The Future Of Lending

Reflecting on the 2010’s: self-regulation, open banking, and a decade of change

February 05, 2020 DirectID & LSB Episode 2
The Future Of Lending
Reflecting on the 2010’s: self-regulation, open banking, and a decade of change
The Future Of Lending
Reflecting on the 2010’s: self-regulation, open banking, and a decade of change
Feb 05, 2020 Episode 2
DirectID & LSB

In Episode 2, Liam from the DirectID team interviews James and Harry and prompts reflection on the last decade in their respective industries. As The Lending Standards Board approach their 10-year anniversary, Harry discusses how they’ve had to adapt and update their standards in line with an ever changing regulatory environment. James reflects on the ten years that he's worked with bank data, outlining his predictions for the future of Open Banking and relaying his opinions on the newly coined 'Open Finance'.  

Show Notes Transcript

In Episode 2, Liam from the DirectID team interviews James and Harry and prompts reflection on the last decade in their respective industries. As The Lending Standards Board approach their 10-year anniversary, Harry discusses how they’ve had to adapt and update their standards in line with an ever changing regulatory environment. James reflects on the ten years that he's worked with bank data, outlining his predictions for the future of Open Banking and relaying his opinions on the newly coined 'Open Finance'.  

Liam:   0:03
Welcome to the future of lending podcast. I'm Liam Thomson from the marketing team at DirectID. This podcast is an occasional series between the Lending Standards Board and DirectID. In the podcast series, we look to answer some of the questions facing the financial services sector specifically to do with financial technology in the future of lending. Welcome to the future Lending podcast, I'm joined by James Varga, the CEO and founder of DirectID, and Harry Hughes, the senior insights manager at the Lending Standards Board. Well, first of all, thanks so much for coming. Done.  I guess it marks a special period for the London Standards Board Now that you're approaching the 10 year anniversary, it's a huge milestone, and so much has changed and taking place in the regulation space over the last 10 years. So I thought it would be a good opportunity to catch up on the last decade, maybe discuss some of the challenges you faced in that period on what your overall expectations are for the future of the Lending Standards board.

Harry:   0:57
Yeah, absolutely. Thanks for having me down again, really look forward to it.

Liam:   1:01
Yeah, yeah, it's really great to have you here.  James, I think it links up pretty nicely with things on our end. You've been working in the Fintech open banking space for the past 10 years now, and reflecting upon that time, I think it's fair to say that we've lived through a massive change throughout the industry.

James:   1:15
There's been an absolute fundamental change, and it's is interesting. Sometimes when you start off these journeys, you don't anticipate spending 10 years doing something, is it? So I think what we're seeing an open banking is is definitely ah, evolution of the subject from from where we started 10 years ago.

Liam:   1:33
For a lot of people I'm sure it feels like open banking and using bank data came out of the blue, and suddenly every news source and conference agenda was structured around debating the opportunities and adversities. But I know that's not really the case for you. In that respect, It's been a really long journey, so to set the scene I'd be interested to find out from your perspective, What was the general consensus surrounding bank data? Say the zeitgeist? What was your journey like moving from those early days to actually developing an open banking platform

James:   2:00
schizophrenic, I think, is probably the best way to describe it. 10 years ago, I mean, bank date has been used in one form another for a long time in the UK. Uh, we've used bank data digitally for the last 15 almost 20 years in one form or another. You know, people have been in the industry for a while. Remember those days Not to age my myself. But, you know, bank data is just bank data. Someone's bank statement essentially is what we're talking about today. Bank statements have been used for 30 40 50 years. So actually, the idea of using bank statements is nothing new. And the value that we see on that bank that is maybe developed over the years. But but the fundamental sort of, you know, understanding that there's there's data here that can be used in some of these use cases has always been there. I think 10 years ago, the idea of using this data digitally was fraught with a lot of concern and challenge around, not just who owns the data keeping in mind. This is before GDPR are right where we said, actually, consumers can you can have a right to share and use their data in different ways. Um, I think the idea of of where the data comes from has changed in a recognition now, today that you can rely on digital copies of statements, you don't have to rely on something that looks like a bank statement. It might not be that bank statement, but as long as it it looks like a bank statement smells like a bank, they must be a bank statement. You know, um, I think that's that's changed a lot over the last 10 years. This is this is a tribute to the a huge amount of work that the open banking implementation entity and all the working groups and everything.

