The reason a lot of people do not recognise opportunity is because it usually goes around wearing overalls looking like hard work
- Thomas Edison
He may not have been speaking about bank data, but Thomas Edison knew what an opportunity was and how to exploit it. Edison’s inventions were groundbreaking for the time, and included the light bulb, motion picture camera and phonograph (gramophone).
The theme of this article is ‘opportunity’. There is an opportunity for both the financial services industry and for individual consumers, and it is incumbent on us all we make the most of this opportunity.
All of us have a financial history. Some will be bigger, some smaller, some complex, others not. But if we have opened a bank account then we will have a history. This history has generated data. Data from millions of transactions. Data from millions of payments. Data about the individual.
The opportunity is now in front of us to make use of that data. This data can be exploited by individuals to save themselves time and expense.
In a similar but separate vein, the opportunity is also there for banks and other financial providers to use this data.
So how can both parties make best use of this data? And what more do banks and financial providers need to do to ensure they are best placed to utilise this data?
What we'll cover in this article:
Within this article, we will explore what the current landscape looks like, suggesting five services within financial services that could benefit from the use of data and why; examine how customers can benefit from the Open banking opportunity; before finally looking at seven key areas for banks to focus on should they wish to compete in this new world.
Part 1: Financial Services and Bank Data in 2019
The banking landscape has changed considerably over the last decade. A key component of these changes has been the introduction of Open Banking in 2018, and the resulting use of data in core banking fields such as compliance, fraud and affordability assessments.
5 Benefits Financial Services Could Take Advantage of by Using Bank Data:
2. Customer Insights
3. Product Offerings
4. Cost Savings
5. Lending Decisions
Compliance is one facet that has felt the effects of bank data use. Prior to the introduction of Open Banking, Compliance Officers and Credit Risk Officers required paper-based bank statements to be manually sent to them in order to make lending and affordability assessments. AML and KYC checks have become ever more onerous as regulations such as the Fourth and Fifth Money Laundering Directive’s, and the Bank Secrecy Act in the US have been passed. The use of bank data means those making decisions can now see all of the information they require, and within seconds of an applicant submitting an application.
It will come as no surprise to anyone that banks and financial institutions are targets for criminals and fraudsters. The use of bank data and Open Banking is an effective deterrent to fraudsters trying to game the financial system.
Use case 1: inflated income
A fraudster pays someone an amount of money to pay regular amounts of money into their account starting three months before they know they will apply for a loan. This additional income results in them being accepted for a loan they would not otherwise be able to afford.
Use case 2: tipp-ex out the evidence
After submitting a loan application, an applicant is asked to manually supply bank statements. Using some creative skills and a printer, they physically alter their income to inflate it to a level where the loan will be accepted.
The use of bank data and Open Banking negates both of these issues. In the first, using a tool such as Income Verification would show an applicant’s salary going back up to 12 months, showing red flags for the “boosted amount”.
In the second, because there are no physical pay slips to send in, it becomes impossible to physically alter the pay-slips. Assessing a loan submitted through Open Banking, the vendor is given read-only access to the applicant’s bank details, eliminating fraud risk.
As we know from experience, compliance is the key component that holds up customer onboarding. This can be a frustrating period for both banks and the consumer. The institution needs to conduct checks fulfilling AML and KYC criteria, and lengthens the period of time before they can start selling services. For the customer, there is a waiting game – as well as an ability to cancel and move to a competitor – between applying and being accepted and using the desired services.
Bank data can resolve this issue, verifying identity, matching applicants to known bank accounts and speeding up the process to the benefit of both.
2. Customer Insights
With data for the use and benefit of the customer, power sits squarely in their hands. The ability to determine if they are paying too much for a service, allied with the ability to quickly and easily change provider, gives unprecedented control to the individual.
The same use of data and analytics can also benefit financial providers.
Banks and other providers, with the resource and tools they have at their disposal, can through use of AI, machine learning and advanced analytics provide customers with insights on their income, spend and more that will illustrate value in the relationship. Open Banking’s introduction has reversed the relationship that banks have been built on. Recognising this reversal and building a mindset that puts the customer at the forefront thinking will be key to financial institutions success from 2019.
