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Open Banking Needs A Blockchain Boost

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ACKNOWLEDGMENTS: This is the first post I've published using the "Insert/edit image" feature I recently found on Finextra Blog Editor. Unlike the old "Assign a picture link" that permits bloggers to add an image only at the bottom of a blog post, the new feature can be used to place an image anywhere in the body of the post. I'd a few questions about how to use this new feature and shot off an email to Paul Penrose and Dirk Kinvig of Finextra yesterday. I got a reply from Dirk within a few minutes. Thanks to Finextra for launching this feature and to Dirk for helping me speedily "onboard" it.   

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Ever since Open Banking was launched in January, the media has gone on an overdrive, warning bank customers about data breaches and urging them to be cautious about sharing their data with TPPs (Third Party Providers).

Fintech thought leader Chris Skinner accused the media of kissing "the banks’ backsides".

But it's not as though the media is always balanced while reporting about fintechs. That became very evident when I read What banks can learn from Amazon. This Tearsheet article claims that banks don't have enough products to sell and advocates them to partner with fintechs to increase their offerings portfolio.

This claim is ridiculous: An ex-banker told me that even a midsized bank has around 50 products and not enough bandwidth to sell them all. Apparently, sales teams at banks focus on high-yield products like home loan, mutual fund and insurance and don't bother too much about digital payments, gift cards, etc. This resonates with my personal experience of trying to get a credit card for my daughter and running from one branch to another to buy a gift card. (For the record, I failed at both endeavors.)

(https://twitter.com/s_ketharaman/status/963797638540877824)

Given that fintechs have abandoned their founding mission to disrupt banks and are now actively seeking partnerships with banks to ensure their survival, it doesn't require a genius to guess whose cause Tearsheet was pandering to by making the absurd claim that banks don't have enough products to sell.

Media has its own challenges and these "you said, I said" arguments won't help Open Banking / PSD2.

Which seems to be in need of help.

It's no secret that Open Banking hasn't set the market on fire. As Verdict says, "The open banking era has started with a whimper".

There could be any number of reasons for that including lack of value proposition, security concerns, plain-and-simple inertia, and so on.

(https://twitter.com/s_ketharaman/status/970637651706568705)

I once believed that, if fintechs provided strong enough value proposition via personalized money management offers,  people will part with their banking data. I had second thoughts about that later and proposed automatic fulfillment of personalized offers as A Killer Feature For PFM On The Eve Of PSD2.

Now that was in the context of money management TPPs.

Coming to payment service providers who form another significant cohort of TPPs, I already shared my personal view about their outlook in the comment thread below Chris Skinner's post. Let me copy-paste it below:

Me: TBH most of the use cases in this blog post are available without Open Banking e.g. PayM, Play Store, Amazon 1-Click. Why risk giving online banking creds to 3rd parties? Media does have a point. IMHO, accusing it of kissing "banks' backsides" is a bit harsh.

Tim MossWhy risk it? If the merchant gave you a discount of 3-4% because you pay them directly via OpenBanking API, instead of using one of the card schemes, or gave you 20-30% discount if you didn't use an MNO based payment. (the %s quoted are how much the merchant loses due to fees/costs of those payment schemes). Besides if you're using Play Store, Amazon 1-Click, PayPal, PayM then you've already given your banking details to at least one third party (albeit a big one), why not give them to some more? ;-)

Me: (1) Merchant Fees for Debit Card is 0.25-0.5% versus 3-4% for Credit Card. I don't know what's the Merchant Fees for PayM but I'm sure it's lower than that for Credit Card, if not Debit Card. Yet, I don't know a single Merchant who gives a discount for use of Debit Card / PayM versus Credit Card. OTOH, when government / card networks remove the "No Surcharge" rule, Merchants are known to charge as high as 7.5% Surcharge even though the max Merchant Fees is 4%. In short, Merchants are greedy, as I'd highlighted in my blog post titled Do Retailers Want To Have Their Cake And Eat It Too? Since the time I published that post, I've come across enough examples to justify extending the same opinion to merchants worldwide. So, I strongly doubt if any Merchant will give me a 3-4% discount for paying them directly via OpenBanking payment methods. (2) I've only kept my Credit Card - not online banking creds - on Play Store and Amazon 1-Click (and Uber and Ola). Open Banking PSPs demand online banking creds to access Account-to-Account payment methods. I see a lot more risk in handing over my online banking creds compared to my credit card details. Besides, A2A payments lack several benefits provided by credit card like rewards, deferred payment, superior fraud protection and proof of receipt. On top of that, they suffer from shortcomings like non-repudiation and zero fraud protection.

