Open Banking, Open Door – Empty Room?

Pushing against an open door is all very well. What happens if the room behind the open door is empty?

This is a topic of considerable interest to us here at Money&Co., a we pursue more traditional methods of entry into the banking system. Our friends at Finextra offer a couple of reports – one asking questions about the demand for open banking, and the other reporting the latest entrant into the market.

Banks that are struggling to harness the potentials of open banking can be compared to opening a shop and neglecting to fill it with any products that people want to buy, according to ABN Amro’s lead product owner. 

Following his virtual session, ‘Open Banking, Road to Successful Models’ during the APIDays conference, Koen Adolfs tells Finextra Research of his experience building an API platform and developer portal at the Dutch bank, and how this relates to incumbent banks’ innovation strategies. Adolfs claims the bank approached this change differently to some competitors.

He cites as an example the success and growth of ABN Amro’s payments request application, Tikkie. As a mobile app this was already a successful product, but creating an API for companies to plug in to took it to another level. While the basic functionality of Tikkie was already popular, empowering external developers to create products and services is what made it more competitive.

This resulted in the development of the Business Account Insights, Business Account Payment, Business Account Notifications and FX Trade APIs and more to come. Combining that with blogs and big events, inspired many developers and companies to create an account and start developing new user experiences, integrations and process automations.

Adolfs compares having a developer portal to running a shop. The bricks and mortar of the physical establishment are not what bring in a profit – it is the products and the customer service that the shopkeeper offers that make it a competitive business model. Being aware that building this combination takes time, this is where certain other institutions may still be struggling to fully harness the potential of Open Banking. 

 

ThinCats, a UK-based alternative lender to mid-sized SMEs, has partnered with Salt Edge, a leader in offering Open Banking solutions, to improve the efficiency of its upfront credit assessment and ongoing loan monitoring processes.

The UK is globally recognised as a cradle of Open Banking and during these uncertain times the most forward-minded participants in the industry are using data provided by Open Banking to improve their service offerings. According to a recent McKinsey online survey of UK SMEs, 80% of SMEs reported declines in revenues during the Covid crisis. Considering the cash flow challenges that lockdown restrictions have caused, many businesses are struggling to receive additional funding. Using Open Banking data, lending companies can more accurately assess the cash flow needs of creditworthy borrowers and shape funding solutions specific to their needs.

ThinCats is a leading alternative finance provider dedicated to funding growing and ambitious mid-sized SMEs from the UK with loans from £1 million up to £15 million. The collaboration with Salt Edge will enable ThinCats to build up its Open Banking dataset to support its customers through earlier identification of changing circumstances or additional funding needs. Data aggregation will help ThinCats to integrate real-time information in its credit decisioning and portfolio monitoring.

Historical Performance And IFISA Process Guide

  • Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee). 

That figure is the result of over £20 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.

  • Money&Co. has been lending for over 5 years and has only had two bad debts so far, representing a bad debt rate of 0.03 per cent per annum.

All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.

So here’s our guide to the process:

  • Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
  • Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
  • Step 3: Buy loans in the loan market. Once you’ve put cash in your account it will sit there – and it won’t earn interest until you’ve bought a piece of a loan. It’s this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans – all loans on the Money&Co. site can be held in an IFISA – and your money will start earning tax-free interest.

The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.

Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.

Risk: Security, Access, Yield

Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.



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Disclaimer: Money&Co.™ is the trading name of Denmark Square Limited, Company Number 08561817, registered in England & Wales, authorised and regulated by the Financial Conduct Authority (FCA). The company is identified on the Financial Services Register under Reference Number 727325. The registered office is 58 Glentham Road, Barnes, London, SW13 9JJ where the register of Directors may be inspected. Denmark Square Limited (ISA manager reference number Z1932) manages the Money&Co. Innovative Finance ISA.