Open banking ushers in new world of personal finance
Launched in 2018, open banking is a government-backed initiative which – along with the second Payment Services Directive (PSD2) – set out to change the way consumers can share their financial information among financial service providers, aimed at stimulating competition and encouraging innovation. However, despite the promise of delivering new products to help people manage their finances better, only one in four people was aware of open banking, one year after its launch.
What lies behind the promise of open banking? In the old world of personal finance, banks were of the view that the data they held on their customers was proprietary to them, enabling them to sell financial products exclusively through their own channels. This effectively created a banking monopoly and one which did not necessarily operate in the interests of the consumer. After all, no bank can claim to offer the best of all products at all times.
Open banking set out to challenge this outdated view and to break banks’ stranglehold on customer data. It enables authorised financial service providers to access and analyse an individual’s spending and saving habits securely (but only if they are given permission to do so by a consumer). This opens the door to a whole raft of new offerings as more innovative competitors take slices of the pie previously owned by large banks with dominant market share. Added to this, the introduction of open banking came at the same time as a growing cohort of fintechs started to make headway in collaborating with more established banks to provide better, faster, more intuitive apps for everyday banking and finance management.
As a result of this quiet revolution, consumers now have at their disposal a far greater selection of tools and apps to help them take control of their finances. And the removal of ‘friction’ from banking has enabled customers to get the best products for them from whoever offers them, without the need to switch bank accounts.
What does this new world of finance look like? For a start, it can change the way you spend. For instance, Klarna enables you to pay later for purchases made online (after 14 or 30 days) but prevents overspending by analysing what you can afford. It also offers the ability to split the cost of purchases over equal monthly payments. And the roll out of PSD2 means that banks are now integrating third party services. This allows account holders who opt-in to share their purchase data with chosen retailers who can then reward them with loyalty points, discounts and cashback. As an example, Yoyo Wallet enables customers to pick up loyalty points in store as they pay with their device or payment card.
It can encourage you to save more regularly. Chip is an app which plugs into your bank account and works out how much you can afford to save, based on your spending habits. It then automatically sweeps excess cash into your Chip account every few days, with the typical sum saved being £20. It also ensures that your account does not drop too low, meaning that you risk missing any regular payments. Tandem works in a similar way by rounding up all purchases made on a card to the nearest pound with the option of making regular additional weekly or monthly deposits into its savings account.
Open Banking can help promote financial well-being by helping you keep on top of all your outgoings and create budgets. Mint, for instance, enables you to keep all your bills in one place and will alert you to any upcoming payments and helps budgeting by hosting details of your outgoings and available funds in one place. Similarly, MoneyHub taps into your bank accounts to provide budgeting tools and insights into expenditure. Monzo, with its now familiar hot coral card, helps consumers keep track of all transactions, notifying them when and where they took place and providing an overview of spending habits. It can also help people switch utility providers to secure a better deal on bills as well as secure better deals on foreign currency exchange with its promise of no fees and no mark-up exchange rate. This can introduce significant savings: independent research from YouGov and Consumer Intelligence estimates that the average Brit will rack up losses of nearly £17,000 to bad exchange rates over their lifetime.
When it comes to saving for retirement, apps like PensionBee can help. During an individual’s working life, they might contribute to several pensions. PensionBee allows them to combine all old pensions into one place and transfer them to a new plan which can then be managed online.
While encouraging good financial behaviours, part of the promise of open banking is a much easier flow to financial transactions. However, if left unchecked, this reduced friction can inadvertently lead certain customers to lose control of their finances and spending habits. This in turn can be damaging to overall well-being as concerns over money frequently cause mental stress. However, financial institutions are now taking steps to prevent this too. For instance, Barclays recently reintroduced friction into its mobile banking by adding alerts when customers make repetitive transactions on habit-forming activities on gambling and gaming sites.
Open banking has been slow in gaining momentum, after all, inertia frequently typifies consumers’ relationships with their financial service providers. Security fears also pose concerns for many, particularly given high-profile data breaches (British Airways, Equifax, Uber and O2) and IT failures amongst high street banks.. Despite mobile banking applications being extremely secure, user vigilance over the privileges granted to mobile apps will continue to be essential and trust is vital. However, as more people are converted to the benefits open banking can bring and embrace the innovation it seeks to promote the more it will be recognised as the foundation of modern financial services. And as traditional banking entities see their customers migrate to fintechs and challengers, they in turn will be forced to evolve or risk extinction.
Daniel Meere is UK managing director of global management consulting firm Axis Corporate