Open banking may be a slow burner, but it it's likely to ignite innovation in banking and enable accountants to focus more on the spark they can offer, rather than the administrative burden they currently have to endure.
In the first of a two-part series, Sooraj Shah explores open banking and what it means for the profession.
What is open banking?
Back in June 2013, the competition and markets authority (CMA) commenced a retail banking review to check whether there was enough competition in the industry. It took more than three years to complete.
Before its completion, in November 2015, the second payments services directive (PSD2) was passed by EU lawmakers, meaning that banks were told to create application programming interfaces (APIs) to open up their data and infrastructure to third-party companies. The rules are set to be introduced into all EU member states – including the UK – by 13 January 2018.
Then, in August 2016, the CMA finally published remedies from its review concluding that “older and larger banks do not have to compete hard enough for customers’ business”.
It suggested that retail banks release and make available data through an open API by 31 March 2017, and then agree with IT open standards for APIs with full read and write functionality by the PSD2 deadline of January 2018.
open banking is set to unleash a transformation in how financial services organisations view themselves and each other”
Richard Evans, head of risk and assurance at audit, tax and advisory firm Crowe Clark Whitehill defines open banking as “a software platform that allows a customer to compare prices of different components of banking services – for example, clearing, payments, investments and use of different providers for different services on one platform”.
And according to Farida Rahman-Wright, professional standards manager at AAT, once the directive is fully enacted it is set to unleash a transformation in how financial services organisations view themselves and each other, as it will provide a legislative mandate for more open data and an increased open data interchange between financial services organisations.
“It will mean that software developers can create apps and websites, which can access compliant users’ financial information and use it to provide services such as cash flow forecasting, bookkeeping or expense management,” she said.
The use of APIs is already prevalent in the tech industry.
“A prime example of this is Uber, which for the Android version of its app uses the Google Maps Android API, making it possible to view routes and directions, as well as tracking the driver and the customer,” Evans explained.
While there are numerous benefits to consumers, there are drastic changes for traditional banks as it enables smaller, more nimble challenger banks and financial services companies to better compete with their larger counterparts.
What does this all mean for accountancy?
Alex Cardona, co-founder at Codat, an API and online portal to view data from software, explains that the first change that will impact accountants is reconciliation.
“Clearly, open banking is going to make it much more simple and robust to access banking statements,” he said. This means that bank customers will be able to better manage their money – leaving accountants to focus on the value-add part of the profession.
There will be significant changes in the extent to which different business software tools consume financial data – and Cardona believes this will spur on innovative ideas in the sector.
“The benefit of opening up data access like this is that smart people will come up with great ideas that no one had thought of until they had the data. Accountants will become more empowered to focus on being advisors than ever before as the administrative work gets increasingly automated, and every business system feeds directly into the accounting software,” he said.
the concept may shift power away from cloud software providers in the years to come”
According to Daniel Houghton, head of partnerships at Tide, a technology banking service for small businesses, open banking will extend many of the benefits that were first introduced to the accounting sector as a result of cloud accounting software.
“Cloud accounting software made a lot of the data more accessible and transparent for the accountant, and open banking will accelerate the rate at which it is happening,” he said. However, he also suggested that the concept may shift power away from cloud software providers in the years to come.
“Some accounting firms are building their own software competing with the likes of Xero, and open banking will make it easier for these firms to build their own software – whereas before that was a mammoth of a task,” he suggested, adding that both large and smaller businesses could develop their own proprietary software in a bid to save costs.
While there are some unknowns as to how open banking will affect the industry, Evans suggests that it should not be viewed in isolation by the accounting industry.
“It should be considered alongside wider regulatory changes, such as PSD2 and the EU general data protection regulation (GDPR), UK data privacy bill, as well as further CMA actions regarding competition,” he said.
Have you been following open banking’s evolution? How do you think it will affect the accountancy world?
*This article was amended 17 Aug 2017 to correct the long form of API*