Frictionless Finance Report - Wednesday 19th May

We examine how Open Banking and digital transformation can help the UK to recover from the pandemic, and whether Canada needs to step up its Open Banking game.
Published on
May 19, 2021
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Category
Finance & Fintech

Welcome to the Frictionless Finance Report, our monthly look at everything new in the world of Open Banking, FinTech, and consumer experience. If you’d like to receive this in your inbox, fill in the form at the bottom of the page. This month we examine how Open Banking and digital transformation can help the UK to recover from the pandemic, and whether Canada needs to step up its Open Banking game.

Open Banking 

Notwithstanding the threat posed by future variants of the Coronavirus, May 17th will almost certainly be a date on which many of us rejoiced as restrictions across the UK were loosened.  In the UK, indoor hospitality opened while restrictions about meeting with friends and family were similarly loosened. 

We have written previously on these pages about what the country will look like post pandemic. Whether we take the opportunity to make the UK more equitable, with better working conditions, healthcare or social care provision remains to be seen. 

One of the challenges that we have seen over the last fifteen months that has yet to be fully resolved is access to credit. Individuals and companies alike have desperately required access to credit through the pandemic, and will continue to do so.  

Bounce Back loans and Coronavirus Business Interruption Loan Scheme (CBILS) have in their respective ways, shown both the strengths and weaknesses of the current methods of delivering monies where it is required. 

And though we may be able to see the light of the end of restrictions, and whisper it, maybe even Covid itself, the need for support continues. 

In the first of our run downs this week, we pick up on how funds are being disbursed. The weaknesses in the current system of credit scoring has been exposed over and over through the pandemic as those most in need of gaining access to finance have been unable to do so. 

Credit scoring works against many in our communities, particularly those new to the country, young people who have never before had credit and many other groups all suffer through the reliance on credit scoring. 

AltFi have correctly noted that young people are disadvantaged, when in many instances, they are most in need of credit. And as well as being part of a group that is most likely to be turned down for credit, young people under-35 are also most likely to have their credit rating adversely affected by the pandemic.   

In a survey reported in AltFi, three times as many under-35's have had their finances negatively affected as those in older age brackets. The survey also found that many more young people than those over the age of 55 had been denied credit. An increasing number of young people are recognising the value of bank data in the credit decisioning process, and are calling for a hastening of its adoption.  

Co-workers in meeting room brainstorming ideas.

The need for further use of bank data and Open Banking in credit decisioning has been reinforced by an article by Experian and featured in Finextra. Indeed, in their analysis, the volume of people that are choosing to share their data now compared to the start of the pandemic has now more than trebled.  

Experian write: 

The use of these financial digital apps and services offer people new insights that can help them manage their money and access better products that they may not have been able to access before. Many of these services are also personalised or tailored to someone’s individual behaviours or lifestyles, offering a much better user experience. 

Open Banking Innovation 

If Open Banking and bank data can therefore help young people and other disenfranchised groups gain access to credit, then what else can bank data provide for us to help us build a better society where money works for all? 

This month, both International Banker and FinTech magazine ponder what future innovations can be derived from bank data. 

International Banker have focused their attentions on the continued and persistent issues of making payments smoother. They highlight that SMEs in the UK are currently chasing around £50 billion in late payments. The Federation of Small Business further points out that late payments cause around 50,000 SMEs to go out of business every year. 

They write that using a combination of Open Banking and open data in conjunction with AI tech, near immediate facilitation of payments can be achieved. Banks also can play their part in helping cashflow arrive with small businesses by allowing them to access cash locked in unpaid invoices.  

They conclude: 

Open Banking has clearly fulfilled its goal of powering more innovative, secure payments at the consumer level. There is a clear and increasingly urgent need to direct this promise of open data sharing to B2B payments, which are crying out for the benefits open data can bring. As the events of the past year have shown, slow payments is not just an ever present problem, it worsens during times of crisis. While we cannot prevent another crisis from occurring, we can ensure there is a robust, fair payments framework to help weather the storm.

FinTech magazine highlight the impact that Request to Pay (RtP) can have for small businesses. Lowering costs, clearer tracking on the status of monies owed, and lowering the time taken to chase outstanding invoices are all illustrated as benefits that can be derived from RtP.  

