Reflections on a Year of Open Banking

In the UK, Open Banking and the revised EU Payment Services Directive (PSD2) have been heralded as the sea changes that will benefit everyone’s finances. They were officially launched on January 18, 2018. Fourteen months on, what has come of it? In this episode, Eric speaks with Jonathan Musto, Head of Development at Zoot Enterprises in Europe. They discuss what has transpired since the 9 top banks in the UK were forced to comply with new regulations around data sharing. Listen and learn, from the direct experience of someone living through the change, about wide ranging impacts that include changes in customer sentiment and the idea of ‘self-driving banking’.



Jonathan Musto is the Head of Development at Zoot Enterprises in Europe, which is a global provider of advanced origination, acquisition and decision management solutions for financial institutions. Prior to Zoot, Jonathan was Head of Professional Services at Callcredit Information Group.

Eric: 00:02 Welcome to the Finance Frontier. I’m your host, Eric Hathaway. Today, we’re going to be speaking about the topic of open banking, which is a movement to open up financial services by allowing authorized third parties to access bank data on behalf of the customer. We’ll be talking specifically within the framework of the United Kingdom, where regulators have been driving this ahead of the rest of Europe. On the US side, many think that we may be heading towards the open banking path as well. But, the UK is the first to go through this.

Eric: 00:34 Today, I’ll be speaking with Jonathan Musto, who’s the head of development at Zoot Enterprises in the UK, which is a global provider of advanced origination, acquisition and decision management solutions for financial institutions. Prior to Zoot, Jonathan was a head of professional services at Callcredit Information Group. Thank you for being on the podcast today, Jon.

Jon: 00:53 Thank you.

Eric: 00:57 Why don’t you give us a little background, first of all, how you got involved and what’s happened in open banking over there.

Jon: 01:07 Sure. Well, from my personal point of view, it was way back when I was working for Callcredit in the UK, who were one of the three credit bureaus in the UK. So, at least in my last couple of years there, there were all these sort of rumblings that these new regulatory requirements were coming into play and that banks were going to be … have their arm forced by the Competition and Markets Authority.

Eric: 01:39 Sure. So, you mentioned the forcefulness of the regulators. From my understanding, nine banks who were pretty much forced by regulators to go down this path have implemented it. You guys haven’t seen a massive onslaught of the other banks jumping on board. Is that correct?

Jon: 01:59 That’s correct, yeah. I think it’s safe to say while there were some of the CMA 9, as they’re called, some of those guys as well were late, so they missed the deadline, and a few of them asked for extensions and got permitted extensions, but as of January this year, all the CMA 9 are now on board and have these APIs available.

Eric: 02:25 What about the consumer side of things? I think there’s been some articles written about consumer adoption being relatively low. Obviously, I think that has to do, as well, with maybe the fintech community coming on board and creating some of those connections, but can you give us a little insight into the consumer adoption ’cause I know that’s a piece that everyone’s concerned about.

Jon: 02:49 Yeah, it is. I definitely think it’s lower than a lot of people expected. I think, as well, there’s a lot of friction in the process for the consumers to provide consent and for the organizations to gain access to their data. So, if you think as well, along the lines of when somebody’s applying for a loan, or a credit card, or something like that online, with a traditional credit bureau, they can just tick a box that says I consent to you pulling my credit data. Then, when they submit their application, the decision engine does all its calculations behind the scene, and they get an instant decision as to whether or not they’ve been approved for the loan or the credit card.

Jon: 03:34 If the open banking data is to be used to make that same decision, then there’s a lot of friction in that the consumer has to go through an authentication process that involves essentially logging into their online banking, often with some sort of physical device, two-factor authentication device, that they’ve been provided by the bank already. They then have to go through a series of screens to give consent for the organization to access their data. I think something that has affected adoption here is a lot of people, because they don’t understand the details, the technical stuff that’s going on behind the scenes, I think a lot of people will always see that as hmm, am I giving away my password here for my online banking?

Eric: 04:27 Right. Yeah. Especially with all of the breaches that have gone on over the last couple of years. I would assume that, yeah, that fear factor.

Jon: 04:34 Exactly, yeah. And, before open banking came along, there were already very, very similar services available that were using screen scraping technology to pull the transaction data down, and they were actually storing users’ credentials on their systems. Whereas, the open banking implementation does not. The organization that the user grants permission to is given a token that is valid for the period of time that they have granted and that they have allowed, and then, subsequent to that token expiring, if the organization wants to pull their data again, they have to re-go through that authorization process again.

Eric: 05:30 So, do you think that it’s gonna take quite some time before this adoption occurs? Or, one of the articles I’ve read recently, as it’s starting to blossom here in the States, is that the banks and the fintechs are gonna have to really start to work together because the fintechs are obviously coming in. They’re far more nimble. They’re able to address some of these concerns with the consumer base because they’re creating a little bit better customer experience side of things. Do you think that same thing’s gonna happen there as it develops, or do you think the banks are gonna have to step up and start really looking at educating the consumer?

