Traditionally, we put trust in banks to look after our financial data. In the past, they were the only ones with access to this sensitive information which they could use to their advantage. This has changed with the PSD2, a directive issued by the EU in 2015 according to which incumbent banks were obliged to recognise customers as the rightful owners of their financial data and to provide them with the opportunity to decide who they want to share this information with. Open banking became a reality.
Fast-forward to 2021, there are now plenty of new actors offering to make better use of customers’ financial information than banks. One of them is Capify, which provides alternative loans to small and medium-sized enterprises. We’ve invited one of its decision-makers, Simon Farmilo, to express his views on open banking and tell us how it enhances customer experience in his company.
FinTech commentator says: “Ask Me AnyFin.” and is ready to share his insights.
Simon is the Director of Strategic Partnerships at Capify, an alternative lender to SMEs, where his mission is to work with brands and platforms to support SME audiences with easy and embedded access to finance. Simon also runs his own FinTech blog where he explores the latest trends in FinTech and cryptocurrency.
Simon’s insights are fuelled by years of experience in the industry and his skill of in-depth analysis of the financial world which combines social, economic and technological perspectives.
Watch the conversation with Simon or read the transcript below.
Historic moment for Finance
Łukasz Korol: Hello, today in our Ask Me AnyFin session, our guest is Simon Farmilo from Capify UK. Simon is also a commentator in the FinTech space whom we invited to talk about open banking.
Simon Farmillo: Hi, Lukas. Good to be here, thanks.
Łukasz Korol: Thanks. Let’s start from a general question… Is open banking more a revolution or an evolution in the financial space?
Simon Farmillo: Yeah, it’s a good question. In theory, I think it’s a revolution. I say “in theory” because fintechs have been using screen scraping for some time. So in actual practicality, open banking has been more an evolution of something that had been done but it’s a little bit more formalised in this day and age. Since the emergence of FinTech, it’s really been fintechs and banks fighting over product market share, so with open banking that now allows fintechs to access data that banks have been holding really since computers were invented…
Still to this point, banks do rely on the principle of safeguarding your money and your data. That’s why, in theory, I do call it a revolution because it’s the first time in history when the giant walls of the banks have come down and that’s only really been possible through regulation that initially came out in 2016 in the UK.
Open banking learning curve
Łukasz Korol: Interesting. As I understand, one of the main goals of implementing open banking was to bring more competitiveness to the market and allow fintechs to grow and be more competitive compared to already existing financial institutions. Do you think this goal is already achieved?
Simon Farmillo: I wouldn’t say it’s already achieved. The innovation has been quite substantial so far, but we’re still fairly young into it. However, even in my industry, customers are now experiencing a much more seamless and faster experience in the lending space. Before open banking, customers essentially had to upload manual bank statements and hope that either OCR technology, which could read the statements, or someone in underwriting could actually read them and make sense of the months in the right order and things like that.
What banks struggle to service is the smaller end of the town, the SMEs. It’s very hard to scale that profitably or assign enough bankers to be able to look after them, especially when you don’t have the technology.
Now, customers just connect their bank and a lender can make credit decisions through standardising that banking data that is coming in and doing the number crunching and the algorithms to make faster decisions. That’s really the innovation and the competitiveness because, for a long time, banks were good at rolling out the red carpet for corporates and companies that can make a difference to their profit line.
What banks struggle to service is the smaller end of the town, the SMEs. It’s very hard to scale that profitably or assign enough bankers to be able to look after them, especially when you don’t have the technology. So I think in the subprime sector, alternative business lending, the space that I’m in, is certainly a good example of how open banking is driving more competition and innovation.
Having said that, though, I think we still have a long way to go in terms of the reliability of open banking. It’s still got some growing up to do. There are still teething issues with banks where banks are only providing a certain amount of data that’s linked to the current accounts. They’re extending to savings accounts now, and others, but mortgages, all that stuff, is not readily available. Some of that is changing. Then, you’ve also got the dreaded 90-day expiry rule where users have to reconnect every 90 days, so things like that are certainly teething issues.
But I think, so far, open banking has done a lot of good.
How many players are in this game?
Łukasz Korol: So, in theory, we have two groups that benefit from open banking: fintechs and retail consumers. Naturally, fintechs are using this solution to bring new products to the market and customers have more products and more capabilities on the financial market to use their data. Do you see any other beneficiary of this change, other than these two?
Simon Farmillo: It really does come down to the three major players which are the consumer, the fintechs and the banks. In the economy, as a whole, innovation is good because it is a driving force. Soon that’s where the regulators can actually come in and make a good bit of difference.