They write: 

Open Banking users can also make more accurate financial forecasts and reduce billing costs thanks to electronic invoicing. For business users, the removal of legacy and manual processes means that they can operate more efficiently, reducing the time wasted chasing overdue invoices, as Open Banking enables a 360-degree view of payments on a single platform.
Architectural photography, top of large concrete building and blue sky.

Building on success? 

To be able to vindicate further progress however, does Open Banking need to justify its current successes? Has there been enough to justify future developments? 

One continued headache that we have heard almost from the moment that Open Banking was launched is in the volume of user adoption. Global Banking and Finance report that while there has been considerable take-up from a standing start in just three years, user growth is now starting to plateau. Moreover, with the UK clearly in the lead in terms of take-up, use in Europe has barely registered.  

With consumer confidence being key, they correctly note that; “we see consumer education, especially in the field of security, as having a key role to play in building confidence and consequently optimising uptake of open banking.” 

Best of the rest in Open Banking: 

  • MP John Penrose has written a strong defence of Open Banking in Politics Home and has called for the evolution of open finance. 
  • Will Open Banking provide a conduit for a new wave of fraudulent payments asks Finextra

Open Banking Abroad 

We focus our attention this month on the situation Canada, and ponder, for all the talk that we’re hearing within the country – are we likely to see Open Banking go live anytime soon? 

Canada 

The slow state of the Canadian Government’s review of Open Banking has been making headlines over the last month. The review has been in progress for over two years, with no definite end date in sight. Betakit has been following up with a variety of stakeholders to gauge their feelings at the slow pace of progress.  

Benjamin Bergen, executive director of the Council of Canadian Innovators, said: 

Canada is home to some of the world’s most promising FinTech companies, and Ottawa can support them by introducing regulations that allow for increased competition and delivery of innovative and affordable services to Canadians. 

We are disappointed by the lack of commitment for financial innovation and a framework for open banking in Canada, especially after a round of industry consultations and promising signals from the government.

Meanwhile, the delay in the implementation of Open Banking has given financial institutions too much time to think about some of the ramifications, and are now concerned about what Open Banking may bring.  To allay dome of their fears, Hossein Rahnama, a FinTech innovator has written in Policy Options on the benefits that Open banking will bring, while also pointing out some of the genuine threats banks should be worried about – prime amongst them being big tech.  

He writes: 

The traditional financial sector needs to recognize that, in a digital society, data rival money itself as a foundational building block of wealth. And everyone – big banks and big tech along with government – needs to recognize that those data assets belong to customers.
Architectural photography of financial services building.

Latin America 

There is optimism in South America that Open Banking could help them to build the next FinTech unicorn.  Writing in Crunchbase, investor Bob Ma shares this enthusiasm, and writes his four key rules that will see FinTech companies in South America thrive – all courtesy of Open Banking.  

Finance 

As well as being positive for the consumer, the rise in digital adoption – and particularly that spurred on by the pandemic – has also been hugely positive for the financial services sector.   

Research recently carried out by Yobota has highlighted some of these benefits. In a raft of positive news, those surveyed said: 

  • They are more confident in their businesses ability to survive future disruption (73%) 
  • They can put tech at the heart of their business operations (76%) 
  • They can improve their customer experience (74%) 
  • Speeding up digital adoption allowed them to pivot during the pandemic (79%) 

Other opportunities that have yet to be tapped, still, however exist. In Finextra, ING have written on three opportunities that could have yet to be capitalised on. These include helping customers in everything to do with buying, owning and selling a home, far beyond just mortgages; taking far greater care of their customer’s financial health, and; developing their lending capabilities so it is flexible and tailored without need for endless forms and paperwork.  

In their continued development of technology, should banks begin to look more closely at crypto? 

There have been several flirtations already, some Volte-face, several outright denials that banks will ever involve themselves in crypto, and of course, Elon Musk. 

The FT [paywall] writes that after the Bank of New York Mellon, State Street and Goldman’s, Citi have become the latest to dip their toes in the water. Citi state that they have a number of asset managers looking for research briefings and some high-net worth investors who are looking to invest in coins  

Of course, as we focus more and more on digital coins, our reliance on cash dwindles further and further. In an effort to ensure that cash is still accepted in high-street stores, thousands of stores and shops have signed a new pledge to keep accepting cash. The Which? Scheme has involved some of the biggest supermarket chains and department stores.  