James:   3:45
 So there's a regulatory framework that supports people digitally sharing a copy of the bank's Davidson and digitally accessing this data and providing that to 1/3 party for use in these business cases. Were businesses like us or anybody else can use that data to make decisions and do things with that, that liability question, I think is, is probably the biggest shift over the last 10 years. But regardless of what the challenges, I think today we're in a fundamentally different place, that it's that is there and hopefully here to stay.

Liam:   4:18
It feels like we're beginning to get into the second step in that journey. There's been a big influx of open banking in the financial press and even just general engagement in the industry. There's a lot of talk of now of a financial revolution. These have been some huge changes that are set up over the next few years. potentially going to shape financial service is more than we know over the rest of our lives. . As a starting point, We went and spoke to the lending industry and tried to see how we could help them overcome the fundamental challenges that they've been facing. And that's really when the untold value in the data became clear. So if we're referring to a revolution that some people are calling it, where do you think we are on that journey? What is the interest we have to do to take the next steps to adapt to this change that we've heard so much about

James:   5:05
so that the changes massive. I think sometimes we underappreciate the amount of effort and and work that's gone into helping to make this change. Uh, it was described that event we did before Christmas, as Banks opening up a new channel. And I think that was a really interesting parallel that when you think about over the last 10 years, when was the last time that a banks opened up a channel to their business and we had payments, we had credit cards. That was a big, momentous step in the industry to be able to pay and transact with a piece of plastic. I think the next big channel that was opened up was around Internet banking and accessing Service's online. That was another huge, huge effort by the industry on. I think it's the same thing with open banking is providing this data through APIs. It's taken a huge amount of effort, not just by the regulators but by the banks themselves to provide access to change, change their systems and approaches and their mindsets to be able to to support this initiative. where we are today is is this data is now available, least in the vast majority. In the UK Open banking now being a global trend with with 15 16 17 countries in addition to Europe, all committing to the open banking movement, whatever you want to call it, the data is there today. I think the big challenge for the industry now is is we need to consume it right? We need to build use cases that change lives that show the value, that evidence that there's an impact from making the state available. And that's down to the small lenders. The big banks, the fintechs, um, the members organisations, whoever it is the startups, the regtechs. I mean, there's a huge broad range of potential benefits derived from bank data. But if we as an industry we don't consume and make something of this data, then then eh, it's not going to stay around, but be we also need to highlight and recognise the huge amount of effort that went into making this available in the first place.

Liam:   7:07
I think moving to an open banking program really just marks the start of the movement. There's still a lot to be done to ensure the open banking is successful. But I guess it's about actually understanding that data that we have access to in finding the relevant use cases to get the value from the data. So I guess if we stick to reflecting over the 2010s, I wanted to find it from the Lending Standard Boards, what have been the key changes have taken place from your perspective?

Harry:   7:30
Well, I think, as you said Liam at the start, that is, our 10th anniversary, it's been a good time for us to look back and consider the changes that have occurred of which there have been many. But I think there's two main ones. So the change from the lending code to the standards lending practice and, secondly, the scope of those rules. So the customers they apply to, specifically the increase in the scopeof business customers who now fall under our our standards, said lending code, was that the rules that were there initially from 2009 and became really well known throughout the industry at a time when consumer credit was regulated but under the OFT. And in a very different space to how it is today. So the Lending Code applied to credit cards, overdrafts on loans, mostly for individual consumers. Microenterprises fell into it as well, but that is really changed with the move to the standards of lending practice that occurred in 2016. But that was driven by the FCA taking on the regulation consumer credit and us having to really look at our place within the industry and how self regulation could work in this in this sort of different financial space. And moving with those times and working with our registered firms to see how we best add  value and continued sort of enhance the outcomes for customers. So I think that moved to the standards has really been a sort of game changer for us on. Secondly, the change with who those standards apply to, so our business customers now go up to £25 million turnover, which from micro enterprises is sort of night and day.  It's exciting for us and for the industry as well that we can sort of show how self regulation can fit a gap where there isn't, you know, FCA regulation in the same way as there is for personal customers. Yeah, but also that the industry's keen on the registered firms are keen to do the right thing and getting places, processes and governance frameworks to make sure that their customers are getting the right outcomes.

