anking is boring. For most people this might seem instinctively true – in the United Kingdom it is an objective statement of fact. Here, five big banks – Barclays, HSBC, Lloyds TSB, Santander and Natwest – control over 80 per cent of the current account market, offering opaque variations on near-identical products. People pick a bank more or less at random (parents bank there; they have a branch nearby; they gave me a free young person’s railcard), then, once they’ve chosen, stick with it for life. Since 2013, only 3.5 million of an estimated 70 million UK account holders have changed bank. By comparison, in the same period, 44 per cent of marriages ended in divorce.
Now, this is about to change. In August 2016, the Competition and Markets Authority (CMA) issued a ruling ordering the nine biggest UK banks to allow licensed startups direct access to their data, right down to the level of current account transactions. Account holders must approve any exchange. If they do, then the data lying dormant in bank accounts – electricity bills; mortgage payments; weekly spend on cappuccinos – will become as easy to exploit as personal details online.
This is a potentially scary prospect – but if what you want is innovation, nothing could be more welcome. From the combination of maps and location data, Travis Kalanick invented Uber. With names, ages and universities, Mark Zuckerberg created Facebook. What could finance startups (or Amazon, or Google) make with the authoritative record of a lifetime’s spending, shopping and borrowing? “It’s a treasure trove,” says Conrad Ford, CEO of lending comparison site Funding Options. “It could upend the whole industry,” says Tom Blomfield, founder of banking app Monzo. The CMA gave it the name Open Banking.
As soon as the measure was announced, a 115-strong team was assembled to build the technology. But with powerful political and commercial interests vying to dictate its shape, the project has been fraught with difficulties. The current head fired most of the senior team after six months. Doubts remain whether it will work as promised.
There’s another worry. In other sectors – newspapers, television, retail – digitisation has splintered institutions by breaking up their bundle of services and products and allowing consumers to pay only for the bits they want. If Open Banking brings that kind of disruption to banking, are we ready for the consequences? “My vision of this, and I think it’s not uncommon, is that where banks make their money at the moment just fizzles out,” says Andy Reiss, co-author of the initial investigation into Open Banking. “Will RBS – and there’s probably a reason why I pick on that one – be the one that fails to move with the times and collapses?” A recent McKinsey report estimated that digitisation and a weak economy could cost UK banks between 31 and 45 per cent of their profits by 2020.
Open Banking comes into force on January 13, 2018. In less than three months, banking will become exciting. The question is: is that a good idea?
OPEN BANKING: WHAT YOU NEED TO KNOW
- After concluding there was too little competition in UK banking, the Competition and Markets Authority ordered the UK’s nine biggest banks to open up their data to third parties.
- OPEN DATA
- The first step is to release data about the location of branches and ATMs, and about different products. This means that product comparison sites will be able properly to show different accounts and loans foe the first time.
- OPEN APIS
- Open Banking also lets account holders share their transaction data securely with other banks and third parties, through the use of APIs. But what will startups make with this treasure trove of digital gold?
To understand the way banks currently use data, it helps to begin with a simple question. Why isn’t it possible to see transactions from different banks in a single app? There’s no technical reason: it’s all just entries on a spreadsheet, after all. But, like Apple and Microsoft during the PC-Mac wars of the 1990s, the banks don’t allow it. This incompatibility is what Open Banking is designed to correct.
To do this, Open Banking Limited, the non-profit set up to deliver Open Banking, is building APIs that transfer data automatically from one piece of software to another. (The name makes more sense backwards, because APIs are Interfaces used by Programmes to interact with Applications: a plug socket, for instance, is an API for electricity.) What makes APIs so powerful is their open-endedness: they expose something useful, then let developers make what they want with it. When you watch your Uber crawling round the nearby streets, you’re seeing the Google Maps API in action; sift through city centre flats on AirBnb and it’s the same API, just in a different context.
Blomfield, a gingery 32-year-old, is referring to Monzo, the startup he founded in 2015 – one of several smartphone-only “challenger banks” attempting to remake banking for the digital age. The name is a misnomer, because Monzo doesn’t do mortgages, loans or any of the other things you’d associate with a bank (including, of course, physical branches). Instead, it collects and organises information. “Basically,” Blomfield explains, “it’s this financial control centre that pulls in all of the data from all your different bank accounts and shows you an aggregated view of all your money in one place.”