Online Scams 

Having spent over a year cooped up in our homes, many of us will recognise the small pleasure of receiving a delivery to the door. The proliferation of vans on our streets bearing names such as Hermes, DPD, Amazon, and of course Royal Mail, has been noticeable. 

Unfortunately, however, fraudsters are also aware of this and have been targeting UK citizens because of our love for online shopping. Text messages purporting to be from Royal Mail, DPD or Hermes have been sent to thousands of us (including this writer) suggesting a fee needs to be paid to have an item to be paid.  

Finextra have reported some research from UK Finance that shows that 70% of scams begin online. Their research shoes that as well as delivery scams, romance and investment scams were also prominent. 

Meanwhile the Guardian has shown the human face of what happens to those who have fallen for these delivery scams. After filling out a short form with their bank details, they receive a telephone call from “their bank” saying there has been fraud on their account and they need to move all their money to a new “safe” account. Of course, these are fraudsters accounts, and their unwitting victims have lost tens of thousands of pounds.  

Close up of person using their phone while sat at desk.

FinTech 

Our roundup of FinTech news centres on home turf this month as we report on FinTech Scotland’s new ten year roadmap to promote Scotland as the number one place to create and build a FinTech company. 

The plan, which builds upon the recent Kalifa Review of UK FinTech has been created in conjunction with the Global Open Finance Centre of Excellence.  

It seeks to promote Scotland’s reputation as a natural home for FinTech, develop themes such as financial inclusion and wellbeing, aligning research strengths and capabilities and influencing Government priorities.  

Nicola Anderson, chief executive of FinTech Scotland, said:  

The roadmap will further advance and grow Scotland’s fintech cluster and it will bring insight and specific focus to accelerate fintech innovation.

Kevin Collins, chief executive of the Global Open Finance Centre of Excellence, said:  

We’re delighted to be working with FinTech Scotland and Whitecap Consulting on this roadmap which is essential to ensuring we prioritise the needs of financial and fintech businesses, including key skills gaps as well as provide an opportunity to align businesses and academics effectively.

News via InsiderScotsmanFuture Scot and Digit

DirectID News

The demand for Open Banking account verification in the payments space continues to accelerate. And with that, DirectID are delighted to have signed PayShield as a customer. PayShield will be utilising DirectID to help their merchants reduce fraud and offer dispute management in their ecommerce solutions. To find out why Bank Account Verification is fast becoming the entry point for organisations who wish to utilise bank data, see our use case page.

We were thrilled to invite FinTech blogger Rodney Law to write another guest article for the DirectID blog. Rodney’s latest piece ‘4 Security Considerations for Online Store Payments’ explores the security considerations that must guide the development of online stores.

To address the increase in momentum for Open Banking services in the US, we were joined by our partners Constant AI to co-host the webinar ‘Validating Assumptions on the Use of Open Banking Data’. DirectID CEO James Varga co-hosted the discussion with Carissa Robb, President of Constant AI, highlighting the benefits of using bank data throughout the lifecycle of a loan. Watch a full the recording of the session here.

James also joined Holland FinTech’s CEO Don Ginsel on the #FlashFriday podcast to reflect on the last ten years in the UK Open Banking space.

That’s a wrap for May. As ever, do let us know any thoughts or comments. We’re available through our social channels and on email – frictionlessfinance@theidco.com.

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Frequently asked questions

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What is open banking and how does it work?

Open banking is the practice that allows people and businesses to share up to 12 months of transaction data. DirectID is regulated by the Financial Conduct Authority as an Account Information Service Provider (AISP) - the intermediary who safely facilitate this process.

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Transaction categorisation is the process of adding context to raw transaction data. The process gives you an understanding of what your customers' spend their money  and where.

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Using the bank account verification API, DirectID matches the details provided from your customer to those on their account. We apply a set of sophisticated algorithms and rules to verify the name, and then tell you what does and does not match.

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After a customer shares their data, DirectID identify recurring credits to the account and group these. Using an algorithm we identify the monthly income for each income stream. We then return the calculated income and confidence score to you.

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