I was working on a paper which had its origins in making the case for a comprehensive Open Banking offer but I ran into a challenge and basically got stuck.
That was May 2023. My mission for the paper had its origins in various private and government sites where I was able the gain insight to the state of Open Banking in UK, EU, Canada and Australia. Canada had a special appointee on secondment from PWC to address Canada’s position and approach. Everything seemed positive.
On deeper analysis however there were cracks in the global picture. A few themes became apparent which ultimately led to the challenge, but more on that later.
Background
When I first wrote on this topic i joined with others and we coined the phrase Open Source Banking. That was 2006 and somewhere on the journey the ‘Source’ was dropped.
The earliest relevant solution I encountered was Wesabe which provided a benchmarking service that allowed participating banking customers to see their financial progress against like minded customers. This occurred within a secure platform and Personally Identifiable Information on participating customers was abstracted out. This all in the days before todays Open Banking but importantly it highlighted another step in the internets organic evolution. Wesabe represented one of the early movers bringing social to the world of banking and financial services. Here are three selected posts of many that I prepared back then. The context had remarkable similarity to the Open Banking discussion today, such as customer empowerment, API solutions, account switching. Wesabe ultimately failed to big money competition and the industry shifts to payment vehicles, but the concepts live.
Wesabe Interiew — making it easier for consumers to find the ‘right’ bank
Why Union Square picked Wesabe
In 2023 here is the OpenAI background to Open Banking.
Open banking is a system where banks and financial institutions provide access to their data to third-party developers and applications. This concept has evolved over the years, but a significant milestone occurred in 2018 with the implementation of the Revised Payment Service Directive (PSD2) in the European Union. PSD2 mandated banks to open up their APIs (Application Programming Interfaces) to authorized third parties, allowing them to access customer account information and initiate payments with their consent.
The idea behind open banking is to promote competition, foster innovation, and enhance consumer choice in the financial services industry. By allowing third-party developers to create new financial products and services using bank data, customers can access a wider range of offerings, manage their finances more efficiently, and potentially save money through better deals and rates.
Since the implementation of PSD2, open banking initiatives have spread to various parts of the world, with different regions adopting their own frameworks and regulations to facilitate secure data sharing while ensuring customer privacy and security. As of my last update in September 2021, the open banking movement was gaining momentum globally, with many countries exploring or implementing their own open banking initiatives to transform the financial landscape.
Over the last few months some quotes and comments I captured in recent posts on bankwatch.ca:
- Creating a Blueprint for open banking — ozone API (British company engaged with original API framework)
- Open Banking now has over 6 million active users in the UK
- The OBIE will continue to ensure that the 6 banking providers maintain the required standards and will promote Open Banking to encourage industry adoption.
The origins were rooted in the outcomes of the 2008 Banking crisis in UK. The solution was determined by government task forces to be rooted in banking competition and the solution included ease of moving money to and from other banks, aggregating bank and loan account information or even shifting the entire banking relationship to the one bank.
That original vision became mixed with different views, and then PSD2 really became the behemoth that drowned out all other visions. Open Banking became tied to payments. More recently some new fresh thinking from likes of Dave Hooper and his work are surfacing sone of the original concepts as well as new ones.
Two Credit Union papers provide current context in Canada
Clear overview of current state (Chamberlain) Canada’s Shift To Open Banking Moving Slowly
One prescriptive and typical solution but with no tangible strategy Three key considerations for developing your unique strategy
The consumer impact remains noticeably absent and I incorrectly believed I would solve that problem when I began this piece in May. I was wrong and that is where I became stuck.
My review of current state and the empirical results
The UK Road Map is as most countries and all vendors, highly technical in nature, with the focus on a better API strategy.
The API design and approach are well documented and targeted but the consumer remains absent. Many pieces mention the consumer in passing but their interests are not a substantive component that addresses customer financial and emotive benefit.
My early conclusion then was to press pause and let the ideas develop with hopefully a new and novel solution.
Then I read this piece by by Art Chamberlain, Contributing Writer on CUES. He writes about all the arguments we all agree on, but the linear resulting strategy that arises from quotes of Messrs Garrity, Hooper and Guthrie is limited by business reality..
