Apple has stepped into Open Banking in the UK by acquiring Credit Kudos. This is one of the startups that uses transaction data and machine learning to create very accurate credit ratings. They use API access to bank accounts to collect real-time data and feed it into their systems to provide clients with affordability and risk assessment scores and are good example of how Open Banking data will support better lending, as risk assessment will be guided by richer data on under-served markets and business owners which will in turn open up opportunities in the significant total addressable market of finance-hungry SMEs and micro-entrepreneurs across the globe.
As it turns out, if you want to make a decision about whether to offer a short-term loan to an Uber driver who needs a new tyre or a small business that needs to finance expansion or a microenterprise that needs more stock for an upcoming craft market, traditional credit bureaus are not much help. If, on the other hand, you can get hold of the actual transaction data from the relevant bank account then you can make very accurate decisions.
With Apple expanding their range of services around payments, and presumably looking at partners for merchant onboarding and buy-now-pay-later and so on, the acquisition makes complete sense: it gives access to the data and algorithms for immediate opportunities but also provides a more general platform for exploiting Open Banking to obtain financial institutions data for future opportunities.
(Once again, I return to the convention of using Open Banking to mean the regulatory version and open banking to mean the generic connection of third-parties to customer data with consent)
BNPL is a good example of a service that can benefit from this approach and whether you think BNPL is sub-prime by another name (as I know many people do) or part of a natural repackaging of payments and credit in a connected world, there’s no doubt that it is important. While (as Visa pointed out in their last earnings call) the impressive growth of BNPL still leaves it as a small fraction of the total retail payments market, it is indicative of the ability of non-banks to mount a real challenge. Simon Taylor of 11FS says that BNPL “has to be the perfect use case for Open Banking” and explains that if a consumer could be persuade to take the option to “verify via your bank” or whatever then BNPL provider would have a better view of the consumer’s affordability.
(Mastercard is already deploying Open Banking technology through Finicity in the US and its pending acquisition of Aiia in Europe to use consumer permissioned data tied to debit or bank account credentials to run affordability checks on applicants.)
Why Now?
What is especially interesting to me about Apple’s move though is that it has taken so long. Many people (me included) thought that the introduction of Open Banking would lead to an inevitable asymmetric exploitation of bank service because Big Tech would gain access to bank data, whereas banks would have no reciprocal access to Big Tech’s data hoards. So I assumed that, for example, Facebook Pay would link the social media platform to customer accounts in order to allow instant transfers, but in fact they carried on using the debit card infrastructure.
One argument against the Open Banking route was that consumers would be reluctant to share their intimate financial details with technology companies, but this view was founded on the common misunderstanding that consumers know (or care) what open banking is and understand (or care about) the liability models. This is demonstrably wrong on both counts.
Fo example, half of all Americans have never head of “open banking” and only one in seven say that they would trust linking a third-party to their bank account, so it would seem that there is no reasonable prospect for open banking plays in the USA. Right? Wrong. As it happens four in five Americans have already linked their primary bank account to a fintech tool. As Jim Marous accurately observes, people don’t trust open banking or fintechs, but use both of them all the time.
Therefore, I deduce, the use of open banking to deliver more sophisticated services will continue to accelerate for the foreseeable future. And one interesting direction that they will develop is into payments. A recent UK survey found that half of all consumers, and two-thirds of all mobile banking users, would be willing to pay via open banking today if given the opportunity. Interestingly, around three in ten consumers said that a trusted brand would encourage them to use open banking as an alternative to cards. In contrast, more than one in six said a retailer could incentivise them to use open banking through loyalty schemes.
Accenture, for example, highlight the rise of Open Banking around the world as a factor enabling super-apps that use financial data from multiple sources to target customers’ needs and deliver customers financial services.
Apple’s move illustrate just how the exploitation of open banking is accelerating, but we are still only at the beginning of the consequent reorganisation of the financial services world. Sam Seaton, who runs Moneyhub, knows what she is talking about when it comes to this sort of thing and she has a nice way of framing strategy. She says that open banking gives a one-dimensional view of the consumer, open finance gives a two-dimensional view but to deliver real financial health you need the holistic three dimensional view of the customer that open data provides.
Snippings 