London launch of the Open Finance Association
On 07 November 2022, the Open Finance Association officially launched in London. The Association brings together tech companies providing services in Open Banking and Open Finance, as well as businesses using these services.
John Fingleton was asked to give an opening speech at the London launch event, covering his personal reflections on the origins of Open Banking which go back about 15 years.
The birth of Open Banking
Open Banking has its origins in the work of the Office of Fair Trading (OFT) on the banking market in 2007/8.
We were concerned that the "free if in credit" model, whereby banks funded current accounts with a combination of unauthorised overdrafts and foregone interest (which, having disappeared after the financial crisis, is making a return) both limited competition and new entry and was deeply unfair to consumers in several respects. Our market study focussed on the competition aspects, and we brought an agreed test case against the banks on unauthorised overdrafts to address some of the fairness issues.
In our market study work, we realised that it was impossible for consumers to compare prices across different banks. Conceptually we wondered if it would be possible to drive competition by having standard charge categories for different aspects of the current account service and enabling consumers to download their data to apply to that. It is very similar to allowing people to compare mobile phone offers. Nudge by Thaler and Sunstein published in 2008 set out how this might work for credit cards, relying on excel sheet downloads. We did not think this was practical for current accounts, but the concept of some industry standards and consumers' access to their own data remained central.
Another strand to our thinking arose from being asked by the Treasury to oversee the introduction of faster payments. This was a painstaking task, led by a team under the late Jonathan May. The ultimate outcome was a huge win for consumers in terms of their ability to transfer (or "push") money to a specific account almost instantaneously. However, we had been unable to get agreement on "pull" payments, and these continued to rely on existing payment rails. I believe that this asymmetry restricted innovation in payments, particularly account to account based payments, in the decade or more that followed.
Ultimately, there was a much wider issue here. Companies, not just banks, were increasingly using technology to make ever more complex pricing offers to consumers. What looked like greater choice was actually a form of "yield management" or price discrimination that possbly reduced competition and consumer welfare. Given the various concerns with this, including political, and what was happening in energy, telecoms and many other markets, I was of the view that if we could not harness equivalent technology on the consumer side, then we would end up with more crude (and possibly harmful) interventions.
This was not an abstract fear. The energy market is a good example. In late 2012, interventions to simplify the market were tried by David Cameron's government in the energy market with the introduction of a four tariff rule. This wasn’t just a Conservative policy - a few years earlier, David Milliband as energy secretary had also intervened to restrict tariffs in energy. Subsequent research showed this intervention had increased prices overall. I don't believe the later tariff restriction, the energy price cap, was any more successful.
Before I left the OFT in 2012, we had set out a forward programme of work on competition in banking, but personal current accounts and SME banking over the subsequent years. This provided the backdrop to the work by the Competition and Markets Authority (CMA).
Open Data and the CMA report
The CMA came into existence on 1st April 2014 and, building on the OFT's programme of work, was able to announce a market investigation into competition in personal current accounts and SME banking on the 18th July. The personal current account aspect of that Investigation revisited the question of how technology could be used to improve competition and consumer outcomes.
Serendipitously, after I had left the OFT, we at Fingleton and the Open Data Institute were asked by the Treasury to write a report on how Application Programme Interfaces (APIs) might be used to drive competition in banking. That report, Data Sharing and Open Data for Banks, provided important evidence for how new technology could be harnessed on the consumer side. Essentially it argued that Open Data and a clear standard could be used, and that APIs could provide the basis for secure access to the individual consumer's information.
The report was published in December 2014. There is no reference to the Fingleton/ODI report in the final report of the CMA: its influence was indirect in that the submissions of the various banks relied on it. At that time, we advised Lloyds Bank, which in various submissions and underlying work (example here), championed approaches that moved in the direction of Open Banking.
The CMA's final report brought together all this work into a clear recommendation on Open Banking.
"Our first foundation remedy, which is of central importance to our remedies package. The focus of this remedy is to deliver open API banking standards and to require the largest banks in GB and NI to make data available using these standards so as to enable consumers and SMEs to more easily identify products which suit their needs and to facilitate the creation of new digital services to help them manage their money."
The implementation of Open Banking
The story from 2016 will be more familiar to the people in this room. The Open Banking Implementation Entity (OBIE) was created. PSD2 happened in parallel. In 2019, we at Fingleton were asked by OPIE to review the operation of Open Banking. We made a number of recommendations around improving payments capability, improving the consent process, and considering premium APIs.
My personal view has always been that the process of public intervention to enable technology and empower consumers is the right way to go. It allows competition to operate in the interests of consumers, and enables innovation along the way. While I never expected it to be a fast process, I did expect that its benefits would go wider than current accounts. For example, it would enable external credit providers to provide consumers faced with a need for some short term credit with options other than an unauthorised overdraft. And, in our review in 2019, I did wonder if wider enhancements (e.g. double anonymisation) could bring substantial benefits to regulation in other areas such as the protection of consumers in gambling regulation or the ability to regulate age restricted services without intruding on privacy.
My experience with using regulation to increase competition in other sectors is that it is a slow process but one that delivers huge benefits over the longer term. For example, the deregulation of restrictive European aviation rules in the 1980s and 1990s really only began to deliver benefits in the 2000s, when new low cost business models took hold and the incumbents had to radically reform their cost structures to keep competitive. In the same way, I expect that Open Banking will continue to deliver long term benefits to UK consumers, both via new entrants and business and the pressure they put on incumbents to improve their offerings.
In summary, Open Banking
- Open Banking is good for competition in UK current accounts where I hope it continues to have impact, driving productivity and consumer welfare.
- It is important for the UK internationally, showing our leadership in technology and creating many commercial opportunities.
- It is important for the wider financial services ecosystem where the FCA is looking at open finance more generally.
- Open Banking also has lessons for other markets where similar concerns about complexity being the enemy of consumers and competition abound.
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