Despite acquiring a banking licence, which gives it the legal right to host current accounts, in April 2017, Monzo’s distinctive coral-pink bank card only functions as a prepaid debit card, which users top-up from their existing bank account. Even with this limitation, however, it has attracted more than 400,000 users, with a further 50,000 on the waiting list, growth that shows strong interest in aggregation, according to Paul Barnes of app tracker App Annie. “Aggregators just provide better ease of use,” says Barnes, who connects French app Bankin’ to his First Direct account. “The rate of growth is 50 per cent faster than in traditional banks.”
Usability is one advantage aggregators have over their older rivals. Another is visibility: you get to see everything laid out in front of you, like Post-its on a pinboard. That won’t mean much if you can’t bring yourself to look – but aggregation can also help with that, because if the data is one place, then startups can add the algorithmic tips and filters familiar from other apps. Monzo automatically sorts every purchase into spending breakdowns by category; Coconut and Solo does the same thing for freelancers, incorporating time tracking, invoicing and tax returns. Ex-Googler Nick Heller’s Fractal Labs provides automated cash flow advice for small businesses.
With APIs, data analysis is just the beginning. When your Uber arrives and you get an alert on the app, there’s no-one in Uber headquarters tapping out a message – instead, the system uses an API for text messages built by a company called Twilio. Open Banking creates a similar system for payments. At present, when you buy your niece a Minions doll on Amazon, the retailer contacts an “acquirer”’, such as WorldPay or Global Payments, which gets in touch with Visa or MasterCard to take the payment from your account. By opening up banks’ data, Open Banking makes it possible to pay with lightning speed directly from a bank account – in effect, creating an Amazon “One Click” for the entire internet.
For shoppers, this will put an end to fumbling around for cards – and, since the various middlemen each charge for their service, it should lead to cheaper products. (Visa and Mastercard are among the many established firms threatened by Open Banking.) It also lets a “control centre” such as Monzo not only make money visible, but actually move it around.
“The great thing about opening up data via APIs,” Blomfield says, “is that you can just automate away so many of life’s annoyances. You can use software to start optimising your life: auto-switching your gas or electricity or making sure you’re always on the best insurance policy.”
This kind of automation is how Open Banking Limited hopes to eliminate one of the great unfairnesses of the existing banking system: charges for exceeding your overdraft limit. Over half (51 per cent) of overdraft users find themselves paying a myriad of expensive daily, monthly and transaction fees, according to the CMA, usually when they are struggling financially. (To give one indication: if you go over your overdraft, you get charged £10 to £25 for every transaction, whether or not it actually goes through.) The Financial Conduct Authority said recently the system gave it “significant concerns”.
Open Banking makes it possible to create automatic systems that monitor your account and step in when you go into debt. If it can’t move money from another account, it will take out just the right amount of credit from the lender with the lowest rate of interest, without fees, and without even needing to ask for permission. “We expect that to become automated,” says Miles Cheetham, head of customer engagement at Open Banking Limited.
For banks, this is a problem. Overdraft fees – often from apparently free accounts: a classic case of, if you’re not paying for it, you are the product – provide around a third of bank revenues, according to the CMA. But the larger danger is that, like other incumbents before them, banks find themselves sidelined by digital platforms. “Look at what happened 10-15 years ago to Vodafone,” says Barnes. “They owned the network, the portal and the content. Then the App Store came in and that became where people went. The huge threat for banks is that they become plumbing for the financial sector, rather than having a direct relationship with the consumer.”
This has been the vision of Open Banking since the very beginning. “This is how I pitched it to Treasury,” says John Gibson. “I told them, it would be like the App Store but for banking.” Gibson was working in the Prime Minister’s policy unit when he first came across the idea of APIs for banks. He moved to a competition advisory firm, Fingleton, but stayed in touch with his old colleagues – so when the Treasury started investigating the area in 2013, he went to tell them what to do.
The result was the Fingleton Report, the first formal investigation into Open Banking, which Gibson co-wrote with Andy Reiss in 2014. (“I like to think,” says Reiss, “that John is to traditional retail banking what Charles Darwin and Richard Dawkins are to religion”.) Then, the following year, the CMA started to explore the area. “I have to be careful what I say about this, because the CMA’s an independent regulator,” says Gibson. “But in the course of discussions the Treasury and others will have suggested things they thought were worth including.” The plan to disrupt banking was underway. Best of all: the banks themselves would be required to deliver it.
The man charged with encouraging the banks to promote their own competitors was Imran Gulamhuseinwala, head of fintech at accounting firm EY. A tall, elegant 44-year-old regarded as a rising star in the industry, Gulamhuseinwala was appointed Implementation Trustee of Open Banking Limited in April 2017. He arrived at a difficult time. The previous Trustee, Andrew Pinder, had died suddenly of cancer, and many close to the project feared it was drifting off course.
