Open Banking: Banks Will Face “Head-To-Head Competition” from Alternative Lenders

19. January 2018.
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Open banking: Banks will face “head-to-head competition” from alternative lenders

Global / 17-01-18 / by
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Businesses across the UK can look forward to better access to financing and other financial offerings now that the country’s open banking reform has come into effect. Incumbent banks, on the other hand, are warned of increased competition from alternative lenders and the risk of redundancy.

It’s fair to say that open banking wasn’t off to the best start. Although January 13 was the day the reform came into force, all but three banks (Allied Irish Bank, Danske and Lloyds Banking Group) missed the deadline to develop solutions in line with the open banking standards.

Despite these initial challenges, the official beginning of an open banking regime in the UK could mean huge changes for both consumers and businesses.

Driven by a new EU directive, PSD2, and an order by the UK’s competition and markets authority, open banking aims to boost competition and choice in the banking sector. The legislation covers nine of the major banks in the country, although other banks have opted in to the UK’s standard and more are expected to join.

Specifically, the new regulation means that customers can now allow third parties to access their financial data – data that banks have historically kept under lock and key. For non-bank business lenders, this opens up a whole new world of opportunities.

“It would put us and other lenders on a level playing field with the banks,” Christoph Rieche, CEO of iwoca, tells GTR. “Open banking is an opportunity for alternative finance lenders to compete head-to-head with the banks, who currently enjoy the lion’s share of the £164bn SME lending market, by unlocking data that only the banks could access until now.”

iwoca is a UK-based fintech firm that offers small business credit facilities. The company was recently awarded a £100,000 prize by Nesta, an innovation foundation, as part of its Open Up Challenge, a contest for fintech firms to take advantage of the new opportunities that the UK’s open banking initiative will enable.

Before open banking, iwoca had various, rather old-fashioned and cumbersome ways of obtaining financial data from their customers. Screen scraping methods, for example, involves companies having to share their online banking login credentials, a method that is both inconvenient and insecure.

Now, this data will be shared via a secure API (application programming interface). In practice, this means that iwoca can ask businesses for consent to digitally “plug in” their bank account to its lending facility, giving iwoca access to past and current cashflow data.

Rieche explains that the access to more data and longer transaction history, as well as the ability to see this information on an ongoing basis will improve the firm’s underwriting and credit decisions, allow it to easily reapprove customers, and become more competitive on its loan terms. It will also make it quicker and more straightforward for its customers to apply for a loan.

As a result, iwoca expects to grow its customer base, while also expanding the products it offers. But it’s not merely about picking up the many SMEs that have been neglected by their banks, he explains.

“We are in a better position to gain market share and get some of the businesses that the banks currently have. That will also help create a much better awareness of alternative lenders in the market, which then in turn helps to attract more customers. Open banking is helping with that,” he says.

Banks as high-cost utilities?

It is still too soon to tell what exactly the future open banking ecosystem will look like. Rieche expects that in three to six months’ time, it will be clear how new players have decided to develop their apps and products as a result of the reform.

But it may well take years before major changes will be seen in the market.

Nevertheless, the new competition is something that incumbent business lenders should take seriously – or they risk being left behind.

As reported by GTR in its latest feature on open banking, the challenge faced by financial institutions can be compared to those encountered by the telecommunications industry in the 2000s, when alternative providers such as WhatsApp, FaceTime and Skype began to take market share from traditional mobile network operators.

Drawing that parallel, Louise Beaumont told GTR that banks will face the risk of becoming mere financial utilities – providing only the essential infrastructure that enables high-value experiences offered by others – which is just what happened to the phone companies. Beaumont is the co-chair of the open bank working group at techUK, a trade association for the UK tech industry, and sits on the UK’s Open Banking Implementation Entity.

“There is a very real risk that those banks which do nothing other than minimally viable compliance find themselves as a high-cost utility,” she said. “And being a high-cost utility is not a smart place to be. There isn’t too much space for those in the marketplace.”

At a Baft event this week, Tracy Clarke, Standard Chartered CEO of Europe and Americas, said in her opening address that banks’ ability to extract value from data will be “crucial to remaining profitable” in future. She noted too that a move into data analytics will open up “new opportunities in transaction banking”.

While the banks that GTR has spoken to all said they welcome the legislative changes in the UK and EU, it is unclear whether they would have embraced open banking without lawmakers’ intervention. After all, it’s not for nothing that the regulation has been introduced. Yet, there is general agreement amongst various sources that open banking also means the opening up of new opportunities, which will allow banks to thrive.

Beaumont, for one, is hopeful that the changes will push traditional banks to rethink and improve their products and services.

“It’s changing their mentality to recognise that data has value and to do something with that data to the benefit of their customers,” she said. “The innovation in terms of new services will filter back into the banks and they will be able to deliver modern real-time flexible services, rather than push old-fashioned products.”

The most exciting outcome, however, could be the opportunity for old and new players to drive innovation together.

Natalie Willems-Rosman, head of payables and receivables, Emea, at Bank of America Merrill Lynch, told GTR: “By the industry adopting a new way of sharing data – through APIs – it ultimately speeds up and increases the sharing of information and facilitates the opportunity to work with other parties in the chain – this could be fintech companies, new entrants or other banks.”

No doubt, banks, fintechs and other third parties will have operational challenges to overcome as this new legislation takes them into unknown territory. Some may lose out, others may find a new role in the market. Ultimately, the biggest winner will be the customer – and rightly so.

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Comments

One thought on “Open banking: Banks will face “head-to-head competition” from alternative lenders”

  1. avatarMark Bortonsays:

    I’m absolutely all in favour of open banking – and share views about “level playing fields” – but let’s be honest. If it’s to be a level playing field then alternative lenders need to be subject to the same level of stringency, regulation and accountability that banks are now unless the plan is to loosen this for the banks so that they too can operate on said playing field.

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