Four key parts of the API economy

New Open Banking regulations will provide simplified and uniform access to the data in customer current accounts via application programming interfaces (APIs), and a wide array of new innovations in retail financial services may follow.

Any organisation wishing to access customer current accounts will, of course, need permission from the customer in question, and they will also have to be approved by the Financial Conduct Authority (FCA) under the terms of the Open Banking regulations.

In February the FCA revealed that it has already authorised 40 firms to access customer accounts, and has many more in the pipeline. This new ecosystem of companies has been called ‘the API economy’.

Here we take a look at four distinct parts of the emerging API economy.

1. Lending brokers: replacing the overdraft
   When a customer takes out a loan today, the process is initiated by the customer.
   
   These applicants primarily go either to their bank for a loan, or to a price-comparison website. Consumer advocates usually recommend going to a few sites to find the best deal.
   
   Open Banking could change this model entirely.
   
   Firstly, customers might be prompted to take out a loan, especially to cover a short-term financial shortfall. Instead of simply going overdrawn, and paying high interest rates, customers could be automatically prompted to seek cheaper credit from elsewhere, meaning vulnerable customers might find it easier to break a cycle of debt.
   
   Secondly, any app through which a consumer manages their finances should be able to perform a whole-of-market search and identify alternative products that may be of interest.
2. Financial assistants: the end of financial products?
   The term ‘financial services’ has, for most consumers, long been a misnomer; they’re not financial services, they’re financial products.
   
   Those with significant wealth usually experience the industry as a service, with wealth managers and accountants managing their affairs for them.
   
   Everyone else buys products.
   
   Open Banking might see the beginning of the end of this divide.
   
   Given the right permissions, an artificial intelligence-powered virtual financial assistant could use the data in consumers’ bank accounts to manage their finances for them.
   
   This could mean, for example, automatically switching to a savings account offering a better interest rate if the consumer could get a better deal elsewhere.
   
   Equally, if linked to an individual’s pension plan, a financial assistant could prompt higher levels of tax-advantaged long-term savings.
   
   The possibilities are endless.
3. Debt advisers: creating trust in debt recovery
   Millions of people seek debt advice every year. The vast majority go to charity services like National Debtline or Citizens Advice in the UK; and some use commercial offerings.
   
   One of the first things a debt adviser has to do is to complete a household budget for the person struggling with debt. This enables them to understand where the problems are coming from, and what debt repayments a person can reasonably afford to make.
   
   This self-reporting of household budgets causes numerous problems. Firstly, people often don’t have accurate information to hand and so provide either incorrect information or no information at all. And secondly, creditors can mistrust the information customers are providing, leading to difficulties in agreeing repayment schedules.
   
   By using Open Banking and APIs (with customer consent), debt advisers can get more accurate household budgets, creditors can be more confident that repayment schedules are fair and affordable and advisers can cut the costs of their advice (meaning charities can help more people, and commercial entities can pass the cost saving on to customers). Through all this, people with problem debt can be given a greater chance of finding a sustainable resolution.
4. Credit scoring: getting much more sophisticated
   Open Banking should add significant opportunities to more accurately predict an individual’s ability to meet certain financial commitments. The first versions of credit scoring simply reviewed a credit applicant’s past interactions with credit products and used this history to help a lender understand the likelihood that the customer could repay whatever credit terms had been applied for.
   
   Over time, this process has become more and more sophisticated. Today, banks provide credit scoring agencies with a summary of current account data so that lending decisions they make can incorporate an individual’s current financial state, as well as their previous interactions with credit products.
   
   Open Banking promises to provide credit scoring agencies with an additional source of data on an individual’s financial history, and a larger role for these agencies in the API economy. At a basic level, the credit reference agency will be able to get a more accurate sense of credit affordability. But it could go much further than that. For example, agencies could review how a customer’s financial situation now compares with their situation when a previous credit product was taken out.
   
   Similarly, it has proven to forecast credit risk for a small businesses without a day-to-day view of inflows and outflows. Open Banking promises to overcome this difficulty, heralding a dramatic shift in credit scoring and availability for this traditionally-hard-pressed sector.