You can learn a lot about someone by looking at their bank account.

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 a 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.

(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)

Getting hold of this bank data is a great business opportunity because 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.

A joke about lenders and personal data.
Lenders and lattes.© HELEN HOLMES (2022).

With Apple expanding their range of services around payments, and presumably looking at partners for merchant onboarding and buy-now-pay-later (BNPL) 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.

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” because if a consumer could be persuaded to take the option to “verify via your bank” or whatever then a BNPL provider would have a much more accurate view of consumer’s affordability metrics than they could obtain from traditional credit bureaus.

He is spot on, and not only for the UK. Mastercard is already deploying Open Banking technology, through Finicity in the US and its acquisition of Aiia in Europe, to use consumer data from bank account 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 data because Big Tech would gain access to customer data, whereas banks would have no reciprocal access to Big Tech’s data hoards.

One argument against my expectation that Big Tech would, in a reasonably short time, begin to exploit this data more effectively than the banks themselves do 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.

For 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 so, as Garret Reich accurately observed over at The Financial Brand, while American’s claim not to trust open banking or fintechs, they use both of them all the time.

It’s the same in the UK. A survey last year found that half of consumers didn’t really know what open banking was (28% had “no idea” about it and 20% were “confused”) yet around 20% of young people and 5% of old people are already using it. In fact a detailed November 2021 survey found that the customers of such open banking-enabled services had a positive experience of the services and that the functionality and ease of use of these fintech tools enabled customers to better comprehend their finances! So they don’t know what open banking is, but they like the services that fintechs can provide by using it, which I suppose is another testament to the power of embedded finance.

(That detailed 2021 study of UK users had a rather negative conclusion as well though. It found that the very people that need help or could significantly benefit from improved management of their finances are not using open banking-enabled services. Apart from anything else, many of them don’t have bank accounts. This is what consumer finance expert Faith Reynolds calls the “dark side” of open banking.)

Consumers Aside

I deduce that despite consumer ignorance the use of open banking to deliver more sophisticated services will continue to accelerate for the foreseeable future. And one interesting direction that those services will develop into is payments and I can see why. A Nuapay survey found that half of all consumers, and two-thirds of all mobile banking users, would be willing to pay directly from their bank accounts 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 and more than one in six said a retailer could incentivise them to use open banking through loyalty schemes (which I fully expect to happen).

Payments, however, are only part of the story. As we all know, it’s the data that’s the power play. Accenture, for example, highlight the rise of Open Banking around the world as one of the key factors enabling super-apps that use financial data from multiple sources to target customers’ needs and deliver better financial services. This generates real returns and will continue to drive new products because by combining transactional and behavioural data, fintechs can do better than traditional players. For example, a study found that of the six most predictive attributes of default on a loan, two were social network information and these also outperformed traditional credit ratings. What’s more, credit scoring models that included mobile phone call data performed better than traditional credit scoring models, both statistically and financially.

Apple’s move illustrate just how the exploitation of the data obtained using open banking is accelerating, but we are still only at the beginning of the consequent reorganisation of the financial services world. Sam Seaton (CEO of 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. 

I strongly doubt that Apple are going to use that data to provide financial services themselves, but their move is surely the first step on that journey into a metaverse where their holistic view of you and your bank account will be of incredible value to their network of business partners.

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