Open Banking: the technology revolution sweeping across the banking industry. Policy Pulse June 2018 compendium

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1 Open Banking: the technology revolution sweeping across the banking industry Policy Pulse June 2018 compendium

2 Eamonn McGrath UK Head of Regulatory & Public Policy Loree M. Gourley UK Director of Regulatory & Public Policy This article forms part of the June 2018 EY Policy Pulse compendium. A collection of six articles that cover key topics which will become increasingly important to UK policy makers and regulators, company boards and investors. Policy Pulse aims to help ensure boards know about these topics and the associated changes, challenges and opportunities that lie ahead. of 6articles Article 1: A bold vision for retirement: pensions in 2030 Article 2: Cryptocurrencies and why policy makers will need to adopt cross-sector thinking Article 3: How robotics is changing the way accountancy firms conduct audits Article 4: The impact of BREXIT on the application of IFRS in the UK Article 5: The future of auditing: where to now with statutory audit? Article 6: Open Banking: the technology revolution sweeping across the banking industry 3 Policy Pulse 2018 Open Banking: the technology revolution sweeping across the banking industry

3 The managed roll out of Open Banking started in January 2018, providing customers (including small and mediumsized business customers) with a secure way to view all of their accounts, irrespective of provider, in one place and better manage their finances. Customers can choose to give third party financial services providers (regulated by the Financial Services Authority or equivalent EU regulators) access to their financial data. As of April 2018, third party providers have also been able to contact customers directly. Open Banking opens up a dynamic new range of financial services to help customers manage their finances and find the best offer based on their financial position, further augmented by customers being able to give third parties authority to make payments as part of a wider value proposition. The UK launch was a world first and heralds the start of a new age where consumers can share their financial data securely with other companies and grant third parties access to their banking information, thereby opening themselves up to a new world of opportunities where they can access better products and services. Open Banking owes its origin to the Competition Markets Authority s (CMA s) final report of its retail banking market investigation, published in August The report found that older and larger banks do not have to compete hard enough for customers business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services. As one of the remedies, the CMA required banks to implement Open Banking by early 2018 in order to accelerate technological change in the UK retail banking sector. Open Banking will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital app, to take more control of their funds (for example, to avoid overdraft charges and manage cash flow) and to compare products on the basis of their own requirements. Open Banking marks not only a significant change for UK consumers but also, as the CMA envisaged, for the financial services industry as a whole. The successful launch was a result of collaborative effort by the UK s largest banks and building societies, the FinTech industry, regulators and the Government. However, January 2018 was just the beginning. Together with the 2nd Payment Services Directive (PSD2, which came into force on 13 January 2018) Open Banking has already accelerated technological change and has the potential to create a new competitive landscape in retail banking. FinTech firms have their eyes on the prize In EY s UK FInTech Open Banking Snapshot, launched at the HM Treasury 2018 FinTech conference, UK FinTech firms (FinTechs) said that they see Open Banking as a major area of opportunity for According to the survey, 81% of FinTechs who responded are focused on building new propositions for Open Banking while 94% are enhancing their current products and services and almost a quarter (23%) are prioritising account and data aggregation. Of the participants, 59% see Open Banking as an opportunity to review their collaboration strategies and almost three-quarters (74%) of participants believe that new competitors will become increasingly important over time. However, whether it will be other emerging FinTechs, more established banks, technology companies, or a combination of these, it will be fascinating to see what new products and/or services are launched over the coming months and years, which will transform our daily financial lives. It is clearly important that in implementing Open Banking banks and third parties strike an appropriate and compliant balance between openness and sharing, and also the control and protection of data. Policy Pulse 2018 Open Banking: the technology revolution sweeping across the banking industry 4

4 Open Banking is about customers achieving better outcomes through better data and better choice. It also enables banks and other financial services providers to better understand their customers, including their spending patterns, and provide a tailored set of products that are better suited to the customer: with an underlying benefit, for the financial institution, of augmented credit scoring and affordability assessments. Despite the clear opportunities, FinTechs are realistic about the potential challenges, with the ability to achieve customer adoption ranked as the biggest obstacle. In terms of what could be done to help ensure Open Banking is a success, customer education was identified as the most important area, followed by agreed industry standards outside the nine banks identified by the CMA. While the advent of Open Banking has caused some understandable concern about the sharing of private data, the crucial point to remember is that the consumer is in control of what, when, to whom and for what purpose they share their data. Of course, as with all new technological advancements, it will take time to bed down and for people to get comfortable with the concept of sharing details of their financial affairs. In the medium to long term, however, the hope is that increased transparency will be seen as a positive move. It will help people to make more informed financial decisions and should also serve to further increase innovation and competitiveness across the sector. Additionally, although the initial focus is on consumers, we are now seeing an increasing focus on SMEs customers and how Open Banking can better help these businesses with their finances. Data protection: the balance between openness and sharing While PSD2 and Open Banking are increasing data sharing with third parties, the General Data Protection Regulation (GDPR) which came into effect on 25 May 2018, is focused on data protection, data control, permissions and being clear on how data is managed, stored and looked after. Open Banking, however, is about enabling customers to share their data with third parties not about data sharing data per se. It is clearly important that in implementing Open Banking banks and third parties strike an appropriate and compliant balance between openness and sharing, and also the control and protection of data. However, whilst there might appear to be a tensions between PSD2 and GDPR, at the heart of both Regulations is the principle that ownership and control of data sits with the customer. Obtaining appropriately informed and robust customer consent is a fundamental part of what banks and other third party providers need to ensure. The old adage is bad news travels fast : in today s digital age bad news travels even faster and consumer confidence and trust in Open Banking could easily be damaged by a data protection breach, whether it be the result of internal error or a cybersecurity incident. 5 Policy Pulse 2018 Open Banking: the technology revolution sweeping across the banking industry