First and foremost, the consumers are the winners, at the end of the day. This change has allowed a whole variety of an ecosystem to come forward around open banking. The way fintechs can standardise the open banking data and speed up the experience is a great thing. Lending, as I mentioned, that’s also happening. Payment solutions, I think, is a huge opportunity, and a lot is happening in that space, too. It’s allowing consumers cheaper options to move their money around rather than use traditional card payment rails that can be more expensive.
Then, there are also fintechs who are able to make profit off these new innovative products. It’s a natural thing when a major event like open banking happens. You think about Amazon… About 300,000 new companies have been formed around the world off the back of Amazon, and probably more than that. That’s just one example of something big that happened. In that case it was home delivery and being able to order online which spurred a lot of innovation and new business opportunities. So fintechs are the same with open banking in the sense that they are clustered around this ecosystem, being able to create new things and work off the back of it and it’s great for them.
From my perspective, banks are still trying to really work out the ROI at the moment, the original CMA9 cohort of banks that were forced to open up. I think it was a fairly expensive exercise for the ones that are working to create their own ecosystem. There are also some examples where they’re actually pulling in open banking fintechs that are doing a better job than they are with their own data and actually bring them in to help service their customers. They’re the ones that will also win, in my opinion.
There are so many opportunities that are coming through very soon in the likes of open finance where you start to include insurances, pensions, mortgages, investments. That’s going to be really good for the economy and, mainly, consumers.
Open banking in the lending sector
Łukasz Korol: Let’s talk about open banking in Capify. Could you tell us how you use it and how critical it is in your business?
Simon Farmillo: Absolutely! So Capify, first and foremost, for those who don’t know who we are: we’re an alternative lender to small and medium businesses. We do same-day funding, which is really a way to help businesses that would typically struggle using banks to come through and get easy and quick access to finance. That’s what we provide and we do that well.
It’s important to know credit writing is made up of two important elements: affordability; can someone afford to repay their loan, first and foremost, and creditworthiness; is someone actually likely to repay? Instantly, open banking provides a benefit there because we’re able to actually see a very holistic picture of the customer and those two important criteria. We can get those insights if we’re using that data correctly.
Credit writing is made up of two important elements: affordability; can someone afford to repay their loan and creditworthiness; is someone actually likely to repay? Instantly, open banking provides a benefit there.
So you can get someone with, maybe, lower income that pays their bills, and someone on higher income that doesn’t pay their bills. And that’s one insight you can actually pull from that data. For us, it speeds up the credit decision and gives us the necessary insights. We can price the risk more accurately which is a great benefit to customers because we’re providing a price at a sphere according to their creditworthiness, which is responsible as well.
What we also do as part of our experience is talk to our customers. Usually our average deal size is around $50,000 and we find that business owners do like to talk to someone during the process just to understand a bit more. We have a local-based call center that handles that. Part of the process, we also preempt open banking. We introduce it as a step when talking to the client on the phone and we, certainly, see a much better uptake as part of that. That’s how we use open banking!
It’s very powerful. And it’s just been great for us as a business, also on the profitability side, because it does lower costs as well.
Witnessing and experiencing the change
Łukasz Korol: Do you have personal experiences with open banking from the customer perspective?
Simon Farmillo: Certainly, I do. When I was working for an alternative lender in Australia, we were doing screen scraping, which is, for people that don’t know, asking customers to provide you with their bank login details through a third party. An automated system will go in there and pull the data out, which is not an integration and you need to surrender your login details. There are a few issues with that, but it was okay to do by the industry as well.
That was my first taste of it in a sense, but when I came to London three years ago, the UK was much further ahead than Australia, thanks to PSD2. The first FinTech I actually worked for here had open banking and that was provided through a third-party service even three years ago. However, it wasn’t terribly reliable as we had constant connection issues. The reliability downtime was quite a factor and, especially as a fintech, you really want to have great customer reviews, Trustpilot, all that stuff…
So even though it might not be your fault… It might be one of the big banks just having a server error or something like that… It is your fault from the customer’s point of view. So what we actually did is switch our third-party open banking provider, which was quite a tough exercise to restabilise everything, but we got it back to a much better place. We put the open banking… We were an app, so customers downloaded us on the store, the App Store, and then as part of their onboarding, they would actually connect to open banking.
Now, that was a hugely important step for us. It was a step where we saw the biggest drop-off in our funnel… We did a lot of work encouraging trust and motivating customers to go through that journey. We saw a massive change when banks allowed their own mobile apps to approve open banking connections rather than a customer trying to remember what the actual bank login was. Maybe, they’ve been using an app for two years and they haven’t logged in online for so long… This new implementation allowed customers to approve a buyer in their app. We saw a massive upload there.
With Capify now, open banking is an integral part of our operation. I can see on both sides: the business side but, also, on the customer side how it is making a difference. So yeah, I’ve been around the original screen scraping, the consumer side and on the business side and it’s been very interesting.
