Break the bank: Welcome to the era of Open Banking
Back in the 90s, when Microsoft was at its imperious apogee, the software maker operated under the informal maxim of “embrace, extend, and extinguish”.
Microsoft would barge its way into a product category offering widely used standards, extend them with proprietary innovations and then, well, then came the “extinguish” bit.
Once Microsoft’s extensions became the de facto standard, they’d actively undermine their competitors. They managed to ring fence entire sections of the software market. The tactic drew the ire of American regulators who attempted to split Microsoft in two.
Microsoft, as we know, ultimately remained intact. Instead of cleaving the software giant in two, Microsoft’s settlement required it to share its application programming interfaces (or APIs, as many MTD watchers will know them as) with third-party companies.
History has a habit of repeating itself. The Microsoft settlement isn’t too dissimilar from the philosophical underpinning of Open Banking. After concluding there wasn’t enough competition in the banking sector, the Competition and Markets Authority (CMA) ordered the nine biggest banks by customers (the CMA9) to allow third-party access to their data.
The thing about open banking is, it was never going to happen on time. That’s one reason why I’m bearish on it.”
The comparison between Microsoft and the CMA9 isn’t a perfect fit, though. There’s the simple numerical difference between the number of parties implicated, of course. And while Microsoft was monopolistic, the UK banking sector is what we’d call an oligopoly (that is, a market dominated by a small number of large players).
Actually, the dominance of the CMA9 presents a more dyed-in-the-wool challenge than Microsoft ever did. Before Metro Bank broke ground in 2010, there hadn’t been a new high street bank in the UK for more than a century.
Metro Bank was a bellwether for a flood of new banks. The FCA and its sister organisation the Prudential Regulation Authority were tasked with cutting the red tape and adding more competition to the banking sector.
Open Banking can be seen as an extension of this mission to increase competition, going beyond just new banks and tapping into the really valuable stuff: banking data.
Open Banking will hand control of this data from the bank over to the consumer, allowing a personal customer or small business to share their data securely with other banks and third parties. The aim is to make it simpler to control and manage your funds, compare products and use the data to more easily access financial services like loans.
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Open banking limited
This process – the creation of a standard API (and the APIs to follow) – is being driven by Open Banking Limited, a non-profit governed by the CMA and funded by the nine largest British banks.
The deadline for this entity to achieve its aim of releasing the API was 13 January, 2018. It’s big release date wasn’t a blockbuster event. Five of the banks weren’t ready for the standard API, and the CMA allowed a “managed rollout”.
For some critics, it was a sign of open banking’s faulty promise. “The thing about open banking is, it was never going to happen on time. That’s one reason why I’m bearish on it,” said Stevie Graham, founder of Teller API.
Graham has become somewhat of an enfant terrible in the banking API game. Instead of using formal, point-to-point deals to create his API, Graham is an exponent of a more DIY method. Graham realised that the banks already had a public facing API; the one they use for their respective mobile apps. “We get access by breaking the mobile app and talking to the bank as if we’re that mobile app,” he told AccountingWEB.
We’ve realised that partly the challenge is opening up the data, but it’s also about creating a much richer set of data.”
Graham’s sharp elbowed, and entirely legal, approach has earned him the ire of some of the big banks. So you’d think the advent of Open Banking would herald a ceasefire, but Graham is persisting. The reason why is simple: he sees Open Banking as a neutered policy being delivered by incumbent banks who have no interest in making it a roaring success.
“I question the mental fortitude of people building companies and waiting for the benevolent banks to give them access, a la carte, completely counter to the banks’ interest. If you’re that naive, perhaps you shouldn’t be in business in the first place.”
By way of example, Graham points to the payment flows for the Open Banking API. “Every time I want to do that,” said Graham, “the service that does it pings me back to the bank to approve the payment.” It’s indicative of how the standard API’s processes will hamper fintechs.
“The acid test is: could a fintech build something that replaces your NatWest or your Barclays app? And the answer is no. It’s not functionally equivalent to what they have themselves, so it won’t do anything to address competition in the market.”
The bright side
Not everyone shares Graham’s outlook, though. When he spoke to AccountingWEB recently, Sage’s Seamus Smith acknowledged the delay and the early difficulties, but saw it more as teething problems than an indicator of underlying issues.
