With huge funding rounds, low foreign exchange fees and, in the case of Revolut, conspiracy theories involving the Russian government, challenger banks have been taking up a lot of media space in the retail banking world over the past couple of years.
As a result, companies that have taken advantage of the Financial Conduct Authority’s (FCA) open banking regulations have largely been left out of the news cycle. But that’s likely to change very soon.
In May, London-based technology company Yapily, which connects businesses directly to customer bank accounts, raised 4.8 million euros ($5.3 million) from investors. A month later, Payments company Token, which also has offices in London, announced that investors, including BNP Paribas, had injected $16.5 million into the firm.
And since open banking regulations were introduced in January of last year, 133 firms have registered with the FCA. Those rules allow companies to license themselves as account information services providers (AISPs) or payment initiation service providers (PISPs).
An AISP can access all of your bank account information, either online or in a mobile application. Budgeting applications, price comparison websites, or companies providing a mixture of both seem most likely to register as one.
PISPs are rather different as they enable payment services. In effect, a PISP license allows a company to make payments directly from a consumer’s bank account, as opposed to using a third-party card provider like MasterCard or Visa.
Eager to innovate
These companies are able to access your banking information as the FCA's regulations require banks to provide access to their customers’ data via an application program interface (API). Through that API, banking data can be gathered and used to provide a range of services.
Not all banks, however, have been particularly receptive to the changes that are taking place in the retail space. One start-up founder that Finance Magnates spoke to claimed that he had found it trickier to work with more established players in the financial sector, noting that there was a reluctance to do business with technology firms.
Others have had a different experience. Philipp Keller, CEO at rewards and cashback firm Tail, told Finance Magnates that both challenger banks and larger institutions have been eager to work with his company.
“[Challenger banks] Monzo and Starling are keen to work with third party providers,” he said. “They encourage innovation and have been incredibly supportive of us and other tech firms, as is clearly demonstrated by the APIs they provide to the fintech community.
“But high street banks are also eager to engage with us. Many are looking at innovating within their rewards programs and want to use our local offers and quick cashback technology.”
Meeting expectations
In large part, the move towards open banking has been driven by a change in customer expectations. Having grown accustomed to
Philipp Keller, CEO and co-founder of open banking application Tail
the fast-paced world of the internet, with its smooth interfaces and easy-to-access services, customers want the same from their bank.
In fact, writing in a document published last May, John Hallsworth, open banking global network lead at KPMG, said that it is user experience that is driving innovation in the banking space.
“Customers are looking for easier, more seamless and intuitive value-added banking experiences and there are a growing number of fintechs and 'challenger banks' seeking to capitalise on these developments,” wrote Hallsworth.
“Some of the greatest activity in open banking is happening in that market as players vie to find new ways to deliver new and compelling customer experiences.”
Bridging the gap
Interestingly, it was seeing the change in customer behavior as challenger banks rose to prominence that inspired Keller, a former executive director at Morgan Stanley, to found Tail.
“I really conceived of Tail when the first challenger banks entered the scene,” said Keller. “It quickly became apparent that open banking would not only be a paradigm shift in terms of how consumers bank, but in terms of the way consumers interact with retailers and vice versa.”
For Sam Abrika, the former EMEA head of Liquidity and funding risk at UBS, the decision to leave a senior banking career and enter the perilous start-up world came in a more roundabout way. Having always seen a gap in the market for a more efficient budgeting application, open banking regulations, and access to customer data meant that he could put his ideas into action.
“When I was at UBS, I had to validate all liquidity, funding and cash flow forecasting models for the group,” Abrika told Finance Magnates. “What I saw was a disparity between banks, which have extremely complex and efficient back-end models to manage their risk and cash flow, and their retail customers, who have nothing even close to that.”
“The average person probably isn’t going to get a set of technology as good as UBS’ anytime soon. But open banking regulations allow us to start developing those products. And by building a better user experience and ‘gamifying’ the budgeting process, I think an app like CashCoach can help people improve their money management skills.”
Taking a cut
On the most basic level, applications such as CashCoach, which is in the process of getting an AISP license, will make money by acting as intermediaries.
For instance, if you have saved for a holiday, a budgeting application could recommend certain destinations for you. Similarly, a
CashCoach founder Sam Abrika
company could also analyze your spending and recommend that you move to a cheaper internet provider. If you do make that move, the application will take a cut of the money you spend with that new company.
PISPs won’t be too different from existing payment companies, although the percentage of your money that they will take in return for facilitating transactions is likely to be smaller than existing service providers.
But ultimately there are a huge array of services that could be provided simply by using banking data - whether it belongs to a retail customer or a large company.
“The opportunity for fintech startups making use of transaction data is huge,” said Keller. “A successful proposition taking advantage of the Starling Marketplace or Monzo API will theoretically have the choice of using open banking to expand to high street banks, or to develop partnerships with banks who are hungry for innovation.”
Finance's social media moment
For others, the ability to access large swathes of customer data could usher in a new world of financial technology. Abrika told Finance Magnates that he believes open banking applications could create the financial equivalent of the social media industry.
“When you open up this sort of data, under a carefully regulated regime, then you also enable a huge number of additional services to start being provided,” said Abrika. “For me, open banking is going to be like social media in ten years - both in terms of size and the way in which people use those services.”
Whatever the case, open banking is here to stay. And with consultancy firms, banks, tech nerds and venture capitalists crawling all over the nascent industry, we'll probably be seeing the first open banking ‘unicorn’ in the next few years.
