Open Banking: the £8.5bn opportunity

On the face of it, Open Banking sounds like an oxymoron, one of those short phrases whose words manage to be mutually exclusive – like military intelligence, economic consensus or even Microsoft Works (sorry Satya).

Because while our banks may be known for many things – solid virtues like security, probity and reliability, hopefully – openness is probably not first amongst the qualities that spring unbidden to customers’ minds.

The old dog with new tricks

But oxymoron or not, thanks to a combination of new legislation, new technology and ever-greater customer expectations, Open Banking is rapidly becoming a thing. And not only amongst the usual suspects, fast moving challenger banks and fintech start-ups, either. From the end of October, HSBC – which dating back to the 1860s is hardly an upstart in the banking world – has been trialling a new aggregator app with 10,000 customers, ahead of a full launch early next year. The app allows its customers to view all their accounts with any UK bank in one place, on their smartphones. Bus queue banking is on the way.

Although consumer developments like this grab the headlines, the opportunities for those of us involved in small businesses are also pretty big. According to an Accenture report last year, by 2020 Open Banking could generate a whopping £8.5bn in revenues in the UK alone, from a plethora of new products and services that help small businesses manage their finances more effectively.

What is Open Banking?

So what is Open Banking, and is it really going to unlock all that untapped revenue? At its heart is a new piece of EU legislation, the Second Payment Services Directive – PSD2 for short. This may not sound like the gateway to a multi-billion pound new market, but bear with me. PSD2 is the latest of many attempts by regulators to boost competition in the market for financial and banking services, and it looks like this time it might actually work.

When it comes into force in the UK next year, PSD2 will require banks to securely share account holders’ transaction details with third party financial services providers (with the account holders permission of course). So for the first time, non-banks will be able to use bank data to deliver new services to customers, massively accelerating the pace of innovation whilst preserving the integrity and security of the banking system.

Open Banking is supported by the Open Banking Implementation Entity, the organisation charged with working with the nine UK banks and a number of other stakeholders to deliver the programme.

APIs in action…

Many of you who live in or travel through large cities like London, Lisbon, San Francisco or Seoul will have had your lives made easier by travel apps like Citymapper. These amazingly useful apps integrate subway, rail, bus, Uber (if it hasn’t been banned there) hire bikes and even shank’s pony to figure out the quickest and easiest routes from A to B. They couldn’t exist if transport providers hadn’t taken the decision to open up their data feeds to the outside world. London’s TfL took the decision to open up its APIs back in 2003, and there are now over 350 third party apps – and millions of customers – relying on its data.

Customers benefit from new and better route planning, and providers like TfL benefit in turn from millions of (relatively) happy punters who no longer have to guess how long it will take them to get from Victoria to Finsbury Circus, or from the FiDi to Pacific Heights, in the rush hour. Imagine a similar ecosystem developing around small business finance, based on open access to bank transactions – that’s the vision for Open Banking.

Innovation foundation NESTA has got behind the idea with the Open Up Challenge. That’s a £5m prize fund for innovative Open Banking applications, taking entrants from anywhere in the world. (Full disclosure, Fluidly is a stage 1 winner. Fingers crossed for the next round!)

…but with the added complexity of the banking system

Opening up banking is more complicated than opening up travel data of course, and the customer journey (see what I did there?) may not be quite so seamless, at least to start with. The hand-off between the banks and the third parties may not be entirely smooth, and there are issues around handling the permissions and approvals that businesses require for payments. How will banks adapt, both technologically and culturally, to a new world in which partnership rather than proprietorship is the name of the game?

These and other questions like them will have to be worked through, but I believe that the appetite for the changes that Open Banking will bring is undeniable. The way in which small businesses run their finances has not kept pace with the progress we have seen in so many other areas of our professional and personal lives. The spreadsheet packages we all know (and don’t always love) date back to a time when the internet as we know it today didn’t even exist. So why are they still so widely used to forecast cashflow, for example?

There has to be a better way, and that’s why I started Fluidly – to use the latest in AI technology to help businesses forecast and manage cashflow in a way that is fit for the 21st Century.

Open Banking will allow us to use banking data as a basis for Intelligent cashflow management, and at the same time it will also simplify the processes involved – no more manual re-keying will save time and eliminate fat finger errors, for example. But Open Banking will also enable a general shift to higher value activities by small business finance professionals – by automating low value work it will enable FDs and accountants to devote more of their energies to more rewarding strategic advisory roles, and buy them a bigger share of mind in the boardroom.

Ultimately accountants will not only be able to handle more clients, they will be able to offer a higher level of service: the technology provided by the Open Banking ecosystem will manage the day-to-day, and they will only have to intervene when the system flags up a potential problem or a cost-saving opportunity. It will be the support system that never sleeps, so that you can rest soundly in your bed at night.