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posted on 17 January 2018

Open Banking - The Invisible Reform That Will Shake Up UK Financial Services

from The Conversation

-- this post authored by Ru Xie, University of Bath and Philip Molyneux, University of Sharjah

Open banking launched on January 13 in the UK. It requires major banks to share data with third party financial providers. This will bring a new level of transparency and encourage competition, shaking up the financial services industry and levelling the playing field for new challengers to take on the more established high street banks.

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The reforms follow a 2016 investigation by the Competition and Markets Authority into retail banking. Its report concluded that the existence of barriers to entry for smaller and newer banks made the banking market less competitive.

This paved the way for open banking, which requires banks to securely share customers' financial data with other financial institutions - provided customers give their permission. This should boost the range of products and deals made available to people and facilitate more switching, with offers better tailored to individuals, based on their past spending habits.

It will also enable people to bring together their financial information from different providers so they can, for example, open one app and see a list of their accounts with other banks.

All in all open banking is set to change the financial services industry in several ways.

Better banking options

The launch of open banking will be a turning point for large retail banks in the UK. The traditional retail banking business model will be transformed from a closed one to a modern, open source one.

The basis is a united financial platform that has been designed to provide users with a network of their financial data. This will disrupt the existing advantages that big banks in the UK have where they have a monopoly on customers' data, not making it easy for customers to see the alternatives that are out there.

With more access to customers' data, new financial technology (fintech) start ups, which are able to provide innovative solutions and modern financial products, will develop and challenge the traditional industry. Meanwhile, the increased competition and narrower profit margins will force existing big banks to adopt new technologies, improve their customer services and open up new revenue streams to keep up.

Better payment systems

Open banking will enable financial institutions to launch easy, fast and innovative global payment methods. Linked with the EU's Second Payment Services Directive, which also comes into force this year, open banking also aims to boost competition in payment methods, which has been in need of a modernisation in the digital era.

The open access to people's financial data means that new payment services can be developed. New providers will be able to initiate online payments (whether to friends, retailers, charities) directly from the payer's bank account, avoiding the use of intermediaries like banks. Paying bills and transferring money will become as easy as sending a message.

Banking payments will get a whole lot easier.

As well as the emergence of new services that are more efficient, they should also be secure. Key to the new open banking standards is enhancing financial safety. Third party financial services providers will be required to obtain licenses and to meet the rules set by the main UK bank regulator, the Financial Conduct Authority.

Collaboration between banks and fintech

Open banking will digitise UK banking and strengthen UK fintech. Under the new regulation, fintech firms will play a more important role in the financial services industry and a huge number of fintech startups will enter into competition with existing major banks.

In a world of digital financial systems, big banks will have to rethink their position. Until now, collaboration between banks and fintech firms has mostly involved the financing of acquisition of fintech firms by big banks or partnership agreements, which enable a bank to use or acquire a digital solution developed by the fintech company.

Collaboration needs to become more customer focused - providing people with better products and solutions. Plus, a successful strategy for banks lies in greater cooperation with fintech firms to improve their own, often older technology to help them lower costs and improve customer experience, as well as developing new income streams so they can compete in the long term.

The ConversationThere are still unanswered questions about how open banking will play out. Security and privacy is fundamental to its successful implementation. Nonetheless, it is a revolutionary experiment aimed at boosting retail banking competition and will help new challengers in the financial services space to grow.

Ru Xie, Senior Lecturer in Finance, University of Bath and Philip Molyneux, Professor of Banking and Finance, University of Sharjah

This article was originally published on The Conversation. Read the original article.

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