To change how you use money, Open Banking must break banks

Banking is boring. For most people this might seem instinctively true – but 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.

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. On this day, banking will become exciting. The question is: is that a good idea?

OPEN BANKING: WHAT YOU NEED TO KNOW

GOVERNMENT-ORDERED
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.