A transformation is occurring in the world of consumer banking. New competitors are entering a marketplace that used to be dominated by a few corporate giants; the most innovative moves are coming from challenger banks such as Starling, Monzo and others who provide specialised financial services direct to consumers. Whether this be Moneybox rounding up purchases and turning this money into investments or the spending analytics offered by apps such as Yolt – these services are becoming ever more popular with consumers, even if they are being offered outside the traditional framework
Consumer banking is being modernised not by the corporate titans who used to rule this space, but by challenger banks and third-party providers that are putting the consumer at the heart of their operations, fuelled by the fact that consumer attitudes are slowly but surely shifting on what they expect from their banks. With an approach that puts the customer at the heart of their operations, these challengers are threatening to undermine the authority of the ‘bricks and mortar’ institutions that have existed for centuries.
The number of account providers is growing and having multiple bank accounts is now becoming commonplace. Customers now have a wider range of options than they have ever had before; customer loyalty is no longer guaranteed.
The Regulatory Framework
The fundamental principle that underlines the Open Banking revolution is a willingness of traditional high street banks to allow their customers to safely share their data with third parties without fear of any potential security breaches. Until recently, this would have occurred through ‘screen-scraping’ - the process of giving companies like Yolt or Chip the login details for your online bank. In a world where the risk of identity theft is so prevalent, it is easy to see why consumers would be wary of such a process.
However, recent action by the Competition and Markets Authority has changed the rules under which banks can share data; high street banks must now allow customers to grant ‘read-only’ access to these third parties. In essence, this means that customers can now hand over the data within their bank statements to these third parties - and have the confidence that this is all they are handing over.
The CMA regulation has been reinforced by the EU-wide directive PSD2, which has similarly mandated that current account providers must facilitate this sharing of data. The intended consequence of this move was to boost levels of competition within the banking market as well as to promote a common European legal framework for the making of payments. However, a further consequence will be to bolster the regulatory underpinning for the Open Banking movement.
There is obviously huge potential here. These regulations have forced banks to underwrite the safety of customers’ bank accounts that have been shared with third party providers (many of which are competitors with those very banks). This added involvement from customers’ traditional banks provides a crucial layer of reassurance for customers who may still have been sceptical of the intentions of the challenger banks despite the fact that most Open Banking companies are regulated by the FCA.
These new challenger institutions can now be presented as a safer and more secure proposition than they ever have been; the very basis of their practice has been given the green light by various governmental bodies and they have jumped through every regulatory hoop that has been required of them.
However, Open Banking is still plagued by one distinctive problem: very few people have even heard of it. Recent research from the Crealogix Group has shown that over 85 per cent of consumers have either never heard of, or are unsure what the Open Banking initiative is and how it will affect them.
Of these, one-in-six (14.3 per cent) are aware of the Open Banking initiative, less than a quarter of this figure were people who had heard about it directly from their own bank or building society.
Small fish in a big pond
Although there is a relative absence of risk involved with Open Banking, consumers seemingly still lack the sufficient education to make informed decisions on the topic. 45.5 per cent of those surveyed were worried about the security of their banking details – whether these be threats to personal identity, data breaches or unwarranted sharing of data with other parties.
What is the root of this inertia? Banks clearly have a vested interest in ensuring that their customers stay put, especially as they are rapidly trying to develop their own versions of these services in house (HSBC look like they will be the first to launch in mid-April). However, this is simply a testament to the fact that start-ups have an edge on the big banks in terms of the speed and agility with which they can operate.
There is no shortage of regulation in this space; consumers have nothing to fear from this movement to modernize the banking system. The key to the success of Open Banking is uptake. In order for the initiative to reach fruition, consumers must embrace the bargain of granting startups read-only access to their bank statements in return for these unique and novel financial services. Given the current state of consumer understanding, it seems that Open Banking is under threat of stagnating not because people are reticent to enter in to such an agreement, but simply because people have no idea that it exists.
Reaching critical mass?
Consumer education is the largest hurdle that faces Open Banking – once people know that the process is safe, they will be far more open to experimenting with the variety of banking solutions that are on offer outside of those offered by the traditional banks. The innovation that could occur is massive – all that is required is for people to be informed of how safe a system this is.
And it is ultimately the consumers who will benefit from this shift – whether this be them having a better understanding of where their spending is going, or that they will have new and useful methods of saving. Not only will this yield control for consumers, but the Open Banking Revolution will save them money.
Jo Howes, Commercial Director at Crealogix
Image Credit: MK photograp55 / Shutterstock