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OPEN BANKING: THE UNSUNG HERO OF THE PAYMENTS REVOLUTION

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By Mike Peplow, CEO at Paynetics UK

 

It’s been more than three years since the introduction of open banking in the UK. While a lot’s happened in the payments industry in that time, particularly within the last 12 months, we’ve only scratched the surface of its potential.

 

Democratising banking services

With the rise of neo and challenger banks in recent years, there has been a surge in the provision of accounts and services available in the finance market.

It’s no longer unusual for consumers to have multiple banking relationships for loans, credit cards and mortgages; and this has extended to the point where consumers are happy to have multiple bank accounts across different providers for their transactional accounts and day-to-day spending.

Indeed, the ‘unbundling’ of banking services has accelerated thanks to the growing wave of fintechs, with a focus on digital-based solutions, enabling banking to be delivered in a similar manner to software services – i.e. without having to set up an actual bank.

The barrier to entry to launch new banking services has lowered, while at the same time the willingness of consumers to ‘try out’ new services from non-traditional providers has dramatically increased.

According to MoneyHub, 42% of financial management platform users now have more than one bank account, while 65% of challenger bank customers continue to have accounts with their existing high street banks.

Mike Peplow

Add to this the shift to e-commerce during the pandemic – which has increased the volume of online transactions, monthly subscriptions, and growth of digital marketplaces – and the opportunity for consolidation services has never been clearer.

 

The case for more choice

This is where open banking comes into play. Introduced in 2018, alongside new PSD2 regulation, open banking grants access to financial data to third-party developers (provided users give their permission).

By enabling non-financials to develop APIs around existing banking infrastructure, a host of innovative new services and applications are now improving the customer experience.

These ‘universal apps’ aggregate data across multiple accounts into one, easy-to-use platform, offering customers a 360-degree view of their spending and simplifying the ever-growing number of financial touchpoints we encounter in our daily lives.

In doing so, open banking has the power to not only transform the way we track and understand our spending but the very concept of what a bank is and who can provide our financial services.

 

Replacing BACS

With the use case for open banking beyond question in a post-COVID world, it won’t be long until this technology replaces BACS payments – one of the most common bank-to-bank payment methods available today. BACS currently accounts for around 90% of all regular monthly payments via direct debit transactions.

Open banking allows aggregators such as payroll providers to make payments directly to employees rather than through BACS, disintermediating the banks in the processing of direct debits and standing orders.

And the payments revolution doesn’t stop there. Open banking will also enhance real-time payments, going head to head with the card scheme to enable instant transactions between retailers and consumers.

 

Request to Pay

While UK consumers can already access faster pay on mobile to make real-time payments from one account to another, open banking will take this technology one step further using Request to Pay (RtP).

As the name suggests, this means users will be able to proactively request payments from other bank accounts. Debtors will receive a notification, via a mobile banking app or similar, detailing the amount owed and due date, thus providing both businesses and consumers with a simple, flexible way to reconcile accounts.

Needless to say, request to pay has the potential to revolutionise invoicing and regular payments. For debtors, RtP offers greater flexibility and convenience, by enabling partial payment options, a better view of outstanding bills and a simpler way to pay.

Meanwhile, payees benefit from greater visibility over cash flow, which in turn can drive more accurate forecasting, reduced billing costs thanks to the switch to electronic invoicing and increased reconciliation.

 

Merchant adoption

In particular, retailers will be quick to adopt open banking technology, particularly for online purchases, thanks to its lower transaction costs, which should also ensure widespread acceptance among consumers.

By encouraging a higher volume of contactless and digital transactions, open banking can reduce the hidden cost of cash from mishandling, and other inefficiencies, with cash-free payments estimated to save retailers £7.2 million a year.

This transformation within the payments industry couldn’t be more timely, with the pandemic accelerating the shift towards online retailing as well as fundamentally changing the way we work, live and pay.

With consumers increasingly looking for payment solutions that fit around their lifestyle and provide better visibility of their spending, open banking is the unsung hero of current payments innovation and will be key to meeting these expectations in a post-COVID world.

While it might not have made the same waves as the rise of contactless payments or mobile wallets, open banking is quietly reimagining what we today consider to be a ‘bank’ – and that’s just the tip of the iceberg.

 

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Banking

Bringing Automation to Banking

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Ron Benegbi, Founder & CEO, Uplinq Financial Technologies

 

Automation is everywhere you look these days; from supermarkets to warehouses to automobiles. This prominent trend shows no sign of abating anytime soon. However, some sectors remain behind others when it comes to adopting automated technologies. Banking is one such segment, but there’s now evidence to suggest that this could be about to change.

 

What do we mean by automation?

There are a lot of ways to define automation, but broadly the term applies to any technological application where human input is minimized through design. Over the years, automation has evolved from a basic level, which took simple tasks and automated them, all the way to advanced automation powered by Artificial Intelligence (AI). In general, automated solutions work to increase productivity and efficiency within businesses and often result in a reduction in costs associated with human capital.

 

Ron Benegbi

Why has the banking sector been slow to adopt automation?

The banking sector has been built on a number of long-standing, tried and tested processes and protocols, which have been continually fortified and refined over time. This is one explanation as to why the sector has been so slow in adopting new, automated methods within its operations. Additionally, many major financial institutions have spent decades building their own internal legacy computer systems, which are often incompatible with modern automated solutions.

