for payments. SCA has the capacity, in the short term, to add a lot of friction to current payments systems. This, in turn, could open the door for the widespread adoption of payments initiation.   

In general, I think we’ll see platforms springing up which combine a lot of different Open Banking-based apps and services into one place. These partnerships of fintechs, financial institutions and businesses will create ecosystems of complementary services which will start to change how we view the very concept of banking and financial services. This evolution is likely to be pioneered by a global tech player. We are likely to see the term ‘banking-as-a-service’ be thrown about much more frequently in 2020.

Finally, I think the established financial institutions will lean much more heavily into developing their own Open Banking-based services. The net-results of all of these developments will be the start of the “Balkanisation” of financial services - people will no longer see a bank as their one-stop-shop for all their financial needs. If you want to inform your own predictions on what will happen next, I recommend keeping an eye on the FCA’s new Advisory Group on Open Finance which is looking at what will happen to the financial industry after Open Banking.

Francesco Simoneschi is CEO and Co-Founder of TrueLayer.

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