Liam:   9:51
You've touched on some major changes there. I'm interested to find out a bit more on how The L S B is able to actually adapt to an industry that is changing so rapidly.

Harry:   10:00
Yes, so it's a really good question, I think. Those changes I mentioned a pretty much driven through regularstory change. So said the standards came in following in 2014 the FCA took over the regulation Consumer credit. That created a bit of an existential risk for us, actually, in terms of what's the point of you in the lending code? Now the FDA is covering this. We answered that by speaking to our registered firms firstly, a staining. Was there Ah, need and desire for a self regulatory body. Given this change and how could we adapt our our rules? What became the standards to address those changes and the introduction of CONC? Because what we don't want to do and we never into sort of gold plate any existing regulation. That's not what we're about. And it's not what are registered firms want so finding that area and where we consider, like, say, add value, increased protections whilst not just duplicating what is already in the regs is that sort of challenge, but opportunity as well. I think we've business standards. There's being an increase over the last set of 10 years of focus on business banking and SME banking for good reasons and bad, obviously massive key drivers of the economy. James. Someone who started your own business, you know very well but the challenges that can come with financing and getting a business up and running. But it's mostly unregulated space. So for us to be able to have the business standards lending practice that first we're up to six and 1/2m turnover and recently went up to that 25.  Its exciting and a new area for us and somewhere that we're going to be spending a sort of next 2 5 10 years continuing to focus on and develop and worked with our firm so they can keep getting customers you know, the best possible service and products that they can.

Liam:   12:11
It's good to hear about the change in keeping the standard high, for the end consumers. I think that's a really important aspect, and it's, you know, an exciting prospect. with technology It does feel slightly exponential. The rate of change just seems to somehow continue getting faster. I mean, specifically in our sector. It feels like the industry is starting to really catch on to open banking. You know, you mentioned James, it being a little bit schizophrenic, but it does seem to be getting a little bit there. I saw that the FCA put a call for input, seeking for proposals on hope Open finance can transform financial services. It's been over the last year to six months. I've heard this phrase coined, and it seems to be the new direction of open banking, Per say. is open banking, really just to start growing for a much bigger movement. Do you think that we'll see in our lifetime, or is there something you think about looking at the next 10 years of the platform? Is that something you have to think about? Do you need to take it into account on your journey?

James:   12:59
Absolutely. And I think it's really interesting thinking about the role that regulators, the role of regulators and how that's changed over even even over, the last 10 years where traditionally they were always reactive to pressures in the market are problems consumers were facing or issues that needed to be addressed. But I think as we move into new grounds as we move, whether it's more digitally or more globally or whatever, they have the opportunity to play a much more proactive role as we've seen right around providing the foundations for things. And I think it's open banking is in a similar situation is that what we built is a bit of a foundation, you know, now is a global trend, which is really exciting, you know, everyone's jumping on the bandwagon, but what we've done in the UK, especially as we built a really good strong foundation to talk about the essence of open banking and what what it means, you know.