When combined, these two issues have caused a significant lag in the banking sector with regards to the adoption of automated technologies. This lag has created a market opportunity that a number of fintech providers have been able to exploit in recent years. Offering a more responsive and tech-first user experience, many fintech providers are leveraging the power of automation to better meet the banking needs of their customers. However, there is still time for the banking sector to start bridging this gap.

 

Does automation have a place in the banking sector?

The opportunity for automation to play a role within banking can be transformational.

To achieve this, it’s important that legacy organizations begin to learn from their more tech-savvy, smaller counterparts. If used effectively, automated financial solutions can greatly improve the experience of banking customers, both on a personal and business level. So, what exactly does this change look like, and how far away are we from seeing it become a reality?

A good place to start is the small business credit lending process, where not much has changed since the 1980’s. Over that period, the world has greatly transformed, but the methods used to assess credit worthiness have remained somewhat static. For the most part, banks assess data related to businesses’ accounting and banking records and from credit scores. For many businesses, especially the newer and less established ones, this antiquated approach is having a detrimental effect. In fact, it’s often cited as a contributor to the huge funding gap between SMBs and their larger counterparts.

 

How can automation benefit the banking sector?

By adopting more automated technologies, lenders in the banking sector can begin to assess more comprehensive information when making credit decisions. Notably, new methods exist, which enable additional data sets to be evaluated, in order to build a more accurate financial depiction of a business’ overall position. This data can come from sources like external market attributes, economic indicators, demographic data and exogenous shocks.

By leveraging additional data sets through new methods of financial automation, banks are now in a position to respond more effectively to small businesses, including those in emerging and evolving markets where there is a lack of conventional sources of information.

With more ways to access funding, facilitated by alternative data and automated processes, small business owners can improve their operational efficiencies and accelerate their growth efforts. In doing so, legacy oriented financial institutions can now better equip themselves in protecting against new, nimbler tech-based disruptors.

 

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Banking

MYTH BUSTING THE ROLE OF OPEN SOURCE IN FINANCIAL SERVICES

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Nigel Abbott, Regional Director North EMEA, GitHub

 

There is no denying the financial services (FS) industry is under pressure to innovate. Not only have customer and consumer expectations for digital experiences surged in recent years, but the emergence of nimble and ambitious fintechs have disrupted the market. Yet, despite striving for innovation being table stakes across the industry, FS organisations inevitably face familiar hurdles that slow their progress, including concerns surrounding security, compliance, and the ability to act fast.

Open source is increasingly seen as a route to drive innovation and create new value. The FS sector’s utilisation of open source and the transformative role it can play is accelerating – on paper, at least. According to the recent Fintech Open Source Foundation’s (FINOS) 2021 State of Open Source in Financial Services survey, as many as 80 percent of FS leaders said that innovation, reduced time-to-market and total cost of ownership are factors for FS businesses to consume open source.

Nigel Abbott, Regional Director North EMEA -GitHub

But the reality is these positive adoption figures don’t tell the whole story. The survey also revealed that 75 percent of FS technology leaders said their businesses are either not “open source first”, or that they did not know if they were. Tellingly, less than one in ten (eight per cent) said that their business has put in place policies to encourage open source contribution.

The statistics point towards disparity between uptake of open source and the ability to use it to its full potential. But why?

For me, it comes down to some common myths about the role of open source that need demystifying:

 

Myth #1: There are limits to the innovation that open source can deliver

This could not be further from the truth. All enterprises, including FS companies, rely on open source software to build the best software for their customers, improve infrastructure, and unlock the potential of their engineering teams. Nationwide, for example, has completely redesigned its DevOps processes to respond faster to market changes and keep pace with customer expectations to remain relevant. The impact is transformative when they actively embrace it and participate fully in the open source community, creating a win-win situation for end-users. 

 

Myth #2: Data can be shared without consent 

Quite the opposite. Open source does not require FS businesses to share all their secrets and give away their competitive advantage. Instead, taking an “innersource” approach allows financial institutions to take the skills of developers who are accustomed to using open source tools and brings these inside the company firewall, providing a secure internal platform for working collaboratively on projects.

 

Myth #3: Open source is not secure

The most common misconception is that higher security risks are associated with code being openly available to anyone who uses it. But the open concept is, in fact, one of the biggest security strengths of open source. This is because of the collaborative nature of how code is built. The open source community has a shared responsibility for developing and maintaining secure code, and there is a vast global pool of developers identifying and fixing security issues. Supported by the right tools and processes, open source makes it easier for developers to code securely throughout the entire software development lifecycle, reducing the amount of time and financial investment in delivering secure products. Research from Red Hat found that security is regarded as a top benefit for enterprises using open source.

 

Myth #4: The open source community lacks finance sector contributors

This is untrue. Financial enterprises of all shapes and sizes are prominent participants in the open-source community and lead by example, sharing meaningful code contributions. Challenger banks and institutions such as Goldman Sachs contribute to open source initiatives via FINOS. By opening their code and ideas, FS companies can share lessons and support the whole community – helping them deliver better services and more value to their customers. And crucially, they are advancing a community that they can systematically tap into and benefit from.

Open source is already delivering innovation in the FS sector. But the bottom line is that there is so much extra value it can bring. Unlocking the full potential of open source to effect change does not just require buying DevOps tools. Open source requires organisation-wide understanding and support, a culture of collaboration and a progressive DevOps and governance process to thrive. Only then can it deliver its true value and accelerate innovation.

 

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