‘Open banking’, which came into effect in January 2018, is a series of reforms which will change the way banks deal with consumers’ financial information. Called for by competition watchdog, the Competition and Markets Authority (CMA), it stipulates that the CMA9 – the eight largest banks in the UK (and building society Nationwide) – will allow their customers to share their financial data, such as spending habits, regular payments and companies they use (so their bank, credit card or savings statements) with authorised third party providers – as long as they give their permission[1].
The logic behind these changes is that it will encourage more competition and innovation within the financial services industry. In turn, it is hoped, this will lead to a wider range of better products and services for customers to access and enable them to manage their money more effectively.
As far as the competition and innovation that open banking is driving, the obvious opportunities are for fintech companies and other banks. Indeed, already new apps that improve budgeting like Yolt, or allow customers to consolidate all their bank accounts into one app such as Bud, are being created using data mined from open banking and many more will inevitably launch in the future.
But what opportunities does open banking present for responsible finance providers? By gaining access (with consent) to parts of a customer’s financial history/data, responsible finance providers could, in theory at least, use that data during the loan application and decision-making process. For example, open banking could enable speedier, more automated lending decisions for responsible finance providers by providing them with all the necessary customer financial data with just a few clicks of a button.
Other areas of potential use include understanding affordability and creditworthiness. If a responsible finance provider was granted permission to see, say, the last 3-6 months of a customer’s financial records, they could more easily pick up on whether a new loan will be affordable, or whether there are existing patterns of unsustainable debt. This could help ensure that the customer gets the right support at the right time.
Of course, ‘in theory’ means just that. As it currently stands, open banking is an exciting concept with a great deal of potential, but it is also in its infancy and many of its core elements still need to be developed further before they become reality. Moreover, considering the reluctance, pushback and concerns of the CMA9 over the implementation of open banking’s proposed regulations, it is difficult to say just yet how, if and when a ‘final’ version will materialise and what this will look like.
Indeed, on the topic of ambiguity, a general lack of clarity over open banking is still a major concern. Despite being launched in January 2018, it is to many people, even within the finance sector, still a relatively obscure concept. Furthermore, while the above scenarios are all plausible ways in which open banking and responsible finance providers could join forces, there remain valid concerns over the use – or perhaps even misuse – of data, and customer understanding of what they are signing up for.
For example, by sharing their data, a customer gives a third-party provider access to their financial data for potentially long periods of time. This could therefore create issues of data privacy (are they using only that data which is necessary for the service?) and data retention (do they have access to this data for longer than is needed?). Furthermore, open banking currently has the same authentication process and levels of ‘friction’ (i.e., steps needed to complete a financial decision) for all financial transactions. Yet, one could suggest that there should be differing levels of friction for a responsible finance provider offering loans of £200 compared to £2,000 or even £20,000 – how to implement this is another area that will require further exploration.
It is perhaps too early to say that open banking should be accepted with open arms. Nevertheless, it remains an intriguing and innovative concept, with the possibility to change the way consumers interact with their financial institutions. As responsible finance providers continue their mission to increase access to fair finance, and build resilient local economies throughout the UK, it is vital that they also harness the most up-to-date financial technology to do so. As such, open banking – and the products/services it will inevitably lead to – will surely play a key future role in the ways in which responsible finance providers interact with customers; hopefully for the better.
In any case, at its core open banking seeks to improve the lives of customers, providing them with (among other things) greater control of their finances and better money management overall. Therefore, while we can wonder to what extent these aims will be achieved, in principle open banking is attempting to espouse responsible finance practices among consumers. This is a step in the right direction and deserves, at the very least, a respectful nod of acknowledgement.