Competition within banking is almost non-existent. Limited incentives to switch discourage customers from embarking on the journey to a new bank account, but this is all about to change.
Traditionally, banks have guarded their customers’ financial information but after the UK Competition and Markets Authority concluded that the financial sector was experiencing stagnation in 2016, they introduced ‘Open Banking.’
What is Open Banking?
As of the 13th of January, the nine biggest current account providers in the UK and Ireland must make their customer’s financial data available to other approved banks and financial services. Don’t worry - it’s not as bad as it sounds!
By releasing your data, FS providers will be able to advise you on the best way to handle your finances based on your financial history. This data currently includes current account transaction history but could see developments over the coming months/years.
Crucially - your data will not be shared without your authorisation.
You data will be shared, with your permission, securely to other FS providers. This could include budgeting services, finance analytics providers or an app that allows you to manage all your finances in one place.
EU regulation PSD2 also mean that banks will no longer withhold their API’s from merchants or non-bank service provider. What this means is that when you buy a product from Amazon, for example, Amazon, with your permission, will be able to access your account data and make the payments for you.
This directive will encourage financial partnerships between established banks and fintech startups, fuelling innovation; stronger identity checks and can eliminate hidden fees.
Why do we need Open Banking?
Drive Competition: Currently, banks and FS providers do not put much effort into attracting or retaining customers.
But,since many people are still with the same banks they initially joined as youngsters, why would they? Previously, your financial data has been closely guarded by your banks. This prevents customers in understanding if they are truly using the best finance provider.
Think about it. When you pick a mobile plan, you take into account how much and what you use your mobile for. Plans are varied to suit specific types of users - not everyone, and this is the same with your finances.
With access to your financial data, banks, FS providers and, eventually, comparison websites will be able to advise you on providers best suited to you. This will encourage banks to offer more competitive products and services to rival their competition.
Encourage Innovation: Fintech startups, like Revolut, Monzo and Bean, are already demonstrating the type of competitive services banks should offer - and this is using very limited financial data. Monzo, for example, breaks down spending into categories so their customers can grasp where their finances go each month as well as assisting budget.
Over the coming months, we are expecting to see masses of innovation within fintech. As new,
fairly unknown banks begin to rival the financial giants, big banks will be forced to review their current services and consider what innovations they can introduce to retain their customers as well as attracting new ones.
Assist Smaller FS and Banks Gain Exposure: Traditionally, a few major banks have dominated the financial landscape. Limited exposure and customers’ reluctancy to switch has enabled this system to prosper, but open banking will dramatically alter this.
Comparison sites will be able to advice and direct you to banks that are best suited to your financial, regardless of their size and exposure.
What do I need to do?
As of 13th January, you'll be able to share your data for any of the payment accounts you hold. This will grow to include current accounts, credit cards, prepaid cards and some savings, though Open Banking will just be for current accounts, initially.
What are the Negatives?
Whilst there are many positives to Open Banking, there are negatives, but these can be easily avoided by remaining alert and vigilant.
Stolen Data: Making your data available to multiple FS providers makes it more difficult to track who is at fault if your data is stolen. Open Banking requires customer to trust that API’s are secure and banks to ensure their security measures are up-to-date. There are plans in place to whitelist relevant companies that can have appropriate security measures in place.
Scams: As with many updates within finance, Open Banking could introduce a new breed of scams. With the goal of stealing your personal or financial information, scammers could use the disguise of Open Banking to encourage people to share their personal information or access to it. This can be easily prevented by using the Financial Conduct Authority's (FCA) Register, and the Open Banking Directory to validate sources.
Whilst some banks have missed the January 13th deadline, Open Banking is certainly something financial customers could consider. Open Banking will encourage innovation and competition across the financial industries. Established financial providers will need to consider what products and services they can introduce to stay relevant and withhold a satisfied customer base.
Emerging technologies are at the forefront of financial innovation. Many fintech startups utilise tech, like artificial intelligence, to enhance the services they offer and win over new customers. To discover how your business can utilise emerging technologies to improve your current offerings, get in touch with one of our technology experts today!