Communicating the change to its participants
Łukasz Korol: You mention very important factors that have a major influence on the adaptation of open banking. For instance, reliability which was critical, especially at the beginning of open banking. But you also discuss trust and user experience. These are the key elements that can affect the final adoption of open banking solutions. What do you think is the biggest challenge for open banking implementation both from the customer and the business perspective?
Simon Farmillo: Your banking data is a very private thing. It’s something that I wouldn’t want to show to anyone because it is your personal life and it’s your personal choices that you make on a day-to-day basis: where you shop and what subscriptions you have, and how much money you earn, and all that stuff… It’s a real, personal insight into someone so, obviously, it does come down to trust and that’s really important for consumers.
First and foremost, there needs to be increased education around it. What are the actual benefits of open banking for customers? Being open and transparent about how personal data is used, particularly, third parties, is vital. For customers, to be able to revoke permissions is really important. You think about all these subscriptions you might have out there in the world… I can’t even think of all the subscriptions I’ve got, and it might be quite scary if I actually saw them in a list and realised, “Am I still paying for this?” Being able to revoke permissions and having full visibility of who’s actually seeing your data is really important.
Even though people don’t read the fine print, it’s good for customers and businesses to understand how data sharing is actually being used in an ethical way. Who’s seeing the data in the company and how they are actually using their data? Is anyone else in the picture? It’s a good exercise for businesses to be aware of that and be responsible.
Obviously, regulation is important. It needs to allow innovation and it shouldn’t be restrictive, but it should protect consumers. For instance, the complaints process is important. It needs to be very clear who you can turn to if there is an issue and you need to complain about open banking. Again, that really goes a long way with trust.
But, having said that, I think there is a massive growth, particularly, in the open banking payment sector. I was having a look at some data yesterday. When you think back, in 2018, there were around 320,000 open banking payments made. In 2020, last year, there were 4 million. And back in just February this year alone, there were already 1 million transactions in that one month. So it is a tipping scale that’s going to take off, but the regulation and the transparency need to keep up with that.
Sweeping, instant buy now, pay later and variable recurring payments
Łukasz Korol: Before we end, I would like to ask you about the future of open finance. You said at the beginning that open banking is a kind of a revolution and this revolution is changing the whole industry, including the product offering and customer experience. This is only the beginning of the journey and it is interesting where it will take us in the future. In 10 years’ time, what do you see as a potential consequence of opening up the financial data by the incumbent institutions?
Simon Farmillo: Well, 10 years is a long time… You and I know that so much can happen in FinTech. That’s a really good question because it’s still in the unknown what else open banking could actually do. One of the massive areas that we’re already seeing is two big opportunities within what’s called variable recurring payments and instant buy now, pay later.
Open banking payments as infrastructure rails is potentially much more programmable and straightforward than existing card rails, and cheaper. So I think that really comes down to the ability to feature a user’s account history with a payment, which is quite an exciting idea. So variable recurring payments first off, a new way of making payments via bank APIs, as opposed to doing a direct debit or card payment. What that actually allows you to do is control amounts that are coming out of your bank account and have visibility, set limits.
It also does something called sweeping. So normally I will get a ping on my Monzo account that Netflix has tried my account and I forgot to top up my current account… What sweeping actually does is, it would take all my accounts and when there’s not enough money in there for this payment that’s coming through right now, it basically pulls the money and then makes that payment. So there’s a lot of opportunity there with sweeping.
If you’ve got an overdraft, you could have a FinTech app that connects in and would actually move your money around, so you’re saving money on interest, on your overdraft, and things like that. There’s a lot that’s going into what is called VRPs idea.
One-click underwriting for buy now, pay later is quite an exciting idea as well. Obviously, buy now, pay later is massive. It’s huge for merchants, huge for consumers. But you can imagine going into your checkout. At the moment, I think it’s getting a little bit crazy when you’ve got, maybe, six buy now, pay later providers. Each of them has got their own application journey that you have to go through. It can be quite overwhelming.
Just imagine, if you click on one of them, connect up your bank, and then, they give you an instant decision if you’re approved for your purchase or not. That’s what open banking can do very quickly and that’s also exciting.
Coming back to your 10-year question, I think what could be the really exciting thing here is the crypto element. At the moment, obviously, crypto wallets, et cetera, are funded through existing card rails. Open banking could be that bridge between crypto and traditional finance, where you’re getting all the data from open banking plus the crypto wallet data all in one financial picture that then you can also make decisions on. So I think it could be that real bridge between those two big worlds in the next 10 years. It’s very exciting and we’ll be seeing a lot of great innovation come about.
Łukasz Korol: Thank you, Simon, for the meeting. It was a pleasure to talk to you. I hope we will talk sooner than in 10 years.
Simon Farmilo: Thanks.