Tell us about OakNorth and your take on and approach to Open Banking/PSD2.
Rishi Khosla: Launched in September 2015, OakNorth is a UK bank that provides fast, flexible and accessible debt finance (£500,000 to £20 million) to fast-growth businesses and established property developers. Our loan book stands at c.£700 million with clients including Brasserie Blanc, Leon, Z Hotels, Galliard Homes, Frogmore, The Collective and Pocket Living. In order to help fund our lending, we offer a range of deposit savings products – fixed bond accounts from 12-60 months, as well as easy access and notice accounts – to individuals and businesses.
Generally, Open Banking/PSD2 is a good thing – it will inject some much-needed competition into the UK banking sector and create a more level playing field for payment service providers and third party payment service providers. While we are not a payments provider, we (and our customers) still stand to benefit from being given access to customers’ banking information as we will be able to further improve our credit decision processes and onboard new borrowers in even less time.
Will it be a tipping point for UK challenger banks? Should established banks be worried?
Rishi Khosla: It definitely has the potential to be – the financial sector creates more customer data than several other industries combined, but yet there is very little diversity in product offerings and it tends to perform worse than other sectors when it comes to customer service, trust and customer-focused innovation. PSD2 could dramatically change this and significantly improve the financial experiences of both individuals and businesses.
Established banks should definitely be worried, but I think the threat comes less from new Fintechs and app-based banks, and more from the large non-bank corporations such as Facebook and Amazon which are already operating in this space.
Facebook Payments is operative in the US so an obvious next move for the business would be to launch this service across Europe once PSD2 is live. Amazon Pay was rolled out across Europe last year, allowing users to pay for non-Amazon purchases including government services, insurance and travel, using their Amazon login on thousands of third-party websites. This resulted in nearly doubled volumes.
Meanwhile, Amazon’s Lending division has issued loans totalling over $1.5 billion, enabling SMEs to grow sales by an estimated $4 billion. This is not an insignificant number – it is a genuine bite out of the big banks’ market share.
These multinationals have already proven their ability to innovate in this sector and bring new products and services to market in a fraction of the time that it takes incumbent banks, and in similar timeframes as younger, nimbler Fintechs. What’s more is that customers trust them much more than large banks, and tend to have had better experiences with them.
Why should customers care?
Rishi Khosla: PSD2 would enable consumer platforms that are used on an almost daily basis, such as Facebook, to become their own payments processor and connect to the bank accounts of its two billion users directly through APIs.
This would be hugely helpful for a service like Facebook Marketplace for example where, following permission from the user, Facebook could securely access users’ bank accounts and collect their payments. This would not only create cost savings for the users through automation efficiency and the stripping out of third parties, but it would also eliminate the need for complicated check-out processes, enabling frequent users to make one-click payments.
PSD2 is also likely to ensure the continued progress of Europe’s Fintech innovation boom and bring customers more user-friendly services through digital integration. This is likely to not only improve the payment experience but also the overall service.
From business’ perspective, Nesta recently released the names of the 20 successful entrants to its Open Up Challenge. Launched in February this year, the Challenge is intended to inspire the creation of apps and tools for SMEs. Along with cash awards, Nesta encouraged Fintechs to enter the competition by offering access to a huge dataset of anonymised SME banking transactions.
This gave them a chance to experiment with Open Banking-style datasets in advance of the system’s launch; one of the recipients is using the data to build a product that allows businesses to sign up to its services directly from their business bank account – a process that currently requires approval from the bank; another is using it to make “an online due diligence passport” for businesses looking to prove their financial credentials faster and more efficiently.
From the point of view of a challenger bank, what are the key challenges/issues that need to be tackled in order to make this a success?
Rishi Khosla: Security is the number one priority for us so it will be essential for third party payment providers to detail how they plan to securely handle customers’ bank credentials. As a regulated bank, there are number of compliance and risk standards that we have to adhere to which many unregulated entities do not. We will need to go through a series of authentication processes with the authorised account user in order to confirm that they are who they say they are. We are currently awaiting specific guidance from The Regulatory Technical Standards on this.
Could Brexit throw a spanner in the works? With the UK looking to leave the EU in 2019, could this potentially make PSD2 less effective, bearing in mind that the whole regulation centres around opening up banking systems in Europe?
Rishi Khosla: I doubt that Brexit will prevent PSD2 from happening – firstly, it’s important to remember that the regulation applies to the European Economic Area (E.E.A) not just the EU. While we know we’re leaving the EU, it is very likely that we will have some form of EEA relationship with Europe so we need to be prepared for this. Related to this is the fact that if the UK wants to continue interacting with the European payments and finance industry, it’s going to have to be PSD2 compliant whether it’s part of the EU or not. Finally, if the UK wants to have any chance of maintaining its position as a global Fintech hub, it needs to keep pace with innovation.
What could happen is that the benefits of PSD2 could be reduced as fewer companies choose to launch in the UK, forgo plans to expand UK operations, or in some cases leave altogether. The UK would have been the HQ country of choice for many of Europe’s emerging Fintechs, but the added complications caused by Brexit could see the likes of Frankfurt, Berlin, Copenhagen, etc. reaping the rewards of that decision.
What will be the state of play a year from now? Will Open Banking/PSD2 be an instant success or do these things take time?
Rishi Khosla: We can already see that Fintechs and other non-banks are emerging and gaining market share from large incumbents but I doubt that there’ll have been a huge market shift one year from now. What’s much more likely to happen is that as more non-banks and companies without a banking licence enter the sector, more consumers and corporates will begin switching to them as overall trust in their ability to manage their banking data will increase. This is a process that is likely to take shape over the next few years and I imagine by 2020/21, things will look very different.
About me: Freelance journalist specialising in FinTech, banking technology and retail technology. Former Editor of FStech, Retail Systems and IBS Journal. Further info here.