Government faces little pressure to improve system for consumers
Alternatives discussed are basically the usual culprits:
- its the fault of government and they need to promote rule and regulation in support
- its the fault of Banks and they need to offer open banking services
- a trusted utility is needed such as Symcor to handle customer verification and all banks must subscribe
- finally bundle it all together — Deloitte’s online survey found that among the most attractive uses of open banking were the ability for consumers to get a complete financial picture of balances across all their accounts (37%), the ability to track their spending patterns (33%) and suggestions for investment and savings opportunities (32%).
Its a mess and no wonder the PWC delegate for Open Banking is leaving the Government and returning to PWC at end of 2023.
So what is the open banking landscape globally and is this really a Canadian problem or does it require a better approach.
Limitations of Banks as a solution
The common fallback in Canada is to require a centralised solution promoted by Canadian regulation or set up a new Federal body not unlike Symcor to provide regulated guiderails upon which banks and consumers could rely.
It is worth remembering the Banks business model runs on tight margins which makes going alone to create a centralised authority expensive in terms of relative profitability.
The natural next step is to regulate all banks to participate in a Symcor style entity. That would engage Government in managing competition. Other efforts of similar nature result in technical solutions with the PSD2 API framework being the best example.
The Open Banking Landscape in 2023
The successes to date with PSD2 is heralded as proof positive of the successful impact of Government oversight.
PSD2 became primarily for digital processes already used by consumers; primarily payments. PSD2 was also an API strategy.
On the other hand consumer acquisition of new Open Banking processes including but not limited to, movement of banking arrangements between banks, aggregating information from multiple institutions, and other nouveau activities are missing. This is because such services do not exist.
PSD2 was a regulatory driven exercise which introduced a set of new costs and steps towards a common platform but remains largely opaque to consumers.
Back to Open Banking this comment from the UK governingbody has a degree of finality that is not, in my view reflective of reality. Notwithstanding what the reader may know about Open Banking always bear in mind the origins lie in the 2008 Banking crisis. Government determined the solution lay in improved competition, and smooth bank switching. By that measure there is no evidence of success.
Following a report from the Implementation Trustee, the CMA has determined that the 6 largest banking providers in the UK (Barclays, HSBC, Lloyds, Nationwide, NatWest and Santander) have now implemented all the requirements of the Open Banking Roadmap, and the Roadmap is therefore substantially complete.
The public statement takes “Roadmap is therefore substantially complete” literally and that is a political statement. It is used it to back up the oft quoted six (6) million open banking participants. This sounds like an over-simplification; indeed there are 6 million users because of a successful implementation to upgrade the banking platform, primarily the components that support payments and with banks required to provide API access.
But the important aspect is that consumers are using a platform which has been upgraded. They were already using the platform and no selection was made to participate. The solution is opaque.
The Government approved Road Map (2020) says this:
”Today the CMA published the Final Agreed Roadmap on Open Banking, laying out the steps required to take to finalise the implementation of Open Banking. Already an ecosystem of more than 200 third parties are delivering tangible products and services powered by Open Banking to more than one million users, and more of us are realising the benefits of Open Banking every day.
Road Map components is comprised of a list of banking processes subject to compliance. It is technical in nature.
UK APPROACH HAS BEEN POLITICAL
The platform upgrade met the requirements of the government Road Map because the Road Map was designed to ”not” fail.
The question I asked myself and could not answer is how can Consumer behaviour be engaged and aligned with the Road Map blueprint.
It is worth recalling here that the Open Banking mission originally was to solve consumer friction which hindered inter bank competition. This was a by product of the evaluation framework following the Banking crisis in 2008 and the Government were rightly concerned that consumers were afraid of losing their savings due to bank failure but had no easy solution. British consumers were deathly afraid during that time.
There are precedents to independently created services and in Canada one of the most successful was email money transfer through Certapay. Despite the naysayers when this was deployed it was very successful because it resonated with consumers and no sign up was required. It is now considered table stakes and banks have incorporated into their legal, fraud and risk processes. The critical driver of success was the resonance with consumers.
I would argue there is no such resonance for Open Banking with consumers.
A new Hypothesis is needed
We need a new hypothesis to test. While I have been considering the 2023 banking crisis and the drivers of regulatory change required to address it, there could be something there. I have studied bank regulatory change for some time and I must say the changes are not well targeted nor even successful when considering the last crisis as it did despite Basle regulation.
