Last week saw the introduction of the Open Banking system, a new regulatory regime that has the potential to transform UK banking. Since then a whole host of concerns have been raised, including by some of the incumbent banks, who fear increased competition from the challenger banks and more empowered customers.
Open Banking ensures that banks allow third parties to access the data of customers who authorise it, which – in turn – will facilitate innovations and developments in new mobile and internet payment services.
For consumers, the implementation of these new rules promises to deliver a range of benefits and make the whole experience of managing their money more convenient, with better digital banking capability, more targeted and appropriate products and potentially better deals.
For banks and the wider financial services industry, the new rules are seen as both a threat and an opportunity. To date, a lot of challenges have been highlighted and, as with any major regulatory change, concerns have been voiced. First of all, there have been technical challenges in ensuring that banks’ internal systems are ready for data sharing. A number of UK banks have found this difficult and have been given an extension to implement Open Banking capabilities. There are also concerns about the security risks from sharing data and the potential that greater automation could lead to increased fraud.
Perhaps the most substantive issue for the industry, however, is the impact this will have on market competition. Open Banking has the potential to cause significant disruption and threaten the dominance of established players. Some banks will consider their business models under threat from the emergence of new payment and fintech providers, particularly if these weaken the banks interactions with their own customers. Open Banking may see the emergence of a more consumer-focused approach to banking, with the usability and functionality of new smartphone apps becoming more important to customers than the traditional aspects of banking. Banks themselves may become more like utilities, with customer interactions limited to routine and mundane issues, such as complaints. Greater competition and easier account switching could also make it harder for high street banks to retain retail deposits. As retail deposits become ‘less sticky’, it may present banks with prudential risk issues.
Yet, for all these risks and challenges, Open Banking has the potential to transform UK banking for the better. While the greatest opportunities will lie with challenger and specialist banks, there are opportunities for all banks to benefit from understanding their customers better and offer more appropriate products. The greater sharing and availability of customer data will undoubtedly lead to more accurate credit scores and risk profiles, which will lead to more tailored lending and ultimately better outcomes in terms of risk management. This could, for example, bring innovations in specialist forms of consumer credit, particularly those aimed at consumers who struggle to obtain finance from mainstream sources or ‘prime’ lending. With increased levels of access to personal financial data, it may be possible for specialist lenders to provide new types of ‘smarter’ lending products to these consumers, that are better catered to their needs, less risky and less exploitative.
Open Banking could also deliver big improvements to debt management, which would be significantly beneficial to consumers and the industry alike. By allowing creditors to have a complete and accurate view of a consumer’s circumstance and credit commitments, a fairer and more equitable system of repayments could emerge – in which all creditors receive their fair share. For example, an accurate view of a consumer’s financial profile would take into account issues such as irregular income (a common driver in loan defaults and debt management difficulties). This more comprehensive view of customer data could also extend into banks conducting closer scrutiny of consumer spending habits – and, in some cases, making recommendations to limit luxury expenditure (for example, there may be recommendations for cutting Netflix, Sky and Amazon Prime subscriptions). This scrutiny of personal spending habits may not be welcomed by all, but overall, such a system would be significantly less stressful for over-indebted consumers and ultimately more profitable for creditors in the long term.
Open Banking has the potential to be one of the most significant market developments in recent years and could even prompt a cultural change in retail banking. While some of these changes may not take place overnight, those banks that are quickest to embrace the Open Banking revolution and the innovations it facilitates could be the ones that stand to benefit the most. Those that fail to adapt to the new market risk becoming footnotes in history.
Mark Somers, Chief Operating Officer at 4most