“Open Banking could generate $7.2 billion by 2022” (PwC)
“73% of people 18-34 said they would try a tech firms credit card, current account or mortgage” (Bain & Co) “69% consumers want their entire financial lifecycle on digital platforms” (MIT Technology Review in conjunction with Oracle white paper)
“77% bankers agree that Open Banking and PSD2 is one of the most radical changes in recent financial services history” (FinTech Futures and TLT white paper)
Since the launch of Open Banking in January 2018, headlines - such as those above - have been rife as to how SMEs, corporates and individual consumers can benefit from the new legislation.
In the first part of our new series, we explored the context behind Open Banking, discussing how it came about and what the intentions were for its introduction.
In this follow-up, we will go on to examine what Open Banking means for individual consumers and SMEs. Within the confines of these pages, we will look at issues such as security, potential benefits, bank switching, financial inclusion, alternative lending, better banking experiences and the likelihood of new financial products coming to market.
Part 1: The Consumer
The fanfare that Open Banking generated on its launch was considerable, but to-date, has not been fulfilled.
Consumer awareness, as to what it is, and how it can benefit them, is low. As of August 2018, a poll by YouGov, found nearly three-quarters, (72%) have never heard of Open Banking.
There are several reasons for this:
- As we explained in the first article, Open Banking is an enabling technology, that is, it requires service providers, banks and FinTech’s to offer a service using the technology.
- Through much of the first year of Open Banking, there was a reticence from banks to apply the technology. This mindset is beginning to change and we are seeing an increasing volume of banks begin to offer their own services, or partner with FinTech’s.
- Having listened for years to messaging around data security, consumers have also been wary of sharing their bank data.
- There is a lack of general awareness in the market as to what Open Banking is and how it works. There has been a plethora of articles that have misstated the functionality around Open Banking, and Open Banking APIs.
- Finally, there has been no overarching or comprehensive feature or product consumers can buy into, in quantities that will take Open Banking over the tipping point and into everyday use.
For a consumer, data security and privacy are key.
The most important thing to recognise from a consumer point of view is without expressly requesting something will happen, it won’t.
Open Banking is opt-in, and opt-in only. At all stages of using Open Banking technology, the consumer is asked if they wish to continue.
Anyone with misgivings or apprehension about using the technology should be rest assured, that unless they give permission for a Third-Party Provider (TPP) to access their financial data, it will not happen.
For consumers that do decide to use Open Banking, a full list of providers (as authorised by the FCA) including The ID Co. and others, can be found on the Open Banking Implementation Entity (OBIE) website.
That said, there are unquestionable benefits for those that do decide to use Open Banking. New apps, technologies and services are coming to market at an unprecedented rate.
At this early stage in the life-cycle of Open Banking, the key development has been around account aggregation. This is the ability to see all your financial products ‘under one roof’ or within the confines of an individual app. This is increasingly being offered by the big banks, such as HSBC, Barclays, and recently, Lloyds Banking Group.
As we move forward, we will increasingly see Open Banking functionality that allows customers to receive bespoke offers. This could see consumers save money by illustrating their creditworthiness and disposable income. Convenience will also be a major factor. The ID Co’s CEO, James Varga explains:
“Anyone who has applied for a mortgage will know what it’s like pulling together the requisite paperwork. It's quite an undertaking – everything from bank statements and pay slips to credit card repayments. Then, once all of this submitted, it needs to be analysed by the bank to ensure that the customer can afford the repayments.
“Now imagine how it might work under Open Banking. While sitting with a broker or mortgage assessor, an applicant goes through Open Banking to give the assessor read-only access to their bank statements. All the information that is required is displayed in front of them in real-time and would allow for immediate decision making. This illustrates a huge saving in time and convenience.”
In a report published prior to the introduction of Open Banking, one argument the Competition and Markets Authority (CMA) put forward for the introduction of Open Banking was to increase rates of bank account switching rates. Currently, this stands at about 3% per year for personal customers and 4% for business customers according to the CMA. The CMA has said customers could save £92 per year by switching.
As Imran Gulamhuseinwala, trustee of the OBIE said in an interview last year:
“People are paying too much for their overdrafts; money is sat in current accounts not earning interest; there's not enough switching.”
As discussed, one of the simplest routes to providing customers insights around their data is through account aggregation. Account aggregation apps such as Yolt offer consumers insights into their financial data and is the first example of how Open Banking can help consumers.
It is what is in the pipeline, however, that is far more exciting.
In 2019 the OBIE will release a new update to Open Banking which will cover credit cards, currency accounts, charge cards, eWallets and pre-paid accounts. In the not too distant future, we expect to see utilities such as water, energy and telecoms added to the Open Banking infrastructure. This will give consumers far richer insights into their spending habits, illustrating where they could save money.
With a vast array of apps connected to the Open Banking ecosystem, consumers will be able to link their mobile service or energy provider. These apps could then collate and analyse the data, then automatically search for cheaper providers and offer them the opportunity to switch.
The OBIE say on their website:
“Open Banking will bring substantial benefits. It gives customers and SMEs greater market choice and greater control over their money and associated data, along with better and easier access to new financial services providers in a secure environment.”
For one to be accepted for a sizeable loan or mortgage, it is likely that we need a good credit history to illustrate we have experience of managing credit. For most people, this starts with taking out a credit card.