Two potential hypotheses
2. Include the open banking customer offer, with open and predictable bank regulation
Under this hypothesis both banks and consumers would be jointly incentivised so that Banks would better accept the regulation seeing the opportunity to increase Non-Interest Income (NII) and Net Interest (NIE). Conversely Consumers would feel safer, willing to aggregate their accounts in multiple institutions for legitimate benefit. (least likely)
2. Engage Fintech through co-operative efforts
Fintech’s have an opportunity but need to be well capitalised and have at least one sponsoring FI to ensure OSFI support. (highest potential)
Contributions, criticisms and suggestions welcome.
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Appendix
Note 1
Note 2
2023–01–04 — I came across a particularly good podcast on Open Banking Expo. “Creating a blueprint for Open Banking — Ozone API”
Open Banking Expo’s Ellie Duncan is joined by Chris Michael, CEO and co-founder of Ozone API, and Huw Davies, chief commercial officer and co-founder of Ozone API, to explain how their industry experience led them to establish the company, along with CTO Freddi Gyara
Ozone API have recently rebranded and the discussion provided context. The discussion was especially relevant for me and provided high level coverage of the #openbanking ecosystem.
To summarise the international state:
- UK model was prescriptive, akin to punishment and with little freedom. As I blogged earlier its roots lay in the 2008 Banking crisis and the British Government work to provide stability.
- Saudi Vision 2030 — collaborative banks can see benefit and are provided incentives that incorporate customer benefit which in turn provided new opportunities for banks
- Canada — best in what everyone has done. Ed except for EQ Bank not much movement yet
- Huge investment — UK was first then euro zone, now Saudi and South America
- Ozone re branding — early days. Were API focussed but now more focused on customer
Podcast Summary
Open Banking Expo’s Ellie Duncan is joined by Chris Michael, CEO and co-founder of Ozone API, and Huw Davies, chief commercial officer and co-founder of Ozone API, to explain how their industry experience led them to establish the company, along with CTO Freddi Gyara, and why it was the right time to rebrand towards the end of 2022. Given that they were behind the creation of the UK’s Open Banking Standard, Huw and Chris also reveal how they’ve applied their learnings from the UK to other countries, like Saudi Arabia, which has just launched its own Open Banking Framework and what excites them most about Open Banking in the MENA region more widely. Finally, they offer up their predictions for how far away the UK is from Open Finance, as its roadmap nears the end.
Chris Michael, CEO and co-founder of Ozone API
Huw Davies, chief commercial officer and co-founder of Ozone API
Freddi Gyara, CTO
UK’s Open Banking Standard, Huw and Chris
Note 3
2006–06–14
Open Source Banking
Thanks to Nishad Ramachandran for coining this phrase in what the Economist has been calling Branchless banking. This is the notion of depositors and lenders finding each other through internet, and eliminating the need for traditional banks.
I read a preview of Nishads paper that is being developed for a client, and it frames the concept beautifully. The reference I especially liked is to Payattu, and its beautifully written to capture the essence of the concept.
“As a child, I would trail my uncle to many of the Payattu invitations he received. In a Payattu, one member of a community sent out invitations to friends and relatives asking them to come to a local tea shop or restaurant. The invitees turned up and contributed a small sum of money. An accountant sat at the entrance of the shop, collected the money and made a note of the contributed sum. The invitee met up with the host of the Payattu, indulged in some refreshments that had been arranged and left in a few minutes. The person who organised the event ended up using the money he collected to start some project — like financing the construction of a house, a marriage …..The next time this person is invited to a Payattu by one of the attendees, he looked up his little notebook and repaid the same sum that was contributed.”
The paper will go on to reference, Skype, Egg, Ripple, and Zopa, most of whom have been referenced here at one point or another.
The key is how internet facilitates the meeting of depositors and lenders, and the concept of trust has already been proven by the eBay model.
So officially, and with Nishads agreement, I have opened a category for Open Source Banking, and will re-categorise the earlier posts.
UPDATE:
Here is the full article over at OneAngryCustomer
Technorati Tags: open+source+banking
Note 4
Tags #openbanking #RoadMap #CMA #aggregation #bankcompetition
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