“I thought it would fail,” says Reiss. “Then Imran came in and I thought, he’s the ideal candidate, because he’s such a mover and shaker. He’s a real operator. He knows how to influence the right people, which is most of the job.”
Gulamhuseinwala also knew first hand the problem he’d been hired to tackle. In 2013, on gardening leave before joining EY, he co-founded Commuter Club, a startup that helped London commuters buy discounted annual season tickets without paying the whole cost upfront. (Investors include tennis player Andy Murray, who contributed to a £1.2 million crowdfunding campaign in 2016.) Commuter Club loaned its customers the sum they needed, then let them repay it in monthly installments, making money by charging interest – an ultra-specific equivalent of a bank. But because it wasn’t a bank, it couldn’t set up direct debits, and the admin-heavy approval process frequently deterred new customers. For a startup, whose biggest cost was paying for new customers, through advertising, sales calls and discounts, that drop-off can be costly.
“I come at it from the perspective of a fintech,” Gulamhuseinwala told me, when we met, in July, at Open Banking Limited’s glass-and-steel headquarters near Tower Bridge. Under Open Banking, he explained, the direct debit process could be reduced to a few clicks. “If we can get their conversion rate up from 10 percent to 20 per cent we halve the cost of customer acquisition. You’ve suddenly got a new and viable business model and that’s super exciting.” He ran his hand through his sweep of jet-black hair. Despite an almost George Osborne-esque schedule, which involved running Open Banking three days a week and EY’s 100-person fintech team the rest of the time, he appeared full of energy. Later that day, he was meeting funders to raise more money for Commuter Club, where he remains chairman.
In April, Gulamhuseinwala acted swiftly and brutally, firing Open Banking’s CEO, COO, head of standards and head of quality assurance: “quite an important set of changes,” he notes dryly. The clear-out was necessary, he felt, to overturn the organisation’s view of itself as a glorified financial plumber. Instead of focussing on “the minutiae of technical design to tick a regulatory box,” Gulamhuseinwala wanted Open Banking Limited to “drive and steer the vision, which historically the previous leadership didn’t want to do.”
New leaders love to boast about their vision, but in this case the corporate cliche has some connection to reality. That’s because Open Banking is part of a larger geopolitical game relating to the future of banking in Europe. The story goes back to 2015, when, after active lobbying from the UK, the European Union passed a set of sweeping financial services reforms under the name of the second Payment Services Directive (PSD2). The aim was to iron out wrinkles in the European single market, where banking and shopping remained almost entirely national, by forcing banks to present their data in the form of APIs. But while the idea made sense in theory, handling hundreds of different APIs would, in practice, be extremely difficult. So, under the direction of then-Chancellor Osborne, the Treasury chose to read PSD2 in the most adventurous terms, as an invitation to put in place the long-cherished plan of bank APIs with a universal standard.
From the European perspective, this was a calculated risk. Some EU directives give member states lots of leeway in implementation; PSD2 doesn’t. (One sign of this: the unpostponable, pressure-inducing deadline of 13 January 2018, which the original European legislation fixed in place.) The Treasury’s plan was to use Open Banking to influence the way the European legislation was delivered, a piece of rule-bending Gulamhuseinwala calls, tactfully, “challenging”: “It becomes illegal to go beyond European legislation and in some senses that’s what we are doing.” That’s why vision – in other words selling the dream – is so important. Open Banking Limited – which, like most digital legislation, is being carried on almost as if Brexit never happened – must convince European regulators it is carrying out PSD2 while attempting to influence a future PSD3.
Of course, Open Banking will be only influential if it succeeds – and, when Gulamhuseinwala came in, that didn’t look very likely. Chief of his concerns: the frosty relationship with the banks, who many believed were still looking for a way out. “I was convinced they would basically sabotage the process,” says Reiss. The shadow of past failures loomed over the enterprise. How were the banks responding?
“You know what, they’re on side,” Gulamhuseinwala replied. He sounded almost surprised. “It is amazing,” he continued. “I half expected one of my biggest challenges to be insuring the banks continue to back what we’re doing, because they’re paying for all of this. They have to pay for it, but they still are nonetheless paying.”