What then does an eighteen-year old who wishes to buy a car on finance do? How does a first-time buyer who has only rent payments coming out of their account every month illustrate they are responsible for a mortgage? (even should it be cheaper than the rent!)
These are questions Open Banking can help to answer.
Financial inclusion, as we have explored in previous commentaries, is a serious issue. Fewer people than ever before are working regular 9-5pm jobs, with the gig-economy and zero hours contracts becoming ever more prevalent. There is a huge section of society that is underbanked, or are paying way over the odds for mainstream financial services.
Open Banking can illustrate to a lender creditworthiness and disposable income through the last twelve months of bank data. In the example above of the first-time buyer, Open Banking could evidence a consumer’s history of up-to-date rent payments, thus increasing their likelihood of being accepted for a mortgage.
There are millions that are currently underserved by their banking providers. Open Banking can remedy this.
Part 2: The SME
Satisfaction with Banking Providers
A 2015 study by professional services firm Accenture highlighted the main reasons why small businesses leave their bank is because the products they desire are not available. A similar 2017 study from McKinsey and Co highlighted that five million small business in the UK believe they are being offered a “substandard financial service proposition.”
According to the CMA, the big four banks currently hold an 80% share of business accounts, with a 4% switch rate - even for dissatisfied customers.
These statistics suggest SMEs require two things from banks; access to better and a wider range of services, and ease of switching to a competitor who is offering them.
In a similar vein to the consumer market, business accounts have, to date, been analogous, with little variation in offers. Open Banking can have the same positive impact on business accounts as we will see upon consumer accounts. With the option of switching accounts or moving money to where it can be better serviced, Open Banking will force banks to offer more bespoke deals and offers in order to attract and retain customers. Customer retention, and working harder for each customer will thus become critical for financial institutions in 2019 and beyond.
New Lines of Credit
One indicator of how the banking sector is not currently working is the Bank Referral Scheme, a Government initiative to help SMEs find loans. The project forces banks to refer SMEs to the Referral Scheme should they turn down an application for a loan, which then matches the SME with a broker.
Small businesses can also be hindered in their access to capital, and on some levels, face the same challenges around being underbanked.
Now using Open Banking, SMEs have richer and more diverse set of options should they wish to apply for credit. Alternative finance, particularly in the peer-to-peer (P2P) market has become increasingly popular, with a report from axis corporate, stating:
“The British Business Bank’s report, Small Business Finance Markets 2017/2018 found that while equity and alternative finance recorded strong growth over the course of 2017, the banking sector’s share of lending remained relatively flat.”
Opportunities do arise for those financial institutions that are willing to be creative. By partnering with FinTech’s or other TPP’s, they can enhance customer loyalty and generate new revenue streams – all while benefitting their SME customers. Certainly, banks will have to work harder to retain customer loyalty. With financial institutions of all stripes embracing Open Banking, from banks, credit unions, building societies, P2P lenders and more, the volume of competition will have to offer new and cheaper services to retain loyalty.
James Varga from The ID Co., said:
“I’m really excited to see what new products will be brought to market to help SMEs with their finances. We have already seen – as in the consumer space – cashflow and budgeting apps, but the potential within the business sphere goes way beyond that.
“I’m thinking having all of your accounting, revenue and tax information in one source. Then budgeting assistants can initiate payments on your behalf, transfer money to where it is needed, or gain better rates of interest, and digitally manage payments and invoices. We could see AI assistants, and robo-advisors become commonplace. Ultimately, all of this will work to lower fees and increase competition in the banking market.”
We have already touched on account aggregation from a consumer perspective, and for the SME it is no less important.
With links to accounts, leases, payroll, tax and other liabilities the ability to see a consolidated view of income and outgoings is important to small businesses. One of the biggest obstacles SMEs face is cash flow management, so integrating this information alongside analytics and forecasting tools could give the opportunity to save substantial time and resource.
The above seeks to illustrate, the vast tranche of opportunities that exist within Open Banking, and the benefits that can be brought to both the consumer and SME.
With security and data privacy front of mind during the design stage, Open Banking is a secure method for both consumers and SMEs to save themselves time and expense in their financial habits.
At this time, the primary service we have witnessed being rolled-out by both banks and FinTech’s is account aggregation. While this is no doubt helpful in cash flow planning and savings, better, more intuitive services will bring real financial benefits to both groups.
For the consumer, Open Banking can bring savings in time and expense in applications for credit and loans, help the underbanked and further financial inclusion.
Small businesses could save from having all of their financial information housed together, with the potential for smart assistants to save money. The entrance to the loan market of P2P lenders has added a further dimension for competition.
A big benefit that will help both groups is the major banks will need to work harder to retain customer loyalty. With bank account switching rates still low (the adage is you are more likely to get divorced than dump your bank), Open Banking will bring a plethora of new options and entrants, particularly around access to credit.
Final word goes to the OBIE’s Imran Gulamhuseinwala:
“We are pleased with the steady pipeline of new entrants to the Open Banking ecosystem and are beginning to see some compelling and innovative propositions develop which will ultimately help customers move, manage and make more of their money.
"Some heavyweight non-mandated players have already seen and seized the opportunities Open Banking will bring and we are confident this will continue. Looking ahead, we have an intense programme of enhancements planned and we are working closely with the banks to ensure that customer experience and capability are expanded dramatically in the near future.”