3. Product Offerings
As part of the product suite, new offerings can be built on bank data, bespoke to customer needs. Bank customers are not drones, nor should they be treated as such. With millions of individuals, each will face challenges, needs and wants in their finances as individual as the person. The opening of bank data gives banks the first opportunity to design and tailor products to the needs of each customer.
4. Cost Savings
We understand financial pressures on financial institutions are significant. Whether it be updating outdated IT infrastructure, regulations requiring more capital be kept, salaries, and more, cost pressures are a very real headache. Bank data, gives the opportunity to save on time, resource and money. As it reduces pressure on areas such as compliance, contract management, risk and fraud, banks can move resource from these areas towards areas requiring it – such as serving customer need.
5. Lending Decisions
The Financial Conduct Authority has stipulated financial institutions become far more effective in the quality of their lending decisions. In part, this stems from the breakdown of High-Cost Short Term Credit (HCSTC) providers such as Wonga. The collapse of this business came about because of an unwillingness to ensure customers could repay the loans that were being offered to them. When it became apparent thousands could not, it was already too late, and the company collapsed after the FCA declared it must pay compensation to customers.
With new regulations requiring lending decisions be justified from an affordability viewpoint, it is critical for lenders that they be able to illustrate they gathered together all the relevant information, and came to a conclusion based on the strength of that information. Bank data ensures all the information required to make a lending decision, such as income and outgoings can be calculated, and affordability assessments completed quickly and simply.
Part 2 – The Benefits To The Customer
The significant progression in technology has, as we have touched upon, placed far more control into the hands of the individual consumer. Benefits across the consumer financial spectrum from current accounts, mortgages and loans await. Putting bank data back into the hands of customers will further help individuals who have poor credit scores, or thin credit files, as bank data replaces traditional credit scoring.
The 6 Incredible Benefits to The Customer by taking advantage of these Opportunities:
1. Account Switching
2. Making Money Work
3. Credit Scoring
4. Intelligent Payments
6. Financial Inclusion
1. Account Switching
One of the key factors that led to the introduction of Open Banking in the UK was low rates of current account switching. The Current Account Switch Service (CASS) reports on the statistics illustrating only around 3% of the UK population switch their accounts. While switching bank account in 2019 is easy, the introduction of Open Banking should allow consumers to switch to accounts that fit their requirements even easier, saving them money.
2. Making Money Work
Moving money with ease allows consumers to find the best deals, and those tailored to their needs from any provider, irrespective of who they bank with. As a direct result, financial institutions will need to work harder to continue enjoying the trust and loyalty of their customer. As we explored in a previous article, the reason consumers open accounts with a bank tends to be based on arbitrary circumstances – location of a branch, who their parents’ bank with etc. In the past, this was enough to secure the custom of that individual for the rest of their adult life. No more. Banks will need to respond to the new paradigm and offer genuine competitive features and services to win our money.
The growth of the Challenger banks in the UK has added another dimension to this issue. Banks such as Starling, Revolut, Monzo, N26 and others, as well as offering features through their web app, are bringing in FinTech and high-street companies under their fold, allowing customers to do even more without ever leaving their app.
Yolt is a personal finance management app that integrates with current accounts and some credit cards, allowing users to see their balances in one place. Through 2018 Yolt initiated a number of integrations with other FinTech companies, allowing users to undertake in activities without leaving the Yolt app. Within the app, users can access services such as PensionBee (SIPP pensions), Moneysupermarket (price comparison), Anorak (insurance) and Wealthify (savings). Adding these integrations has made the app more popular – with over half a million users as of October 2018 – and added to its “stickiness” by allowing users to do more without leaving the app.
3. Credit scoring
Any one of us who has applied for a loan or a mortgage will be aware a portion of the bank’s decision-making process is based upon the results of a credit check from one of the major providers. As we discussed in this article, this poses many issues, most notably the information provided is often incomplete and always backdated. That is to say, past information most likely has little significance on an individual moving forward. Take a first-time buyer looking for a mortgage. While they may have a decade or more of faultless rental payments (quite possibly at a higher monthly rate than the mortgage they’re applying for), this is not reflected anywhere in a credit score. How useful is the knowledge they pay a credit card and a phone bill every month?