James:   13:53
And a big part of that is a round, open finance, as the FCA is now recognizing. So if your bank statement has value and can help people and change the industry and save costs, reduce fraud, whatever it is, then What does access to your wealth or your pension or your insurances? How the can that be used with consumers at the middle of this conversation, explicitly consenting to share their personal data with other third parties? How does that change? And and we're already starting to see that now, um, ripple out into conversations like open Data. Australia is a really good example of that where they've taken much more of an open data initiative and including potentially healthcare data or other bits of mobile data or whatever it is. Why, as consumers can't we share that? And you know those those issues that we saw in the industry 10 years ago around liability and risk and concerns and whether hard or soft, whatever they were restricted, this open sharing of data was what I find really interesting in open banking k is not only now keep in mind this is post GDPR, but now we have a framework that not only allows consumers to share their data, but I think interesting allows us. Is is FinTechs or is an industry to To make money from doing that right is to understand our role in the place and say, Well, actually, you can do this. There is benefit. We can commercialise it consumer. You can benefit it. You're always in control and it creates a framework. Why shouldn't that ripple out now into things like open finance or open data? I think for us we'll also start to see more and more conversation around identity and trust. Financial services is a fantastic I mean, it is a trust network. You know, if you look at financial services around the world, it's a global trust Network that is built on trust and and managing risk and fraud and regulatory compliance. I mean, that is, in a lot of ways, financial services plus the exchange of value that mean there's there's that level in there as well. But I think if we can leverage that trust network to help solve other challenges not around open finance and open data, but around identity. You know, from a KYC AML point of view from a fraud point of view.How do we elect consumers to take the trust that they've built up with their bank to use that as an identity as they travel around the world to share a bit of that And that's I mean, from a personal point of view, is, you know, this is where we started from 12 years ago, so over 10 years ago now, So it's It's interesting to see where kind of coming back to those core core problems, and that's what all this is doing. It's It's solving these big, massive, enablement challenges that are other in the industry that allow us to interact and engage and do things with customers more, more frictionless.

Liam:   16:43
Yeah, I find particularly interesting that you touched on the global aspect of things. The UK I've been in some way labeled, I guess, pioneers of early open banking, But looking at the consumer data right, there is a lot to be learned from the global side of things and totally different perspectives on really understanding what this could mean for society on a wider scale. I think itll be really interested to see the different angles. I think there's no what 30 or 40 countries moving towards an open bank regime?

James:   17:08
it's a massive movement. That's part of the challenges, as you say, we have to. You know, in the UK, we've represented a model on example which is good and kind of led to thinking in a lot of ways, but we're not right about everything. We have to look at those other changes that are happening in other countries and adopt them back into here, and vice versa, you know. So there's more more global events kicking off around open banking because it is very much a common challenge of global ah, global pain and technologies changing regulations, changing use cases. They're changing the scope of data moving from open banking to open finance to open data. That's all changing. There's there's a lot of change that's happening just now. It's a revolution.

Liam:   17:52
So we spoke a lot about the huge changes in the context of open banking and open finance. when you have so many technological change is happening through financial service is how do you Ensure that the Lending Standards Board update their standards accordingly.

Harry:   18:03
No, it's a It's a good question, and it's definitely, you know, it's a challenge for us, but I think the answer is in not being overly prescriptive about process. So what we focus on and what there, you know, are registered firms like to do is to get right outcome. are you giving the right information to customers? Are they getting products that are suitable for them? Do you monitor these products so that if the customer, if the journey doesn't go, is expected, for example, money difficulties that you intervene appropriately and offer assistance?  by having those sort of standards rather than you must do A +B = C means that registered firms have the ability to innovate, design new products, use technology in a way that they understand best. And it's really you know, it's not for us to prescribe how they should do that, but rather that they can design and innovate with at the back of their minds, understanding that we need to design this with vulnerable customers in mind. For example, we need to design this so that if something changes to the journey from what we expected to be, then we can address that in the customer is not going to be disadvantaged So I think that that's how you know, we sort of deal with that on all of our registered firms have compliance managers along with  the assurance side, making sure that they comply with the standards. Also acted this sort of relationship manager in an  advisory capacity to be able to answer questions, including at that sort of design stage and innovation stage of you know, what's the right way of approaching this. So what would you expect from the L S B from the standards perspective, a product to do in this situation? So I think that's something that we engage with the industry with our registered firms about and something that we're very conscious off.