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Now, all this was before the Facebook-Cambridge Analytica fracas broke.

The common man is now bound to be even more skeptical about assurances of safety of banking data given by fintechs / TPPs. "If Facebook can't stop our data from being stolen by third parties, how can banks?", I can hear them asking themselves.

(https://twitter.com/s_ketharaman/status/975786733777367040)

In parallel, the meme "data is the new oil" has spread like wild fire. Banking customers must be wondering, "if oil costs $75/barrel, why am I getting nothing for my banking data?"

Fair questions, both.

Open Banking proponents have hammered the notion that "customers own their banking data, banks must open it up" but I don't know a single TPP that has acknowledged to customers, "your data is valuable to us".

That has to change for Open Banking to gain traction.

TPPs must share the value of banking data more transparently with banking customers. Personalized offers are no longer adequate reward for banking data, particularly after the FB-CA scandal has triggered massive paranoia about security and privacy. Fintechs must find a more direct way to compensate consumers for accessing their banking data.

How can they do that?

Blockchain ahoy!

More specifically, by adopting the blockchain business model of cryptotokens.

I propose a token that should be used by TPPs to pay banking customers for the privilege of accessing their banking data. Conceptually, this token - let me call it Open Banking Coin for the moment - is not very different from Brave browser and its associated Basic Attention Token, which reward users for consuming content and viewing ads.

The retail industry has already started rewarding consumers via cryptotokens to access their shopping history.

So should fintechs. I believe it's a more pragmatic approach to drive adoption of Open Banking, especially in the current climate of heightened concerns about security and privacy of personal data.

I'm aware that cryptotokens and their selling mechanism ICO are under a cloud in various jurisdictions. Accordingly, fintechs may want to think through the legal nuances of this space before launching something like Open Banking Coin. Alternatively, if they believe that Fintechs Need Guts More Than Lawyers!, they can jump headlong into the cryptoworld and navigate the challenges as they go along.

Either way, Open Banking will receive a much-needed Blockchain boost.

Comments: (4)

Ramdas Narayanan
Ramdas Narayanan - Bank of America - Charlotte 02 May, 2018, 17:21Be the first to give this comment the thumbs up 0 likes

Excellent article, liked the phrase Data is the new oil. Lots of the big banks are sitting on mountains of data, how they utilize it would determine the future strategies and patnerships.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 03 May, 2018, 11:011 like 1 like

@Ramdas Narayanan:

TY for your kind words. As I highlighted in Banks Will Know Chipotle Is Going Bankrupt Before Chipotle, banks are definitely leveraging data from the earth and sky to their own benefit. However, when it comes to leveraging data for the benefit of customers, they're probably not sure if customers like such personalized offers, for reasons that I pointed out in the same post. After the hue-and-cry following the FB-CA fracas, they're going to be even less sure.

Adrian Black
Adrian Black - Contego - Oxford 03 May, 2018, 13:04Be the first to give this comment the thumbs up 0 likes

Interesting line of thought. I wanted to pick up one one point though as you say "Why risk giving online banking creds to 3rd parties?" but one key aspect of Open Banking (speaking from a UK perspective here) is that you don't have to give your credentials to any third party. Tokenised access via Open Banking APIs is a significant security improvement over the current "screen scraping" where you do have to share credentials. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 03 May, 2018, 14:48Be the first to give this comment the thumbs up 0 likes

@Adrian Black:

TY for your comment. I see a lot of diversity - even just on Finextra - in commentary about Open Banking access method. Some people seem to suggest that it's tantamount to giving away the keys to the kingdom (See https://www.finextra.com/blogs/fullblog.aspx?blogid=14986 and comments). Whereas some others say it's tightly controlled. Then I've also heard that its specs are not even out yet and are due to be published only next year!

As a fellow financial services tech professional, I may agree with you that tokenized access is a security improvement over screen scraping. But, as a bank customer, all I know is, if I give consent, someone other than me will be able to get into my bank account. I may still give consent provided I find strong enough value proposition, which I now think can only come out with actual monetary compensation.