Jon: 06:07 I think they are. Yeah. I think they are really gonna have to start stepping up and look at educating the consumer. I think, as well, the fintechs may have had an easier ride of things because, I suppose traditionally, their kind of the demographic of that customer base is more the kind of millennials. Whereas, the traditional banks, the CMA 9, their consumer base will typically be consumers in an older age bracket rather than the city dwellers, the millennials that are using all these app-only based fintech bank accounts.

Eric: 06:45 Right. Let me jump back a little bit. Why do you think the open banking concept started? Why was there this push if the consumers aren’t driving for it? Where did the push come from, from the regulators or the banks?

Jon: 06:59 I think it was to increase competition in the marketplace, first and foremost. It was to make sure that … I think there was a strong feeling that consumers weren’t given all the relevant information that they needed in order to make decisions around what financial products were right for them, and opening up this data allows that to be more transparent. So, I believe that was the key driver.

Eric: 07:33 So, do you think that moving forward, that’s gonna be the case? I know there’s been some talk around that push of new products to consumers, because of this access that, you know, will it really give them a better deal, or is it going to create so much competition that it confuses the consumer? Do you have a viewpoint on that?

Jon: 07:57 Yeah. It’s a very good point. It’s hard to say. It’s really, really hard to say at this point how much competition it will create, and how that will be seen by the consumer. Particularly, one of the CMA 9 recently released an update to their app that allowed consumers to connect their bank accounts from other banks and pull in all the data. So, that particular bank was then able to analyze that user’s spending and also the rates that they’re getting on their savings accounts, the interest rates they’re paying on their credit cards with their competitors, that kind of thing. And, they are able to make offers to that consumer, to say, hey, come over to us for your credit card, and we’ll give you a better deal. So, I think it’s definitely gonna drive prices down, certainly. But, yeah. Like you say, there is that aspect to the potentially, it could end up overwhelming and confusing the consumers.

Eric: 09:09 So, the next phase, I think you and I spoke the other day briefly about a company called Adyen, and they’re really more in the payment space, and you had mentioned to me that that is really the next level that is happening in the UK. Can you give us a little bit of a background and understanding of why that’s the next piece of the puzzle?

Jon: 09:30 Yeah. I see a lot of similarities between the payments aspect of it. I see a lot of similarities between that and self-driving vehicles, I guess. So, it’s almost self-driving banking. It’s giving access to organizations and apps to create, to set up, and delete payment instructions on your account. So, one example of where we could potentially see things breaking out in that particular area would be, you may have a smart thermostat, or a smart electricity meter in your home that is hooked into your bank account. And, based on your energy usage, it could automatically go out, find the best deals for you, based on your energy usage, and contact the suppliers for those deals, and automatically sign you up and create accounts and set up the payment instructions on your account. So, it’s definitely next level, and like I say, I definitely see it as a self-driving banking more than anything else. And it’s, again, going back to the consumers, a lot of people are scared to death of going in the self-driving vehicle. I think they’d also be scared to death of their thermostat having control of their payments on their bank accounts.

Eric: 11:01 That’s fascinating, though. I’d never even thought of that, but at the end of the day, that could potentially drive the consumer’s cost down. One of the questions, these big payment aggregators, PayPal, Venmo in the States, I don’t know, I don’t think Venmo’s over there, it’s just a banking app, but-

Jon: 11:18 No.

Eric: 11:18 -PayPal is, and you’ve got these large payment aggregators. Is it going to compete with them? Or, do we think that the payment aggregators are gonna grasp onto this and try to become part of it?

Jon: 11:31 I think it’s a little bit of both. It’s definitely gonna make them have to think about how they do things and also think about their price instructions, definitely. I think PayPal will certainly be worried, particularly due to the fact that the power is essentially in the hands of the consumer for providing consent, and they can give organizations access to and to take from them and deposit funds into their account without any fees.

Eric: 12:05 Let’s jump across the pond, and as the US has started to branch into this, one of the things that’s occurred here is that the fintech part of the economy has stepped up, and they have said hey, we wanna be the ones that are controlling this, so they’ve created these open API networks, tried to get banks on board with them, and there’s a couple different groups that are going down that road. I think the regulators are happy to see that. The banks are a little fearful of that because it’s not in their control, and I think there’s still a little confusion as to which route to go. Was there anything that occurred in the UK where there were different groups other than the banks or the regulators pushing this, and then the regulators took over? Or, was there anything like that that occurred in the setup?

Jon: 12:59 A little bit, yeah. Like you say, there were some fintechs doing their own thing, and even while the Competition and Markets Authority were defining all the standards, and for the APIs and building everything up, the fintechs were going off and doing their own thing, building their own APIs to give consumers access to this data. So yeah, there definitely was a certain element of that. But, I think now that these standards have been adopted by the CMA 9, it’s really on those fintechs that went off and did their own thing in the first place to almost fall into line and start using these standards now.

Eric: 13:42 Absolutely. So, are you starting to see, then, additional adoption from other banks, and are there any reports that have come out that even over the last few months, there is starting to see an increasing consumer adoption, or is it really paused?

