I have written in the past about the open banking revolution and my thoughts on what this means for the financial services industry. The first major milestone is nearly upon us and by the end of Q1 this year, the UK’s nine largest current account providers will need to have ‘opened up’ their standardised product and reference data to authorised third parties. This means that each bank, despite their individual legacy system challenges, must find a way to standardise the way all their data is stored so that licenced third parties can access it with their own systems. Think of it like a single filing system for everyone to use. By January 2018, with customer consent, they must allow secure access to specific current accounts so these authorised third parties can read the transaction data and initiate payments.
What sparked my interest to write about this again was research I read from Equifax revealing 90% of Brits had not heard of the Open Banking Initiative. Due to be available in under a year and described as “a transformational change” by Alasdair Smith, chairman of the retail banking investigation at the Competition and Markets Authority (CMA), Open Banking appears to be one of the largest changes and best kept secrets on the high street. If we are to believe consumers are still weary and disgruntled with their banks, and digital is the solution to all problems, I find it interesting that the mainstream press is so quiet about what is happening.
Open banking promises to provide reliable financial advice based on our individual circumstances, delivered securely and confidentially. It removes the need for us to gather up our financial history in spreadsheets and cumbersome forms, steering us away from manually uploading confidential and personal information into price comparison websites. The market is set to become more customer centric and focused on applications promising to enhance our day to day lives.
Let’s quote Alasdair Smith again to help explain further:
“Open Banking will make a transformational change to banking for personal customers and small businesses. For the first time, innovative and secure apps will provide personalised services and information to cover all financial needs in one place, and make it easy for people to find out what bank account is best for them.”
“We’re also making banks send alerts to people about to slip into overdraft to help them try and avoid unnecessary charges. Banks receive £1.2 billion a year from unarranged overdraft charges. A new alert system, combined with our order to require them to publically announce their maximum monthly charges, should mean significant savings in future for their hard-pressed customers.”
The power in your pocket.
Principally open banking will make choosing and accessing a best fit financial product easier. This will be achieved thanks to an array of new apps powered by your smart phone. These apps will utilise what are called Application Programming Interfaces (API’s) to allow different computer systems to communicate and share data about our financial transactions. This is achieved without us having to reveal our individual logon credentials and passwords, similar to how Facebook uses APIs to help us sign in to other online accounts.
All this technical stuff is about helping consumers to make the most of their time and money. For instance, imagine authorising an app to find you the most suitable current account based on your financial transactions, or automatically changing your credit card supplier when a better deal becomes available, helping to keep interest payments as low as possible. We may also see smartphone notifications alerting us to the fact that we are about to go overdrawn, offering pre-approved financial solutions at the touch of a button. If you are small business owner like myself, expect to see software accountancy firms like Xero offering better deals and loans for our business accounts integrated into the apps we already know and love. Apps will not just focus on current accounts, but on investments too, so this could mean more people have access to the investment markets, further creating competition and stimulating growth.
As Facebook, Twitter and others have done for communications, these new apps promise to revolutionise the way we bank. They will become our ‘go to’ for day to day banking, providing essential financial data as and when we need it.
A changing landscape
A notable difference in the way we bank will be the array of people offering direct financial services. We could be banking with Google or Amazon, and Facebook might extend Messenger’s ability to transfer money to offer increased services to consumers and businesses. These open APIs will kick start competition, taking mainstream financial services away from the traditional high street banks if they fail to act.
I’m less curious about the big technology firms though and far more interested with retailers like John Lewis and M&S. These are companies whose brands we are already fully engaged with and whose systems are awash with significant amounts of data about us and our buying habits. I think they are in prime position to close the information loop now by fully understanding our entire financial situation. I wonder what state their IT systems are in and how easily they can compile the banker’s mythical technology wonder known internally as the 'single customer view’.
Armed with this data, John Lewis or M&S could further personalise the financial services they offer. Just bought a car? John Lewis can instantly provide you with a quote to insure it, in addition to the personal loan they easily constructed for you to purchase it. Set up a new mortgage? Your favourite retailer may ask you about home improvements! By knowing you better these trusted brands can construct services more personal to you, which will not only save you money but can make good financial management less stressful and time consuming.
At the touch of a button
One of the prevalent benefits of open banking for consumers must be the ability to clearly see all accounts in a single app regardless of the service provider. For the first time everything will be at your fingertips. A single sign-on, to a secure platform, updates all financial detail in the moment.
The CMA want consumers to be better informed and are encouraging banks to push through notifications alerting customers to issues with their bank accounts. These notifications can help to avoid costly overdraft fees and enable people to make better financial decisions. Tracking expenditure to show people exactly how they spend their money, like digital bank Monzo, can help to bring about lifestyle benefits. Further, through sharing financial data we should find we can access better services with context and personalisation based on our habits and financial history. For example, should a borrower be able to show they actively save and live comfortably within their means, they may be offered a better rate than a customer who is frequently overdrawn and has significant regular outgoings. All of this without the hour-long branch or phone conversation typically required today, discouraging many of us to bother.
As we near the end of Q1 I think it is time we start communicating early offers, new apps and new services more. Consumers should be better informed already. I wonder if banks’ marketing pounds are already being pooled in anticipation of providing education on the purpose, benefits and risks of Open Banking? Consumer education is a necessity if we are to realise the full extent of the Open Banking vision. A collaborative effort is needed to inform consumers of the changes, including bank communications as well as mainstream press - as we have seen before when chip and pin was introduced.
The Timetable of the CMA’s remedies demonstrates the extent of the technical, process, legal and policy challenges faced by the nine banks. I would now like to see the challenge of building consumer awareness and engagement to be as fully embraced.