© Vivolution Limited
Author: Dr Gavin Scruby
Within the next year, the Competition and Markets Authority (CMA) will force UK banks to open up their transaction interfaces so that third parties can make payments on behalf of customers. The aim of this change is to remove the stranglehold held by ‘traditional’ banks on financial transactions, to force innovation and drive common standards that organisations can use to create new and transformational services.
The CMA’s stated goal with the Open Banking initiative is to make traditional institutions compete harder for customers and reduce the barrier to entry for new players. But what does this mean for customers? What advantages will normal banking users get out of such a substantial change to banking responsibilities? To work out what’s likely to happen, we can look at similar developments in other technology areas and predict the evolution Open Banking will go through, and how this will impact our lives.
Exploring open interfaces
The basis of all Open Banking is open transaction interfaces (APIs) provided by the banks to other companies in order to carry out basic retail banking activities; i.e. creating payments and reading transactions. There are many more interfaces around loans and interest rates, data on banking product services for comparison sites for example, but to achieve many new services we don’t need to look beyond making and viewing payments. This alone is transformational. These transaction interfaces will be made available to any reputable and authorised third party organisation, who will use them to build services that work on behalf of banking customers.
The first thing new third party systems will do is become a central, better-designed proxy for a bank’s services. They will become aggregators for all accounts across different banks and will allow customers to set up payments from any account, all in one place, with one well-designed portal. Aggregation services like this exist now, but they only read transactions. To create payments in the current system, users must log in to the individual bank’s interface. In the near future, customers will have full control of all finances from one place. This is a powerful first step in providing a complete view of our finances.
The power of contingent payment events
Once users have full, direct control, third party aggregators will then start to further improve the services they provide. With just basic read and create for transactions, they can start to build more complex rules. There will be options such as ‘only pay the mortgage after the monthly salary comes in’; i.e. if this happens (salary in), do something contingent (mortgage out). This can be a powerful tool for the automation budgeting and will ensure individual accounts never get overdrawn. Behind the scenes, these rules will be implemented using a scripting language and algebra created by the aggregator. Often this will never be exposed in all its complexity to the end user, but it’s important for the next innovation stage.
Once they see the possibilities, customers will continually demand more flexibility and power in how they define contingent events within their finances. This will force providers to gradually expose more of their scripting systems so that customers, and then other third parties, can create complex financial applications layered on top of basic transaction and aggregation logic. The most successful of these will be the ones who provide a simple interface with maximum flexibility. Users will start to think of novel new uses, tying their transactions into other aspects of their lives.
Think of the contingent payment event discussed above; with a rules algebra, users can define their own extensions, such as ‘move 10% of everything left to a savings account after the salary has come in and after the mortgage has been paid’. This will still live in the realm of early adopters, but the pace of innovation will drive more rules development and it will soon seep into the mainstream. People will also share useful rules with others to shortcut the process, much like the popular web mashup service ‘If This Then That’ has done for cloud services.
Rise of the machines
Once complex third party scripting and rules engines exist and are available through their own web interfaces, artificial intelligence (AI) systems can use them to provide natural language interfaces with their own interpretive power on top. With systems like Amazon Alexa and Google Home, users can build on the basic payment transaction interfaces, with rules on top. This will bring rules-based payment processing to those who have no interest in the arcana of scripts and programming.
Even rules have rules
While the way finances are managed is broadening, financial rules logic will continue to advance. The next step is to create metadata on the top of basic rules. For example, systems can define things like an agreement to pay someone in the future, where that agreement can be transferred to another person (effectively an IOU). These are metarules (rules about rules), analogous to metadata (data about data): the rule is ‘pay someone at this time’; the metarule is ‘verify and sign this rule, then allow it to be transferred or proven to someone else’.
Services will extend in various directions to support the idea of making rules about rules. The first examples will be completely standard and understood applications such as IOUs between friends, but much like the word ‘meta’ itself, options are only limited by the flexibility of the metarule-set and the imagination of the user.
Into the metaverse: the options are endless
Once metarules are available, new and creative application cottage industries can emerge. IOUs between individuals can be extended to friends, making microcredit brokerage groups without any further financial institution involvement.
The ability to define rules of rules on transactions allows value to be transferred in and out of the system. People can create rules that define exchange rates and mechanisms of a commodity anchored to real currencies, events or places; making possible specific time-based or exchange-based local currencies. Here, ‘local’ doesn’t even mean local geographically – it could just mean local within the group’s membership criteria. Once this happens, the very idea of financial institutions becomes blurred: we all become banks, and the legal and regulatory implications of this could be frightening.
The developments coming to open payments only describe innovations we have seen many times before, even in some limited cases within finance itself. The difference with open banking is that there is a huge legacy to overcome, both institutional inertia and the difficulty in changing something that permeates every aspect of our lives. At the same time, once an idea takes hold, it can make a whole new paradigm seemingly overnight. This is where most of the large Silicon Valley successes have come from. The progress we can make on a system that is still based in some form on passing pieces of paper around is hugely exciting and liberating, and could revolutionise the whole finance industry.