There have been compromises. In March 2017, Open Banking Limited released the first tranche of Open Banking data, comprising information about the criteria for loans and the location of branches and ATMs. (This kind of metadata is not freely accessible, meaning that lending comparison sites can suggest loans, but can’t tell you whether you’ll be accepted.) But when the data arrived it was poor quality, and the licence, which open data guidelines say should permit entirely free use, gave banks the right to revoke it, with a vaguely-worded clauseinsisting product comparisons be “objective”. Similar uncertainties surround the criteria for stopping access to the transaction data APIs.
“If a bank cuts you off, we might find later they were overzealous, but in the meantime, that API provider is dead,” says Stevie Graham, founder of API startup Teller. “The bank might get a slap on the wrist from the FCA, but the oligopoly is preserved.”
Other compromises inhibit the project’s scope. The initial set of open APIs won’t include credit card data, and the banks have been slow to specify how the current account transactions will be presented. “I think that will be resolved in fairly short order,” says Chris Gorst, of innovation charity Nesta, which is hosting a £5 million challenge to find the best Open Banking products for small businesses. But, as a result, few expect Open Banking to get off to a fast start in January 2018.
“Long term I think it will have a big impact,” says Jeni Tennison, CEO of the Open Data Institute (ODI). “In the short term, over the next few years, I wouldn’t expect it to revolutionise everything. We get the most innovation and the best outcomes when innovation is as open as possible. And it’s still not quite at that level.”
The ODI helped produce the original Treasury report on Open Banking, so Tennison has watched the initiative since the beginning. When I ask her what her main concern is she pauses for a long time. “To be charitable,” she says eventually, “I think the banks have come a long way. It’s a big leap to go from having absolute control over the information they’re putting out to publishing open data. And they are within a regulatory regime where, say if somebody signs up to an account without really realising what they’re signing up to then it’s the banks fault. So they’re quite scared.”
It’s a Tuesday afternoon in mid-September and Becky Moffat, HSBC’s head of personal banking, is announcing the bank’s strategy for Open Banking. We’re on the sixth floor of HSBC’s 3,000-person “innovation factory,” opposite Tate Bankside in Southwark. Piles of perfectly-arranged miniature muffins sit uneaten on the table, as Moffat, who started her career in local newspapers, describes the new product: an aggregator that shows different accounts in a single app.
Later, Moffat runs through a demo. The app, which is called HSBC Beta, pulls in data from Transport for London, as well as fully 21 rival banks. It does spending analysis and auto-saves change. To me, it looks like an ugly Monzo. Moffat, however, stresses its significance: it is the first aggregator app ever released by a major UK bank.
“If you look at the world of Open Banking and PSD2, you can take the view it’s a complete nightmare for a big banking company: we’re going to be disaggregated, we’ll just be pushed down the food chain,” she says. “We believe that with the brand of HSBC, aggregation is a space we can actually own.”
If HSBC Beta is such a big opportunity, why has HSBC taken so long to build it? Moffat looks uncomfortable. “I’ll tell you why,” jumps in Raman Bhatia, HSBC’s head of digital, a slight, softly-spoken 38-year-old wearing a woven blue blazer. “We’ve tried doing it before and we got it not that right.” One problem was the interface, he explains. Another was the way the data was organised. “The data was locked up in mainframe,” says Bhatia. We’ve invested, it’s there now. Once we’ve unlocked that, with our brand, with our scale–”
“The more things we can do,” adds Moffat.
More important than the launch is the thinking behind it. With this decision, HSBC is accepting that there will be aggregation and disaggregation in banking, a contest that will pit them directly against the startups. How can it compete when it has the cost of staff, physical branches and legacy IT systems weighing it down?
“That’s the dumb pipe argument,” says Bhatia. “The difference here, and this is something that people tend to overlook, especially when you get carried away with the fintech hoopla, is, this is about money.” Bhatia came from Expedia, which destroyed travel agents by aggregating flights and holiday bookings. That pattern won’t repeat itself in banking, he says, because money is different. HSBC refer to this as the importance of a “trusted brand.” Really, they mean that, when it comes to money, people are too scared to change.
There’s evidence to support this theory. In January 2017, YouGov released a poll of 2,000 British adults: 90 per cent had not heard of Open Banking, and, when it was explained, 60 per cent said they wouldn’t agree to share their data. Their reasons? Security, then being contacted by third parties. The poll was commissioned by credit reference agency Equifax, which in early September announced it had been hacked, revealing the personal details of nearly 400,000 UK citizens (a figure later updated to 694,000, with a further 14 million names and dates of birth stolen). Bhatia references the incident: “Security is in the DNA of being a bank. That plays to our strength.”