Liam:   20:06
Okay, with that in mind, talking about the adaptation, what do you see the next 10 years holding for the Lending Standards board?

Harry:   20:14
Yeah, well, it's a It's a massive question, obviously, and it's I think in that in a sort of immediate term. We were having a sort of 10th anniversary event in next month. Actually, House of Lords, that's where we're going to be announcing our sort of mission strategy for next three or so years, which will, you know fundamentally include building on what we what we have now said protecting you know, protecting customers and raising those standards by engaging with industry and working with registered firms, getting more registered firms on board. We already have around 96% of the personal business sort of lending market. It obviously is great, but especially, as you know, new businesses enter three industry we don't want to be. We want to engage with with them on. Be able to sort of grow with those new entrance to the industry as well. So I think it's about doing, you know, continuing to do what we do well, which is having those standards which it embedded across, you know, our registered firms, making sure that we grow in terms of monitoring the business side of things and the new customers that falling in up to 25 million on continuing on a sort of insight and support level as well. So not just doing compliance or assurance activities, but going out educating firms or other stakeholder organisations about what we do, what the standards mean for the end customer. I'm working with registered firms to be able to to deliver their products as well as they want.

Liam:   21:56
Yeah, really conform to the anniversary event. We're going to be down one there. Ah, as a last point for yourself, James. We've lived through so much over the last decade and  we came so far in the industry. I'm interested to see what your vision is over the next 10 years. Where do you think we're going to go next?

James:   22:12
10 years? the last 10 years have been a bit of a lifetime? Uh, it's a real challenge. I mean, we're all around how do we help our customers understand their customers right, using this financial data And I think, and one way we could spend the next 10 years unpacking the value of that Bank Data's. it's looking for more and more understanding and insights not just to help credit risk decisions or prevent fraud, but Maybe it's around pricing. Maybe it's about financial behaviours and share of wallet and buying habits. There's so much value in someone's bank statement that the consumer can get benefit from. I think we could spend the next 10 years in doing that. I think the conversation of identity will come up some point over the next few years and start to really generates momentum traction. I think they're still quite a bit of misunderstanding in the market around What needs to happen to make that that model work and how to overcome the chicken and egg of of identity has been there for a long time. Um, so you know, we could offer more or plug in more Service is in data, but I think you know, if I were to give you one answer, it would be continuing to develop insights and understanding of financial behaviors financial profile so that consumers can get access to things. They can do things we can understand them better. They can understand themselves better, you know, and and rolling that, up into open finance are obviously I mean, it's not just bank statements is thatw hole Open finance movement. I don't think personally for us It's around getting in the health care, other sorts of data. I think when one of the things we've learned over the last 10 years is that the main expertise is really, really important.

James:   23:58
Bank data is one thing is how you use it. That really, really counts, right? So understanding the context and use case is extremely important. Credit Risk Decision is a world in itself, right? And it's fundamentally different than personal finance management, or insurance, right? Maybe a little bit of overlap with insurance. But, um, you know, there's there's a huge range of use cases and as the market develops and matures and we all have to focus on our bit So I think I think the next 10 years for us is just gonna be continuing in the direction we are going in and and unlocking this value for consumers.

Liam:   24:35
I think that rounds it up pretty nicely. It's probably good place for us to concludes. Know that we've all made our 10 year predictions. We can meet up in 10 years and see how far off we were in a if we held our promises. But yeah, no thanks. So much for coming down. It's been a fantastic catch up, really looking forward to having you back. And I think it might be a nice place to leave here. And I think, as I can the next focus point, it might be actually get to look at the propositions himself, maybe look into the marketing instead of open banking products and discussing how the industry is actually building and delivering these propositions, especially from the regtech point of view, would be interesting to talk about how the smaller Fintechs are taking regulation into consideration. And how is that affecting their development off their products, etc. Yeah, I think that's a great point to leave off. Thank you so much for joining us, and I look forward to joining you. Thanks. Cheers. Thanks. Well, that marks the end of episode 2 of the future of lending podcast way. Look forward to returning soon with even more content. Thanks for listening