Technology continues to progress at breakneck speed. At the same time, regulations imposed by national and supra-national bodies are introduced very slowly. This leads to a lag in which technology can impact without there being ample regulatory safeguards in place. We see this across industry, with questions asked on an ever-increasing frequency:
- Are laws around the internet and social media sufficient to keep users safe?
- What can we learn from the speed of growth in our tech firms, particularly around examples such as WeWork?
- Is data privacy being eroded in our everyday transactions?
- Are Bitcoin and other cryptocurrencies safe?
With the prevalence of questions such as these, each industry must stay ahead of the curve. Introducing and maintaining legislation that ensures public confidence is a constant requirement; this allows innovations to be brought to market that is safe for consumers while offering the convenience that customers crave.
The sustained growth in technology adoption is now one of the critical drivers for evolution. As tech firms, continue to shape how we conduct our lives, their technologies could be supported within the Open Banking framework.
Customer demand also continues to shift and evolve. We have seen a replacement of physical cash in favour of payments by card within the last few years, and phones will soon usurp plastic. As consumers seek to conduct their lives with more convenience, we require technology that can adapt to consumer need.
Finally, we have new and exciting developments such as digital currencies. The impact of digital currencies has yet to be seen across markets, but the potential ramifications of their use, impact on everything from payments to capital markets and beyond.
The above factors, therefore force us to consider whether there is more to do with Open Banking.
If so, what could be brought under the Open Banking umbrella?
Going beyond Open Banking, we are now starting to talk about Open Finance. Open Finance is a highly regarded idea that could incorporate much more than just bank data and include investment, wealth, insurance and much more. Open Finance will further support digital payments, advancements in technology and new demands from consumers. Underpinning existing regulations would be GDPR which would protect consumer’s data.
Whether it be in payments, credit, insurance, or banking generally, the market is being continually tested by new entrants using disruptive technology, with the ability to do things quicker, cheaper or more effectively. The speed and convenience of these services have been paramount in their adoption by customers.
The rise of the Challenger banks in the UK is a good case in point. Unhindered by legacy technology, they have been free to develop banking platforms that are centred on mobile and API technology while robust in customer experience.
The mobile phone has been key to the advancement of technology in financial services. It is worth bearing in mind that contactless technology is a relatively recent advancement, affording consumers added convenience in their purchases under £30. Now, we see cards themselves are beginning to fall by the wayside as mobile wallets such as Apple Pay, Google Pay and Samsung Pay take off.
Western companies are increasingly looking to China as a precursor to what could occur in Europe and the UK. Two tech giants dominate the mobile payments industry; WeChat (from Tencent), and Alipay (from Alibaba). The dominance of these two players in the market is such that cash has almost completely disappeared, to the extent that even the homeless accept payments made through QR code. The Chinese example underscores the primacy given to applications that offer users convenience.
Technological advancements have only been allowed to occur because the public at large has embraced them. Contactless is starting to replace chip and pin because it gave consumers an extra layer of convenience – traded off against security – by affording them a few seconds less at the checkout.
Convenience is a key driver in consumer adoption, and mass uptake is the reward for technology that removes friction for consumers.
Consumers crave convenience
Similarly, Open Banking is bound to succeed because we are beginning to see use cases where it removes friction for customers.
The financial services industry is beginning to take note of the savings in both time and resource that can be made through its use. While it has not yet caught the imagination of the public at large, customer-facing apps using Open Banking are predicated on account aggregation and limited in scope such as Personal Finance Management apps.
As we know, Open Banking offers far more, and this will be key to its success. If we can take what are just now complex personal finance issues, such as applying for a loan or a mortgage and distil this down to mere minutes, with a bespoke rate of interest and payback period, this will stoke further demand for Open Banking applications.
But conversely, as consumers begin to embrace more technology into their everyday lives, there is a need to ensure that that same tech is managed and regulated to safeguard against misuse, misappropriation, or malicious intent.
Which brings us, of course, to the not one, but two elephants in the room – big tech and digital currencies.
The advancement of the big tech firms into the financial services arena has been progressive, but to the casual observer, easy to miss. They are exceptionally well placed to enter into many financial markets, including payments, credit and back office.
Several key developments have taken place that means companies such as Apple, Amazon, Google (Alphabet), Facebook and Uber are now staking out banks:
- Just this month, Uber announced that it was launching Uber Money, principally for use by Uber drivers. This positions Uber to branch into current accounts, payments and settlements in the future.
- Apple and Goldman Sachs have launched an Apple-branded credit card.
- Amazon has been working on payments for several years, including the release of Amazon Pay.
- Despite initial setbacks, Facebook is continuing to push forward with its digital coin offering, ‘Libra’.
As a collective, the big tech firms can completely reshape the banking sector. Their ability to pour untold resource into new products and service, their relentless drive to fulfil consumer needs, and their ability to remake services cheaper, positions them as an unparalleled threat to the banking sector.