From a cybersecurity perspective, Open Banking is at least as secure as the existing banking system. It also stops personal data leaking out in less dramatic ways. At present, banks release transaction data to credit reference agencies, who use it (and hoards of data gathered on everything from job changes to home addresses) to determine people’s creditworthiness. Under Open Banking, lenders will be able to check borrowers’ finances directly via the APIs.
More importantly, individuals can see exactly who’s using their data, and have the authority to permit, refuse and revoke access. “For me,” says Gulamhuseinwala, “this is a real opportunity for people to take control of their data.” That is, if they agree to be involved.
For a programme of this scale, Open Banking has had little publicity. There have been no national campaigns; no media blitz to herald its arrival. “Finance’s best kept secret,” is how one entrepreneur describes it. Once cheap, time-saving products start emerging, people should come round. But Open Banking’s limitations mean that’s not going to happen immediately.
“If it is a slow start, how will that be interpreted?” wonders Chris Gorst, head of Nesta’s Open Up Challenge. “One side might argue it’s because the Open Banking standard and the governance around it isn’t right. But others might argue it’s because consumers just aren’t interested – maybe they’re already getting what they need from banking.
“The implications of these two perspectives are completely different. One is for the authorities to double down on Open Banking and make it work as intended, the other is to give up on it.” Gorst thinks that’s unlikely. Still, he explains, if Open Banking is implemented slowly, then startups will find it harder to press their advantage. We could end up back where we started, with a few big banks fighting over market share.
What’s clear at HSBC, however, is that Open Banking will change even this centuries-old fight. I ask Moffatt if there’ll be more switching after Open Banking. “Yes,” she says. “Or there’ll be less. It’s not going to stay as it is: it will either grow significantly or it will die a death, because you won’t need to switch to be able to do things.” In other words: banking will be delivered by a platform. The current oligopoly will become a monopoly.
Perhaps the biggest danger of Open Banking is not that it fails, but that it succeeds, opening up banking so effectively one company takes over the market. Blomfield is positioning Monzo for precisely this eventuality. “We tend to avoid the M word” – monopoly – “for various reasons,” he says. “But I think it’s true. I do think one player will have a massive market share.”
This firm would be the banking equivalent of Google or Amazon – or perhaps it could be one of the American giants themselves. Amazon already does lending to small businesses: in July, it revealed it had already lent more than $1 billion in the last twelve months. Could it move into banking the way it’s moved into retail? “It isn’t a worry,” says Gulamhuseinwala. “I haven’t seen a long queue of other businesses knocking on the door. I think there’s more of a sit back and wait approach.” Still, the prospect remains. So does the equally daunting prospect of banks struggling financially like retailers.
“If Open Banking is a success,” says Teller’s Graham, “at some point we are going to cross over the Rubicon where banks are insolvent, because costs are huge and revenues are not, and they won’t be able to change in time because of the inertia of large organisations. In the worst case scenario we might see at least one bank fail, and that’s really really bad considering how central they are to the economy.”
Gulamhuseinwala doesn’t have much sympathy for failing banks. But he believes the answer to monopolies lies in fair and open competition. “A standard can replace a monopoly,” he says. “If you have standards so all these different third parties, fintechs, can interact directly with these different financial institutions, then there’s no role for an aggregator. And the moment you don’t have a role for the aggregator it becomes a lot harder to build a monopoly.”
But if one company starts to gather more users, I say, then it could build a monopoly simply because its data make it better. Gulamhuseinwala nods. “If if that is where you end up I wouldn’t be surprised if we see new kind of business models. Things like data custodians.” He describes an app you pay to keep an eye on your data, that “can actually audit and understand where anything is at a point in time.” He means that, if there is a monopoly bank, then people will have to start charging for their data. It reminds me of something he said earlier: “We have an infrastructure that allows people to realise the value of their data.”
This is the thing about Open Banking: it’s not just a technical fix, or even a solution specific to banking, but a new way of dealing with the twenty-first century’s most sought-after resource, personal data. And it comes with gains and losses. It makes the dodgy existing system transparent and accountable. But it does so by enabling the trade in data, with the result that even more of our actions are visible and exploitable.
And it could be just the start. If open APIs work for banks, the government could apply them to other sectors. “In my mind,” says Gulamhuseinwala, “there is really no reason why this couldn’t be rolled out into the mobile phone and the telco space. Why it couldn’t be rolled out into energy, water. And to some extent why it couldn’t be rolled out into transport as well.” First banking, then everything. Until all life is data, and data can be treated as a form of money itself.