Interview with the FCA on open banking, PSD2 compliance and the opportunities for banks

Sheldon Mills, Director of Competition at the FCA, talks about how Open Banking fosters the conditions for competition and innovation.

What’s the fit between Open Banking and the FCA’s competition objective?

Open Banking – and PSD2 – fits squarely with our objective to promote effective competition in consumers’ interests. The point of Open Banking is to improve consumers’ experience and the value they get from specific banking services, by letting them share their data with third-party providers securely. This creates the conditions for these third parties to innovate and provide new products and services. While neither the FCA nor any other regulator should tell firms what these should be, the way we regulate can actively support healthy forms of competition. Open Banking sits right there.

For a long time, we’ve seen a lack of competition and innovation when it comes to banking services. Customers tend to stick with the same provider. This is great for the large banks who hold those customers – they have a captive audience to cross-sell mortgages, pensions, and insurance to. It isn’t great for incentivising competition, though.

While I believe large banks generally aim to serve their customers well, you need a dose of competition to ensure all firms have the motive to innovate and improve what they offer to customers. As Open Banking develops, it should provide this incentive to all suppliers of banking services. Because, as third parties enter the market, banks must either improve what they’re offering, or lose that crucial engagement with their customers, including the lucrative opportunity to cross-sell.

However, ultimately, for me, it is about gaining value, convenience, and innovation for customers. Data and the way we use it will be part of all our futures as consumers, and finance is no exception. So Open Banking should directly deliver more convenience and greater value.

With the customer’s consent, firms can potentially get a real-time understanding of a customer’s finances. This means more accurate credit-worthiness assessments can lead to access to – and cheaper – finance. Intelligent financial tracking can help to stop customers from stepping into overdrafts, and help them put money away in products that work for them. And account dashboards can foster financial awareness – creating savvy customers – who find it easier to shop around for better deals

Does the FCA support the adoption of APIs for Open Banking? Should these APIs be standardised?

Application programming interfaces (APIs) are part of the fabric of the connected world. They’re now a commonplace tool for connecting software, systems and enabling interoperability. Within an Open Banking context, APIs provide a dedicated and secure way for one financial company to access the customer data and payment functionality of another. PSD2 does not require APIs to be the only access method, but we think they’ll deliver benefits for market participants and consumers and we encourage firms to adopt them.

For example, APIs can enable authentication via ‘redirection’, and this is a critical matter. It means that when a customer wants to connect their bank to a third-party provider, they’re sent to their banking platform to provide credentials and complete the connection. They don’t need to share their banking credentials with anyone else. This has got to increase trust and promote the take-up of Open Banking in the long term.

There are clear benefits to APIs being developed according to common standards. In the UK, the Open Banking Implementation Entity, set up by the Competition and Markets Authority, has developed an open, common standard, which the UKmarket is widely taking up. This kind of standardisation reduces entry barriers to support innovation – third parties using standardised APIs don’t have to integrate with different technology for each firm they connect to.

The FCA has been assessing banks’ readiness for Open Banking under PSD2 since January. Are banks ready?

Under PSD2, if firms decide to provide access via ‘dedicated interfaces’ – usually APIs –, they also need a fallback access mechanism, in case the dedicated interface fails. They have the option to apply to us to be ‘exempted’ from the fallback. We’ll only grant this if we are satisfied that their dedicated interface meets certain conditions. Since June 2019, we’ve had over 70 exemption requests, which suggests that banks serving the majority of UK customers intend to implement PSD2 using secure APIs.

Under the criteria for exemption, a firm is ready where they are maintaining their dedicated interface to the same standards as they maintain customer-facing channels, such as the mobile banking app. This is in line with the competition focus of PSD2. If third-party providers are going to become a key channel through which customers experience their banking, then the underlying access mechanism, which is the API, needs to be robust.

The assessment also focuses on customers’ experience. Banks have an important role in how well the redirection model of authentication works for users. So they need to make sure they don’t introduce steps that put consumers off using Open Banking services. We’re seeing a range of different options – the best being the simplest. Open Banking standards around app-to-app redirection have really helped here. Again, it’s all about convenience, and great to see that UK customers can now securely add their banks to dashboard apps with just consent and a thumbprint.

Our assessment shows that some UK retail banks are ready to deliver Open Banking via API, but others have struggled to encourage third parties to connect. This is because some third parties have capacity constraints in trying to connect to several different banks and some banks have problems with API readiness. We still strongly support the use of APIs, but we also accept that migrating to them is a big task and will take time. We’ve been working closely with the industry on this, so that we can make API-driven Open Banking a reality in the UK.

What does the FCA see the future of Open Banking being? Are you looking to open finance?

Open Finance could build on Open Banking by allowing the same kind of access to data from a wider range of products. It could revolutionise the way financial markets work for consumers, changing existing services, improving competition, and spurring innovation. We think Open Finance could improve the financial health of consumers and businesses by helping them manage their savings, loans, investments, pensions, and insurance much better and improve their access to financial advice.

In the long-term, it could enable automated product switching and intelligent financial transfers.

We know that industry is looking at various initiatives around Open Finance, and the UKGovernment is considering its role via the Smart Data Review. We want to ensure that Open Finance develops in the interests of consumers and competition. We’ve set up an advisory group to help us understand how this could be delivered and the ethical and practical problems that data portability could present in the markets we regulate. This includes considering what we’ve learned from Open Banking. Who should have access to data and for what purpose? What do the liability and redress models look like, what are the interoperability considerations? We plan to ask for views on this through a call for input before the end of the year.

The editorial was first published in the Open Banking Report 2019, which clarifies the role of key key-players in a post-September 14th world and assesses how the landscape has shifted within Europe and beyond.

About Sheldon Mills

Sheldon Mills is Director of Competition at the FCA. He is responsible for a wide range of the FCA’s competition work, including market studies and competition enforcement cases. Previously, as Senior Director at the Competition and Markets Authority (CMA), Sheldon had overall leadership responsibility for the delivery of UK merger control across the entire economy and for the strategic design and implementation of the new UK State Aid regime.

About The Financial Conduct Authority (FCA)

The Financial Conduct Authority (FCA) is the conduct regulator for 59,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms. It is responsible for regulating a sector which plays a critical role in the lives of everyone in the UK and without which the modern economy could not function. The FCA aims to make markets work well – for individuals, for business, large and small, and for the wider economy.