Author Trevor Clawson
When Britain’s major banks reopen their doors after the Christmas and New Year Holidays they will be less than a couple of weeks away from a new era of information sharing and competition, driven by the Open Banking initiative.
The brainchild of the Competition Markets Authority (CMA), the arrival of Open Banking will essentially mean the UK’s eight largest banks-and one building society, will be required to share data with licensed financial services businesses. As the CMA sees it, the arrival of a system of regulated data sharing, underpinned by technology, will create a level playing field by allowing smaller financial service companies to compete and co-operate directly with the giants of the industry.
A huge amount of preparatory work has already been done to ensure that information can be shared safely and on January 13 banks will, for the first time, have to demonstrate compliance with the new regulations. As Imran Gulamhuseinwalem trustee of the Open Banking Implementation agency observed: “Open banking continues at pace.”
But what will that then mean for banks, financial services challengers and their customers?
What is Open Banking?
As things stand, the data collected by banks and financial services companies is kept in walled gardens, with each institution essentially owning the information it holds on individual customers.
Crucially, the customer information held by one bank is not available to rivals, So In practice, consumers and businesses tend to conduct their financial affairs through a series of one-stop shops. Typically, a customer might have a current account, and credit card with one bank, a mortgage with another, while also taking out insurance, making payments, to friends, sending money abroad, saving and purchasing a car through a range of providers. Each of these transactions takes place independently and require customers to provide relevant personal information, again and again.
The grand experiment that is Open Banking will, in contrast, allow each of us to access a range of financial services from different providers who can all take advantage of the pooled information. January 13 marks the date by which all of the large institutions affected – must have actually made current account data available. More data will come on stream through to 2019. As envisaged by the CMA, customers will henceforth be in charge of their own data and will be able to authorise its exposure to other players in the market.
“The obvious benefit of open banking is going to be a highly personalised form of financial advice, tailored to the individual’s’ particular circumstances,” says Piers Moore More Ede, Head of Digital at finance company Jameson Smith & Co.
For instance, In the personal and business loans market, competitors will be able to use information collated by an incumbent bank – monthly deposits and outgoings, spending patterns, payment records, etc – to offer bespoke loan packages at competitive rates.
Meanwhile, in the ever-expanding payments market – where apps and tools are being used by consumers and businesses to transfer money – third-party providers will be able to access bank data and initiate payments without any need to use the incumbent bank’s own system. This is aligned with a European Union directive on payment services.
According to Danny Healy, Financial Services Evangelist at enterprise software company Mulesoft, this will, in turn, pave the way for partnerships.
“Banks will increasingly look at how they can offer innovative solutions beyond payments, such as personalised services tailored to the customer’s needs. Those that succeed in next year’s open banking environment will be those that partner with third-party service providers to launch applications and services incorporating open banking data,” he says.
The advantages extend beyond transactions. The technology that underpins Open Banking will also enable the accountancy software tools used by businesses to talk directly to bank systems and access all the required data on money going in and out of the account.
The Secret Sauce
Open Banking is underpinned by technology. Or to be more precise it will be made possible by secure APIs (Application Programming Interfaces) – or in plain English, pieces of software that allow one application or system (say that deployed by a High Street bank) to communicate and share data with another operated by a third party. Overseen by the Open Banking implementation body, there has been a huge focus on ensuring that all the necessary systems are absolutely secure.
Turning an Idea Into Practice
But so far, Open Banking is an idea rather than an actuality and its success or failure depends on both the willingness of customers to embrace the prospect and the participation of financial technology firms.
And arguably, there are no guarantees of a warm consumer embrace. Looking at the issue through the prism of a glass-half-empty, you could argue that bank customers are a notoriously conservative bunch. Rates of customer churn between banks remain low, despite the introduction of the Current Account Switching Service, This was introduced in 2013 to allow users to compare accounts and interest rates. Indeed, in the two years immediately after the service was launched, only 2% of account holders had taken advantage of it…
Beyond Plain Vanilla
That might be explained by a general perception that one bank is very much like another when it comes to interest rates, charges and customer service. Open Banking, however, will make it easier to access new financial services that sit outside the plain vanilla of current accounts and overdrafts. The chances are, open banking apps are seen to deliver real benefits, then customers will use it. And as Moore Ede points out, younger customers are likely to be early adopters.
“I predict early adopters will be from a younger demographic such as millennials. They help prove the concept and, within 5 years, the entire landscape will have radically transformed,”
According to Danny Healy, the banks themselves are expected to innovate..“We’ve already started to see a number of banks take the initiative over the past 12 months and begin to drive innovation by opening themselves up through APIs, to enable idea sharing from beyond the four walls of the bank,” he says.
For instance, HSBC announced in September that it is to allow customers to see all their accounts (HSBC and rivals such as Barclays and Santander) on a single screen. In a service that is to be made available before January 13 next year, customers will be given a 360-degree view of their financial affairs.
There is perhaps a bigger picture here. In the wake of the Financial Crisis, many retail customers and small business found their own banks were refusing credit, reducing overdraft and putting on the pressure to restructure debt. This fuelled a demand for alternative finance. Open Banking will make both the traditional and alternative financial markets much more transparent. This will, in turn, make it easier for customers to access services they need.