The rise of bank data offered through Open Banking would allow for the mortgage provider in this scenario to see those rental payments being paid every month and build this into their decision. Customers will begin to receive more tailored advice and services from their bank and lender, services which will reflect their credit history and financial position.
4. Intelligent Payments
In recent years the FCA has taken a hard line on financial institutions use of generating revenue through products such as expensive overdraft fees and other interest-bearing services. However, research illustrates it is the poorest in our society that pay the most for their financial services.
Open Banking can change this by intelligently moving money and automating payments to reduce cost. PFM’s and lenders are working on products that will move money on an individual’s behalf to save them money. Take an individual who finds themselves overdrawn in the final days of the month before they are paid. The overdraft could cost them £3 to maintain for that time. An intelligent PFM, using Open Banking, could get them a short-term loan of a limited amount that would cost them £1. Without having to lift a finger, the individual has saved themselves money. Replicate this on a bigger scale and across the population and the savings could be enormous.
As we intimated in the first section, the relationship between financial institutions and their customers is set to alter further. With the power to investigate price comparisons and change products and services at the touch of a button, customers can use their data to derive the best possible deal that works for them.
We expect to see banks and lenders begin to compete far more for to in the relationship. This process has already begun with the rise of the Challenger banks, and switching to these accounts has been far heavier than it has to the traditional high-street banks.
The high-street banks have begun to respond. In the first instance, this has been based around offering some of the same services the Challenger’s offer (freezing bank cards within an app, blocking gambling sites etc) and they have now moved into phase two of their approach. This has seen them mimicking some of the key components of the Challengers within their own digital offerings. Mimo (from NatWest), Bo (from RBS), and Marcus (from Goldman Sachs) are prevalent examples.
As an aside, an illustration of how far incumbent banks may be willing to take their new offerings, Monzo CEO Tom Blomfield recently accused Halifax of plagiarism in their new card designs.
6. Financial Inclusion
Open banking was introduced in the UK to help consumers better manage their money and save money. While there have been some claims Open Banking will only be used by the financially literate and wealthy, it can also go a long way to helping financial inclusion.
As we have discussed elsewhere, the wealthy pay far less for access to credit than those who are not. It is also disproportionately difficult for the young, old, those not in regular work, and those with thin credit files to gain access to work. The opportunity exists for these people to exploit their bank data to help them pay less for their financial services, thus helping with financial inclusion.
The ability to verify income is one method banks can use to make better lending decisions, while also cutting down on fraudulent and inaccurate applications. Some financial institutions are now using Income Verification solutions, such as that launched by The ID Co. As we discussed above in the example of the person applying for a mortgage, the ability of the bank to be able to quickly, securely, and accurately identify and analyse the applicant’s income within seconds of a mortgage application being made would allow them to make a decision with a far greater degree of confidence than using credit scores.
Part 3 – What needs to be done to get these benefits?
Banks and financial service providers remain at the forefront of the Open Banking opportunity. They are not only the custodians of customer data, but hold the relationships with the customers. Their actions in the near future will be critical in determining to what extent Open Banking is a success.
While we have witnessed varying degrees of product development from the sector over the last year, how they continue to build the infrastructure, speak to their customers and work with third parties will be key to how customers can utilise bank data.
What Banks and Financial Services Need To Do To Take Advantage of These Opportunities:
• Educate Customers
• Market Proposition
• Product Hierarchies
There have been repeated surveys undertaken in the UK illustrating bank customers do not know what Open Banking is. For customers and the financial bodies to reap the rewards of this new technology, it is necessary for the banks to educate their customers on its use, safety and implications. This has the benefit for banks of showing them as a trusted advisor customers can rely on. Those that start doing so now will further have a head start on others when others decide to join in.
