Apple moves to open banking

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

Apple entered Open Banking in the UK by acquiring Congratulations to the credit. It is one of the startups that uses transaction data and machine learning to create highly accurate credit scores. They use API access to bank accounts to collect data in real time and feed it into their systems to provide customers with accessibility and risk assessment scores and are a good example of how data from Open Banking support better loansas risk assessment will be driven by richer data on underserved markets and business owners, which in turn will open up opportunities in the large total addressable market of funding-hungry SMEs and micro-entrepreneurs worldwide.

(Again, I go back to the convention of using Open Banking to refer to the regulatory version and open banking to refer to the generic connection of third parties to customer data with their consent)

Getting this banking information is a great business opportunity, because whether you want to decide whether or not to offer a short-term loan to an Uber driver who needs a new tire or to a small business that needs to finance its expansion or to a micro business that needs more inventory for an upcoming craft market, traditional credit bureaus aren’t much help. If, on the other hand, you can get the actual transaction data from the relevant bank account, you can make very accurate decisions.

With Apple expanding its suite of services around payments and likely seeking partners for merchant onboarding and buy-it-now, pay-later (BNPL) and more, the acquisition makes perfect sense: it provides access to data and algorithms for immediate opportunities. but also provides a more general platform to leverage Open Banking to gain data on financial institutions for future opportunities.

BNPL is a good example of a service that can benefit from this approach and whether you think BNPL is subprime by another name (as I know a lot of people do) or part of a natural repackaging of payments and credit in a connected world, there is no doubt that it is important. Although (as Visa pointed out in its latest earnings call) BNPL’s impressive growth still represents only a small fraction of the total retail payments market, it does indicate the ability of non-banks to raise a real challenge. Simon Taylor of 11FS says that BNPL “must be the perfect use case for Open Banking“because if a consumer could be persuaded to choose the ‘check through your bank’ option or whatever, then a BNPL provider would have a much more accurate view of consumer affordability metrics than what he could get from traditional credit bureaus.

He’s spot on, and not just for the UK. Mastercard is already deploying Open Banking technology through Finicity in the United States and its acquisition of Aiia in Europe to use consumer bank account data to execute financial capability checks on the candidates.

Why now?

What’s particularly interesting to me about Apple’s decision is that it took so long. Many people (myself included) believed that the introduction of Open Banking would lead to an inevitable asymmetrical exploitation of banking data as Big Tech would have access to customer data, while banks would not have reciprocal access. to Big Tech’s data hoards.

One argument against my expectation that Big Tech would within a reasonable time begin to leverage this data more effectively than the banks themselves was that consumers would be reluctant to share their intimate financial details with tech companies, but that view had merit. on the common misunderstanding that consumers know (or care) about open banking and understand (or care) accountability models. This is patently false on both counts.

For example, half of all Americans have never been a head of “open banking” and only one in seven say they would trust a third party to link their bank account, so it seems like they don’t. There is no reasonable prospect of open banking games in the United States. Law? Wrong. It turns out that four out of five Americans have already linked their main bank account to a fintech tool, like Jim Marous accurately observedwhile Americans claim they don’t trust open banking or fintechs, they use them both 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” and 20% were “confused”), but around 20% of young people and 5% of the elderly are already using it. In fact, a detailed survey from November 2021 revealed that customers of these open banking services had a positive experience of the services and that the functionality and ease of use of these fintech tools allowed customers to better understand their finances! So they don’t know what open banking is, but they love the services fintechs can provide using it, which I guess is another testament to the power of embedded finance.

(This detailed 2021 study of UK users also came to a rather negative conclusion. It found that the very people who need help or who could significantly benefit from better financial management do not use not open banking. Apart from anything else, many of them don’t have a bank account. This is what consumer credit expert Faith Reynolds calls the “dark side” of the open banking.)

On the consumer side

I infer that despite consumer ignorance, the use of open banking to provide more sophisticated services will continue to accelerate for the foreseeable future. And one interesting direction that these services will grow in is payments and I can see why. A recent UK 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 option. Interestingly, around three in ten consumers said a trust mark would encourage them to use open banking as an alternative to cards and more than one in six said a retailer could encourage them to use open banking. through loyalty programs (which I expect to happen).

Payments, however, are only part of the story. As we all know, data is the power game. 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 customer needs and deliver better financial services. This generates real returns and will continue to generate new products because by combining transactional and behavioral data, fintechs can do better than traditional players. For example, a study found that of the six attributes most predictive of loan default, two were social media insights and these also outperformed traditional credit scores. Additionally, credit scoring models that included mobile phone call data performed better than traditional credit scoring models, both statistically and financially.

Apple’s decision illustrates how the exploitation of data obtained through open banking is accelerating, but we are still only at the beginning of the significant reorganization of the world of financial services. Sam Seaton (CEO of Moneyhub) knows what she’s talking about when it comes to this stuff and she has a nice way of framing the strategy. She says open banking gives a one-dimensional view of the consumer, open finance gives a two-dimensional view, but to deliver true financial health, you need the holistic three-dimensional view of the customer that open data provides.

I highly doubt that Apple is using this data to provide financial services itself, but surely their decision is 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 business network. the partners.

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