Tapping your smartphone to jump on the metro or seeing an array of bright, modern plastic cards being used to split a dinner between friends is the new normal in tech-focused cities across Europe. With such pervasive usage it might seem that personal finance has been a particularly innovative sector, quick to adopt new tech-focused solutions for consumers. However, the widespread adoption is actually thanks to a set of regulations known as Open Banking.
Open Banking enables safe and legal third-party access to banking data. The UK’s Competition Market Authority (CMA) was the first to launch mandatory Open Banking regulations in 2018. Now, the EU is set to launch a sweeping new set of regulations across all member states in the form of the revised Payment Services Directive (PSD2).
Although the services are already widely used, the majority of the public are unaware of Open Banking and what it means for their finances: only 1 in 4 people in the UK are familiar with the term. At this important juncture, we break down what Open Banking really means and explore how policy-directives can be used to accelerate digital innovation.
Using technology for a fairer deal
Historically, the personal finance sector was slow to adopt new products and services for consumers due to their strong position in the market. The CMA enforced mandatory participation for the UK’s nine largest banks and building societies in an effort to create stronger competition and a better deal for consumers through the power of new digital services.
This is being implemented through the Open Banking application program interface (API). The API grants approved third-parties with access to financial archives and customer transactions - without this in place, it’s unlikely so many FinTech start-ups would have been able to quickly generate the trust required to process such sensitive information.
Aside from aims to stimulate collaboration in the sector, Open Banking also prioritizes consumer protection and control within its digital transformation strategy. Without such protections in place, development can often outpace the speed of regulations, as highlighted by the many data-abuse scandals hitting social media platforms. However, with Open Banking the Financial Conduct Authority (FCA) has ultimate control over which third-parties have permission to use the API and consumers are given fairer rights and better transparency around the use of their data, including the right to revoke third-party access at any time.
Since the frameworks were launched, there have been a number of changes from early adopters of the technology. Let’s take a look at what the last 12 months of Open Banking has delivered so far.
Putting technology at the heart of personal finance
Although Open Banking was slow to kick in at first, we’ve seen momentum in 2018 focus on two main areas of consumer service: account aggregators and wealth management apps.
Account aggregators, also known as financial planning tools, offer consumers increased control of their income and expenditure through the use of automated software and AI. By tracking purchases in key areas, such as groceries or restaurant meals, consumers can monitor their spending habits. Even if the individual holds accounts with multiple providers, the secure API allows the data to be integrated into a single dashboard. Having an oversight of all spending activity in one place also helps to reduce the chance of accounts being overdrawn or credit card payments being missed.
Wealth management apps have proven a hit with banks and consumers alike, creating an easy way to manage personal investment portfolios - a big bonus at a time of record-low interest rates on savings accounts. Services such as Moneybox round up everyday purchases to the nearest pound - so a £27.05 purchase would be charged at £28.00. The difference of £0.95 is then added to an investment fund of choice. These small contributions accumulate over time to build a hassle-free investment fund.
What’s next wave of personal finance services
Open Banking highlights how a regulatory-led approach can help to ensure digital innovation works for both consumers and the companies leading the change. Now that both consumers and banks have woken up to the exciting potential here, we expect to see a new wave of products being adopted as profitable financial models shift to reflect this. In the next article on Open Banking we explore the new generation of personal banking services, and the cultural factors likely to affect their success.