Without having the right infrastructure in place, including APIs, none of the above is possible. In order to make a success of Open Banking, banks require the right technical infrastructure in place. We have seen repeated delays in infrastructure management in the staged roll-out of Open banking over the last 15 months. The customer architecture has also deviated wildly from bank to bank, with poor user experience across multiple screens being presented to the customer.
It is fair to suggest some of the major banks have been hesitant in highlighting the opportunities brought forth by Open Banking, virtually every UK bank has now begun to roll-out product updates and features made possible by the technology. While these have been modest in scale and scope it shows banks have accepted that Open Banking is here and will be staying.
The next stage is to develop a clear market proposition in relation to Open Banking and bank data. Will banks look to partner with FinTech’s to develop a “marketplace” of apps, place themselves as trusted advisers, even if customers should use others’ services, or to try and retain their customer base using traditional methods?
In a guest article for Forbes, management consultancy, Bain & Co. have this advice for banks:
“[Banks] are adapting their existing platforms so that they can easily aggregate data from external sources; they are setting up distribution partnerships with third-party platforms; and they are investing in new data and service providers, such as digital brokers, to move further up the value chain.”
The same question can be asked of product development and hierarchies. It is necessary in this new age to have clear definition of products and services, outlining their use and cost.
Pricing technology company, Zafin describe it in a blog post thus:
“The more fragmented and unstructured the existing capabilities are, the greater the challenge will be for banks to provide successfully the product and pricing innovation and information required to compete in a way that minimizes reputational risk, e.g. incorrect product or service information being provided, and maximizes opportunity to retain and acquire customers and grow wallet share.”
We've established it is now more straightforward than ever before for bank customers to switch their accounts. We also know an increasingly large percentage of the population holds financial products with a number of different service providers and Open Banking will increase the ease of switching. Banks need to face this reality and embrace the proposition, allowing and helping customers to switch between products. The rise of services such as Netflix illustrates customers do not like to be “locked into products” and prefer a tailored advice – this should be offered.
The good news for the industry is there is a huge amount of experience and talent that can be brought in to help with any programme focused around bank data or Open Banking. The ID Co. is one such company.
Before doing so, financial companies should examine what their needs are, and how they plan on executing on that need. And for those that do decide to go down that route, further help is at hand from the Fintech Delivery Panel. This group of banks and Fintech’s have published the Fintech Collaboration Toolkit in conjunction with the British Standards Institute.
With the use of bank data still in its infancy, no one financial institution has gained a clear advantage in its use. The Challenger banks were the most receptive to its use, and to-date have built far more functionality than the high-street banks. Most players in the sector however are at what we would describe as “base camp”, which is having completed work around account aggregation.
Having spoken to all of the high-street banks over the last twelve months, we know there is a plethora of work going on behind the scenes to bring out the fastest and best services using Open Banking that will help to win market share, as well as deliver a huge range of benefits for the bank as well.
Banks then, need to decide where is the best area to focus their resource. Bank data can be used across so many functions from compliance, risk, fraud, back-office, product development, digital transformation and more, but requires focus and resource.
As new propositions are brought to market it is important for finance houses to remain competitive by being adaptive to new tech. Agility, most often considered when talking of FinTech’s, should be a watchword in the new Open Banking environment. The Open Banking Implementation Entity (OBIE) in the UK continues to implement new updates as part of its product roadmap and this should be another key consideration for banks.
Over the course of this article, I have sought to outline how the opportunity for those with the vision, is currently presenting itself.
We recognise that for both industry and consumers many questions remain.
Enough progress has been made to know that the direction of travel is clear. Open Banking and the use of bank data is here to stay.
Since introduction in 2018, banks and financial institutions have made significant progress and, I argue, most have achieved ‘account aggregation’ status. As listed above, real gains can be won by thinking strategically about how bank data can derive value.
For customers, awareness of open banking and how they can benefit from the new reforms remains low. While account aggregation remains a nice to have, most customers are wary of dipping their toe into the water until real benefits incorporating convenience and savings are seen. It is therefore for financial providers to provide that onus, potentially by working with third parties to develop new services from which both can benefit.
The opportunity is there to be grasped.