Jon: 13:58 I think, and the last stat that I saw, they definitely have seen an increase. I think, and the total number of searches in the sort of production systems, I believe that they had seen, come January this year, was somewhere around 23 million searches in the UK. So, when you think about how many people are there in the UK? Well, there are 75-80 million people in the UK. So, I think that had massively increased from the midway point of last year, from July of last year. So, yeah, I think they’re definitely seeing an increase in adoption, and there are a whole load of new apps and services springing up as well. I think there are now a total of over a hundred different organizations onboarded with open banking from either what’s called an AISP provider, account information service provider, or PSP, payment service provider.

Eric: 15:07 That’s interesting. That’s positive, though. It’s good to hear that the adoption is definitely happening. Though … fascinating example you gave us was with a smart thermostat. Can you give us some other examples of what is actually being used today and what’s in market?

Jon: 15:27 Yeah. I believe there are a couple of mortgage providers on the way that are gonna allow straight-through processing and instant decisions on mortgages, which is something that is been pretty much unheard of in the UK. Traditionally, due to the fact that there’s a lot of manual paperwork that needs to take place, one of which is printing out your last three months of statements, sticking them in an envelope, and sending them over to the mortgage supplier. With open banking, that requirement completely goes away and is replaced by a couple of clicks and logging into your internet banking, so that’s another good example of some sort of emerging areas.

Eric: 16:22 So, in the payments landscape, there’s the collateralized and the uncollateralized, right? And, once you get into collateralized, there typically is so much more paperwork, so that’s fascinating that they’re deleting that. Is it all of the paperwork, or is it just financial records? Is it past mortgage? Can all that stuff be accessed now? So, literally, when we get into collateralized lending, you could take all the paperwork out, or is there still a paperwork side of the mortgage? Let’s just stay on that.

Jon: 16:55 Yeah. There is still a paperwork side, but the key thing is, what they’re able to do for the first time is give an instant decision as to whether or not. So, traditionally, you don’t get that decision until after you provided your bank statements, but obviously, open banking allows you to do that instantly online and have it analyzed by a machine rather than a human side, a desk. And so, they’re able to give you an instant decision while you’re there at your screen online, which was never possible before.

Eric: 17:28 As fast as getting a credit card almost, isn’t it? Wow.

Jon: 17:30 Well, yeah. Exactly. Obviously, you still have the paperwork to sign after that. But, yeah.

Eric: 17:37 Well, Jon. Let me ask you one more broad question, and then you might have experience here or not, and please feel free if not. So, AI. artificial intelligence and blockchain have come to the forefront of the conversation over the last year, two years. There’s people that talk about it, you know, being over hyped. Is there anything from either of those two technologies that start to play into this? You mentioned in the mortgage space, where automatic decision decided by a machine now because of the electronic means of getting that data. Do you see the adoption of those two technologies in open banking, or has that started?

Jon: 18:22 No, and I definitely see a future where open banking forms a part of that, definitely. Yeah. I think it will take time. It will be slow. If we go back to the similarities between the self-driving vehicles, some people you speak to, they say if an Uber pulls up at my house without anybody driving it, there’s absolutely no chance I’m getting in it. Whereas, I’m the kind of person that I’m like, oh yeah, I would be straight in that.

Eric: 18:53 Yeah, me, too.

Jon: 18:54 I think it’s people are either on board with things like this, or they’re not, and I think once people start to understand, not only just the money that it can save them, but the time that it can save them … every year, I must spend hours researching the best energy supplier based on my usage for the last 12 months, and then signing up to that energy supplier, and filling out all their forms, and setting up the payments with my bank accounts, et cetera. Just to switch energy providers. And then, a similar thing with my kind of mortgage. Every couple of years, going through the whole remortgage process. The amount of time that I think this is gonna save people in the future is gonna be massive.

Eric: 19:42 I do, too. And, again, I’m the kind of personality you are, where if an Uber showed up at my front door and I hadn’t called it yet, I’d be like, heck yeah, let’s jump in and go. And, even if there was no driver, I’d be like, I’m trying this out. This is cool.

Eric: 20:00 So, Jon, just to wrap things up on the open banking conversation. Is there anything that we haven’t covered today that you might want to bring to the forefront with our listeners?

Jon: 20:12 No. I don’t think so. I think we’ve covered all aspects of it, I think.

Eric: 20:18 Well, hey, I really appreciate your time today. Thank you very much for joining us. It’s been a pleasure.

Jon: 20:24 No problem. Thank you for having me. Cheers.

Eric: 20:33 We hope you’ve enjoyed this episode of the Finance Frontier. In our next few episodes, we’ll dive into the topic of artificial intelligence, where AI is going in finance and whether the technology is living up to all the hype associated with it. Tune in every other Wednesday for new episodes, and until next time, subscribe on your favorite podcast app. Since we depend on listeners like you to help us spread the word, we’d also love it if you’d take the time and post a review of our podcast on iTunes. Thanks for listening. I’m your host, Eric Hathaway.


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