Open Banking – Scotland’s Global Opportunity

As the Scotsman wrote the race is on for Open Banking, and there is a unique opportunity for Scotland’s Fintech innovators to lead it, a viewpoint written by one of the local pioneers Money Dashboard.

The country has a deep history and presence in banking, and a highly innovative tech sector – The intersection of the two offers a hyper-accelerating opportunity for Scotland’s economy.

A timely example includes Visible Capital raising £500k, to help clients give wealth managers, pension providers, IFAs and other intermediaries controlled access to their financial data, allowing them to receive quicker, more informed advice on products such as ISAs and pensions.

What is Open Banking

The term refers as you might expect, to the use of open standards within the banking sector, to encourage and enable better interoperability between the banks, to achieve more integrated consumer services.

Banking Technology explains What You Need to Know, and Michael Gardner provides this excellent overview, highlighting the challenges and opportunities the trend will present, how banks will need to master better UI strategies and the use of APIs. The Open Bank Project lists a plethora of exciting startups pioneering different niches it exposes.

The enabling catalyst is open standards. The Open Banking Implementation Entity was created by the UK’s Competition and Markets Authority to create software standards and industry guidelines that drive competition and innovation in UK retail banking.

Digital Disruptors

The evolution of Open Banking can be seen as a component part of a larger digital disruption of banking, a wave of change that has been the end of corporations such as Blockbuster or Toys R Us.

It will act as an accelerator of an already transforming industry, engendering highly disruptive business models that will shake up and ultimately destroy legacy institutions that don’t adapt.

As FinExtra writes banks are living through an “extinction phase” as they look to survive the asteroid that is digitisation and the new competitors it ushers in, warns Stephen Bird, global CEO, Citi, speaking at the Hong Kong Fintech Week conference. Threats will come from all angles.

Research from The Financial Brand shows just how important and impactful the trend will be for the banking sector:

 

The nature of this disruptive threat is exemplified particularly by the entrance not just of startups but of ‘big tech‘ players like Apple and Google, set to offer current banking accounts.

The threat is considerable. Not only do digital banks offer the type of convenient services that consumers crave in this day and age, furthermore new challenger banks are trusted more than the traditional big five. Of course existing players can harness the same forces and utilize their legacy to their advantage. For example Western Union is digitally transforming themselves for a new era of global money transfers.

API-Enabled Digital Ecosystems

The common blueprint at the heart of the disruptive trend is the evolution to Platforms – Digital Ecosystems formed through multiple collaborating partners, achieved through open API integrations.

Open APIs are the core component for building Platform ecosystems but they alone do not represent achieving this business model. Tolga Tavlas makes this point writing for FinExtra, suggesting an evolution where Open Banking is the first steps of primary school and adapting strategically to a Platform model the progression to university.

This is a critical point repeated by Cap Gemini too – In their Open Banking article they highlights how Open Banking APIs are one step on a broader journey towards a digital marketplace model. In short the trends that swallowed up industries like taxis and hotel bookings, that entirely obliterated traditional incumbents like Blockbuster videos, is coming to banking, and as such we’ll see the same scale of creative destruction and innovation.

PwC describes Digital Ecosystem Banking, a network of APIs, digital marketplaces and platforms offering new distribution channels.

These standards enable banks to adopt more flexible API-based methods of systems integration, highlighted by the perfect example of the point of this article, a trend being pioneered by local Scottish banks.

In this documentary experts including Kevin Hanley of the RBS explain how they’ve shifted from ‘point to point’ integrations between business systems, to APIs because these are more efficient and critically, enable the open ecosystems that stimulate creative innovations that power new products that customers value.

In their Open Banking article Cap Gemini highlights how an API platform will provide the foundation for cultivating a developer innovation ecosystem:

“This involves the creation of secure APIs by the banks that will be able to perform these activities on your account. This will allow third-party providers, such as FinTech companies, to be able to write applications that consume these APIs and perform these financial transactions on your account.”

In their article Data Sharing and Open Banking McKinsey define three distinct types of API:


Model type Attributes
Public / open

APIs used by external partners and developers who build innovative apps and products.

Innovation through engaging developer community

Extended market reach

Partner / B2B

APIs used by business partners, including suppliers, providers, resellers, and others for tighter partner integration.

Reduced partner costs

API monetization

Enhanced security

Internal

APIs are used by developers within enterprise.

Cost reduction

Operational efficiency

Enhanced security


They conclude with this strategic recommendation:

“Regardless of location, over the next 18 to 24 months banks should capitalize on their incumbent advantages by taking the following actions:

  • Explore data-sharing agreements with fintech and nonfinancial services firms to stay ahead of the curve.
  • Develop a perspective on APIs and their benefit to the bank’s service model, both in leveraging mandated third-party access and potentially extending access beyond statutory requirements.
  • Fully understand both existing data privacy mandates and likely changes, and determine their institution’s appetite for a less conventional approach. And examine how customer messaging would best facilitate any such change.

Banks will need to address the potential loss of revenue from existing payments revenue streams resulting from the lowered barriers to competition. Change is rarely comfortable, but as market evolution in the United States and other countries illustrates, the forces of change are inevitable.

Banks are better served getting ahead of and defining the trend rather than waging a futile

Conclusion – Scotland’s Global Opportunity

Scotland experiences the same banking needs locally that defines market needs globally, presenting the opportunity for a powerful bootstrapping cycle of pioneering and proving them at home first, then exporting those solutions internationally.

For example half of Scotland’s smaller firms believe they get a raw deal from their banks, writes The Press and Journal, and the ongoing closure of branches and ATMs impacts communities heavily especially those that are remote. Each of these pain points is a fertile opportunity area for innovative solutions to these needs.

For example Renovite is a Fintech building innovations for these types of challenges locally in Scotland, moving ATMs into the Cloud, meaning entirely new ways of deploying them will be made possible.

Sharing of data between banks will encourage smarter services, better informing consumers about more competitive offerings. This i Newspaper article provides a great walk through from a consumer perspective of how this translates into considerable value for them, in this case enabling a customer to save money while dealing with challenging financial circumstances.

Money Dashboard, an Edinburgh startup, offers exactly this same type of app, enabling consumers to make informed financial decisions such as planning to reduce their debt or book a holiday.

Similarly Edinburgh-based The ID Co. is another startup pioneering this type of innovation. Their DirectID Bank Data Suite offers a hosted solution to very easily access customer bank data via a widget, automatically having their transaction data categorised and instantly viewing insights into their finances.

And not only are they bringing their own products to market, they are actively cultivating an Open Banking innovators forum for others to learn from their experiences. Likewise FinTech Scotland is building Scotland’s overall capacity for enabling FinTech startups and enterprise innovation.

This type of expertise sharing can underpin the growth of a local cluster of other ventures that crystallizes the momentum required to establish Scotland as a world leader in this hyper-growth sector.

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