Why Open Banking is poised to disrupt the UK financial sector - Outside Insight
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Why Open Banking is poised to disrupt the UK financial sector

The UK’s new Open Banking initiative has quietly opened the doors for increased competition in the long-standing banking sector.

Key takeaway

Open Banking was launched on 13th January, 2018, in an effort to increase competition within the stagnant UK financial sector, as well as to facilitate closer relationships between big banks and new fintech companies. The law will force banks to release data, if customers so choose, to third parties looking to bring much-needed innovation and efficiency to the sector.

The data floodgates have officially opened in the UK banking industry. According to WIRED, the new Open Banking (aka PSD2) initiative will force the nine biggest UK banks to open up their ‘precious’ data to third party institutions.

Open Banking was launched to encourage competition in the market – following a report on the UK’s retail banking market. The report found that switching was low as older, larger banks don’t have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow and access the market.

Currently over 80% of UK residents bank with Barclays, HSBC, Lloyds, Santander or Royal Bank of Scotland.

The initiative will enable individual customers to easily share their banking data with approved third party institutions, putting customers in control of their own data for the first time. This has the potential for far-reaching impact beyond banking, extending into lending, savings, investment and other areas equally ripe for innovation.

This will make it easier for new products and services to help customers securely move and manage money more easily and efficiently. The Open Banking Implementation Entity (the ‘OBIE’), launched for this purpose, aims to create a single standard which regulated and authorized companies can use to access accounts held by a wide range of banks and building societies.

What sort of data is part of Open Banking?

Beyond more public information, like specific bank branch locations, disability access and opening times, banks are being forced to release their transactional data. According to WIRED this includes rich insights on everything customers spend, lend and borrow – from electricity bills to mortgage payments to weekly spend on train travel and coffee. This information is passed on to third parties who can use it to create new products.

Lending gets a hand

One area where this could have a significant impact is the lending and debt financing space, specifically when it comes to SMEs. Open Banking offers a more secure and faster way to provide lending institutions with access to an applicant’s spending history.

Lending and business finance startup Funding Options matches small business owners with the right financing options for them. The team recently created a product that makes it easy for SMEs to share bank account data digitally, thanks to Open Banking.

Richard Leader, Marketing Director at Funding Options, said that this data will allow lenders to more easily automate this process. “Better data makes it possible to automate away a lot of the friction in business finance. Even the most technology-focused lenders we work with have to manually review bank statements, and Open Banking means that this problem should go away soon.”

The Funding Options team is already incorporating AI and working with machine learning experts to evaluate external data points related to their customers and dive deeper into the information they find. “We look at various factors like filed accounts, profit and loss statements, credit scores, and other standard metrics — but it really depends on the lender. We have dozens of the UK’s best lenders on our panel, and their requirements vary hugely — this is part of the reason that our service is needed in the first place.”

In an effort to better understand customer behavior in their industry, the team recently initiated a project with a machine learning firm. Their learnings reinforced the need for access to banking data.

“For example, transactions data was highly predictive of overdraft use, and combining this data with other sources like credit scores and average daily balance gave us a much more nuanced picture of a business’s likelihood of using credit than we would get with more traditional methods. It is these kinds of insights that Open Banking could facilitate — bank transaction data is an important piece of the puzzle.”


“A perennial absurdity is that SMEs end up scanning their paper bank statements, only for the data to be manually re-entered into the underwriting systems of modern online lenders,” Funding Options founder Conrad Ford said.

Fintech leads the way for innovation

UK fintech startups saw a record-breaking year for investment in 2017. From Transferwise’s $280M fundraise, to Funding Circle’s $116M to Monzo’s $100.5M, fintech contributed a significant amount to the UK’s $4.24B in tech VC investment.

According to London and Partners, technology-driven financial services companies based in the UK raised more than $1B in VC investment between January and October 2017, for a total of $1.9B in the year.

Richard Leader predicts a future where new services and technologies will continue to emerge. “Open Banking means that technology companies can develop software using the standard Open Banking API in the knowledge that whatever they build will be compatible with all the major banks. This might sound like a small detail, but the implications are huge, and we expect to see a wide range of services emerging in the next few years as a result.”

Fintech startups making waves in the UK

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