They do not, however, come without baggage. It is for this reason why further regulation is needed to keep these firms in check. Whether it is engineers at Google and Amazon listening to private consumer conversations through their smart equipment or Facebook repeatedly failing to convince regulators of its good intentions, the industry is beset by data privacy issues.
Building on the groundwork that is in place through GDPR and Open Banking would offer consumers the safeguards that they require to ensure that their data is safe, regardless of whom they decided to use for their financial needs.
Digital currencies pose a swathe of new and complex problems that have never before been asked of nation-states.
Fiat (and commodity-backed) currencies have been sovereign for almost a thousand years. Digital currencies, however, have the potential to undermine this system altogether.
Payments made through Bitcoin receive no backing from national currencies or commodities and are wildly volatile in price. Governments cannot create or destroy the money, and they have little knowledge of who the sender or receiver is.
Digital currencies give rise to an unprecedented number of concerns for national governments. Questions such as will it undermine our national currency; will it give rise to sales of arms, drugs or other illicit goods or services; who will benefit and who will lose out; how are AML and KYC checks implemented; what about capital control; all arise.
For these reasons and more, Open Banking will evolve into a new, much broader Directive on Open Finance.
Should new legislation be introduced, what could we expect to see?
Keeping the consumer at the heart of any new legislation is vital, and for them to be truly empowered to make the best use of their data, they must be both protected from unregulated threats, and have new opportunities made available allowing them to capitalise on their data.
The mantra would follow building upon what is already developed. There is little within Open Banking that requires changing, but more needs to be added to its scope. Central to this would be incorporating new technology and consumer needs while also safeguarding the financial system against unmitigated threats.
An Open Finance future
To consolidate what currently exists and to further empower consumers in the use of their own data, Open Finance will resemble the Australian form of implementation. In Australia, the new Consumer Data Rights Act is broader than Open Banking, taking into consideration mortgages, lending and credit cards, before being rolled out to utilities and telecoms.
As consumers become more accustomed to using Open Banking for their banking needs, the next logical step is to progress to other financial instruments. Open Banking is the first strand in handing each individual real responsibility and power over their financial data. The next stage will be to build upon this success, remedy fears and illustrate the benefits to both the public and banking providers.
It is important to note at this point, the critical role that GDPR has played within this construct. GDPR has given the public access to their own data. The next step will be for them to benefit from that data.
GDPR will be pivotal in the role played by digital currencies and big tech in the future.
As we have seen from the introduction of Open Banking in 2018, there are deeply held fears from both consumers and the financial services sector on how data will be kept, appropriated and manipulated.
We have seen over the last two years a swathe of new fintechs entering the market that offer business models based on customer’s bank data. The banks themselves have built upon this model, and, after overcoming their fears, have now started to embrace Open Banking.
Open Banking is also far safer for use than its predecessor technology, “screen scraping”. Once understood and accepted by the public, this will remove one of the primary fears around Open Banking – that fintechs and tech firms will have access to an account’s log-in information.
The move to Open Finance should, therefore, focus on the benefits that this broadening of the regulations would have; the ability to access cheaper services, with far more convenience.
By extending the scope of Open Banking to encompass further advancements in technology, consumers and the financial sector can have greater faith that the system put in place is working for their benefit.
What about Big Tech?
Scoping out the desires of the major big tech firms remains hugely challenging. While they are ideally placed to benefit from the rise of Open Banking, they have made only limited moves into financial services, albeit ones that position them correctly to enter the market.
How they should therefore be regulated is an open question that poses as many questions as answers.
It is more likely then, that rather than focusing squarely on the tech firms new legislation will focus on the recipients of their services, mainly consumers, to ensure that they are safeguarded in their financial dealings.
It would be anachronistic indeed, to regulate against a group of companies, who may as yet build new groundbreaking products and services that offer consumers the features they desire.
It may sound presumptuous to call for the introduction of Open Finance before Open Banking has genuinely caught on with the public at large.
It is clear that while significant work is taking place behind the scenes, beyond account aggregation, the public has yet to feel the full impact of what Open Banking can provide for them.
But at the same time, the pace of technological change has already shown itself to be a necessary driving force.
In parallel, consumers are becoming gradually more accustomed to managing their own finances more professionally, using challenger banks, fintechs and robo-advisors to take charge of their spending and saving habits.
A rise in financial literacy, combined with scepticism of banks and markets borne out of the 2008 crash, has also driven in part, the growth of digital coins such as Bitcoin. At this time, national responses to digital coinage (including the anticipated Libra) have to-date been neither cohesive nor progressive. But by bringing digital coins under the umbrella of Open Finance regulations, it is possible to consider a more holistic approach to their management.
Broadening out Open Banking into Open Finance, ably supported by GDPR, has the ability to satiate these opposing needs.
The pace of change is fast. Open Finance can support consumers, the financial industry and the regulators themselves, by empowering the public to be truly at one with their own data.