“Because of the legacy situation and the complexity among bank infrastructure, around five of the nine banks won’t be ready,” said Smith. “I don’t think that’s an intent issue, I think it’s a practical issue about logistics and some of the legacy difficulties. No one should want to rush into this.”
Smith’s hopeful if sanguine views are common among Open Banking’s stakeholders. Sam O’Connor, the co-founder of Coconut, a new business bank account aimed at freelancers, told AccountingWEB: “The impact won’t be immediately felt and that’s down to the quality of the data. You can put an API on bad data but it’s just an API on bad data.
“We’ve realised that partly the challenge is opening up the data, but it’s also about creating a much richer set of data. I think, over time, banks will move to a richer set of data, but that change will come from competition.”
The role of the accountant
It’s not just the problem of data, though. SMEs just aren’t that aware of Open Banking said Ollie Maitland, co-founder of Capitalise, a loan comparison service that’ll use the Open Banking API. And if they are indeed aware, they’re not sure what it can do for them.
But Capitalise think they’ve found a solution to this double bind: the accountant. Instead of being a broker, Capitalise is really a piece of software that integrates with the accounting software itself.
Maitland envisions Open Banking complementing accounting software, giving an accountants a real-time understanding of their client’s financial situation, specifically in respect to cash flow. And that’s important, because Capitalise is relying on accountants to guide their clients on raising finance.
“We see ourselves as supporting accountants to build that revenue stream into their practice. We’re much more like a piece of software that’s integrated into the practice. It’s a toolkit to bring raising finance into the practice.”
The traditional separation between banking and bookkeeping, accounting, reporting and compliance and finance, all these are artificial boundaries largely separated by data.”
If the past few years has seen accounting and the banking industry form a symbiotic relationship, then Open Banking could be the juncture where the walls really fall down. “The traditional separation between banking and bookkeeping, accounting, reporting and compliance and finance, all these are artificial boundaries largely separated by data,” said FreeAgent’s founder Ed Molyneux.
“The reason why we had to do bookkeeping is because you had to build a cashbook and reconcile it with a paper bank statement. You don’t have to do that anymore. The reason you had a separate accounting and reporting function built on top of your bookkeeping function was because there was no way previously you could have built a real-time accounting engine that had a tax model built into it.
“It was too difficult.”
The way Molyneux sees it, the accounting product has an important role to play in identifying situations and helping the customer find cost-effective solutions. It’s the hub of their financial data and is best placed to talk about their financial products. With improved data and better modelling of tax liability (thanks to MTD), it makes sense, he said, for the accounting system to be involved in finance decisions.
Is it going to work?
It’s easy to be suspicious of the banks’ motives. They haven’t always covered themselves in glory. Ask Graham and he’ll tell you straight: this isn’t going to work. Any progress that’s made is merely down to them being cajoled by the regulator.
Graham and others like him are dubious that banks will be squeezed hard enough to really deliver change. “The oligopoly of banks divide the market between themselves and the market size is fixed,” said Graham. “By improving their products, their margins and the costs increase. The perfectly rational thing to do is to not invest.”
By and large, though, the mood remains optimistic. “There’s going to be a period of bedding down, where users of this functionality - businesses like Coconut - figure out what it is, what data they can get through these APIs, what the authorisation codes look like,” said Chris Gorst, the head of the Nesta Foundation's Open Up Challenge.
We don’t really know what the hell could come out of all of this. Could Open Banking create its own Facebook, Google or Uber? Do we want it to?
Capitalise’s Maitland agreed, saying: “It’s going to be a slow grower. Right now, the first thing to market will be the aggregators of your transactional finance into one place. The interesting thing then is what the democratisation of data does; data that the banks have been sitting on for decades. It points to two areas: wealth management and lending
“I don’t have much faith that the aggregation and transactional side is going to work out because its free in the UK. Until you start building in the other products and services like wealth management and lending, it’s going to be difficult to monetise open banking.”
That’s just the thing. We don’t really know what the hell could come out of all of this. But we do know that more data sloshing through the pipes and the sluices has a habit of preempting innovation. Could Open Banking create its own Facebook, Google or Uber? Do we want it to?
“Who knows what innovations might come?” said Gorst. “Before the iPhone was launched, you’d be foolish to try and predict the range of innovation that would follow.”