5 With new opportunities come new risk Since February 2018, the Basel Committee published a paper on Sound Practices: Implications of fintech developments for banks and bank supervisors, which highlights the new risks that may accompany new technologies. The paper identifies that: Banks, service providers and other fintech firms are increasingly adopting and leveraging advanced technologies to deliver innovative financial products and services, such as artificial intelligence (AI), machine learning (ML), advanced data analytics, distributed ledger technology (DLT), cloud computing and application programming interfaces (APIs). While these innovative technologies present opportunities, they may also pose new sources of risks. These and other risks will also be relevant from a bank audit perspective. Whilst data sharing with third parties provides opportunities in the shape of Open Banking, the downside will be the risk of increasing the number of entry points into a bank s systems, all of which will need to be secured and monitored to prevent cyber breaches and fraud. The technical revolution in the banking industry Throughout 2018 we expect the trend of banks applying emerging technology to solve business challenges to continue. This is a result of three main drivers: first, the need to deliver better, faster, more convenient, competitively priced products and services to their customers. Second, the need to respond to the threat from business model disruptors, ranging from FinTechs to traditional tech firms to new market entrants, and finally, the need to address structural costs relating to legacy infrastructure and the cost of compliance. Open Banking is, however, only one part of the technology revolution sweeping across the banking industry. In 2017, both retail and investment banks increasingly adopted new technologies - for example, Robotics Process Automation (RPA) - to reduce costs across front, middle and back office functions. The pace of disruptive change will only increase going forward, and this will be a theme of 2018 and beyond, as the adoption of other emerging technologies like AI, advanced analytics, and machine learning start to help banks achieve their strategic objectives and stay competitive in the face of an increasing number of providers, whilst also safeguarding them from new cyber security threats. In addition to Open Banking we are seeing some other trends across the sector. We expect the adoption rate of the Cloud to continue to increase, and to see banks make significant further investment in advanced analytics, artificial intelligence and biometrics. Banks will also continue to experiment with blockchain and smart contract technology, and while wholesale infrastructure change is still some way off, we are excited by the potential of product innovation in the near term. At the same time, there will be an increased role for technology to play in safeguarding the banking sector, as threats relating to cyber security and from financial criminals continue to increase in sophistication and scale. It is clearly important that in implementing Open Banking banks and third parties strike an appropriate and compliant balance between openness and sharing, and also the control and protection of data. Policy Pulse 2018 Open Banking: the technology revolution sweeping across the banking industry 6

6 Questions the board should be asking itself Has the Board considered the impact of technological innovation in it its sector and does the company s strategy consider the entry of disrupters? Do the changes in markets such as retail banking create new opportunities for the company? Has the company considered the benefits or partnerships with FinTech and other t echnology companies Conclusion Ultimately, Open Banking has the potential to transform the way consumers and small and medium sized businesses manage their money now and in the future: enhancing financial outcomes for customers through better data and better choice. However, Open Banking also marks a turning point for the retail banking industry will be a year where banks have to strike a balance. The pressures to innovate and keep up with the FinTechs who, as our survey shows, are focussed on the opportunities Open Banking presents - has never been greater, yet the scale of mandatory, regulatory-driven transformation persists. The challenge will be to innovate with less reliance on already-stretched technology functions and the answer is likely to lie in further uptake in low code technology, where applications can be built without deep technology experience, and increased collaboration with FinTechs and other external organisations. With the business models of retail banks under review by the Financial Conduct Authority, 2018 and the launch of Open Banking may well herald the start of a radical transformation of the retail banking industry and mark the real beginning of an innovation-led recovery for the sector. 7 Policy Pulse 2018 Open Banking: the technology revolution sweeping across the banking industry

7 Subject matter expert For further information on any of the issues raised here, please contact the author or your usual EY adviser: Hamish Thomas Partner, Head of Banking Technology +44 (0) UK Regulatory & Public Policy Team Eamonn McGrath Partner Loree M. Gourley Director John Jarrett Director David Parrish Associate Director Jane Hayward Green Associate Director Nina Emordi Regulatory Manager James King Regulatory Affairs Specialist

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