In August 2016, the Competition and Markets Authority (CMA) issued a ruling requiring the nine biggest UK banks (HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske Bank, Lloyds and Nationwide) to give direct access to their data, down to the level of individual account transactions.
The direction came into force on 13 January 2018 using standards and systems created by Open Banking Limited, a non-profit created specifically to provide access to and guidance on the requisite technology.
This increased transparency should mean better bank deals for customers. Other innovations to encourage customers to improve their financial wellbeing are seeing all individual finances in one place, budgeting more easily and finding the best shopping deals – all with the click of a button. For product and service suppliers, the spoils are even greater – imagine getting instant access to countless people’s shopping and spending habits, in near real-time.
As the CMA intends it, open banking should solve a number of problems – multiple savings sources, consumer inertia producing bad deals and lack of financial consolidation making advice more complex and expensive – all remarkably similar to the challenges the pensions sector is tackling through its pensions dashboard.
Open banking technology uses an application program interface (API) – an open set of routines, protocols and tools for building software applications. It works just like messages – a website or app sends an information request to your bank or pension provider and it replies with the data. At the last count there were 67 regulated API providers, made up of 44 third party providers and 23 deposit account providers.
Lessons to be learnt
We’re starting to see the first results now, since open banking came on the scene 18 months ago, and there are lessons the pensions industry will want to take on board when it launches its pensions dashboard. Unsurprisingly, one of the major early criticisms has been the big banks’ poor performance in delivering the required API messaging. Slow responses, including failed or error messages, and otherwise failing to support the necessary infrastructure are turning customers off, as their user experience isn’t delivering the promised functionality or benefits.
Big banks are finding that the strain of open banking and its technological pressures is only adding to the legacy infrastructure problems they’ve wrestled for years – and the pensions industry can look forward to the same, having to continue using old, outdated technologies because wholesale change simply costs too much. Smaller challenger banks, which have newer, more innovative technology, aren’t facing the same obstacles as the bigger banks.
In its bid to benefit customers by liberating the banking market, open banking has invited a range of innovators into the sector to prompt consumer behaviour and thereby generate better deals. The first tranche of new applications focused on aggregation, with Money Dashboard fast gaining a million users just one example of operators quickly expanding in this space.
However, those applications designed to lower consumer costs or provide access to cheaper products have been less successful, or more slowly so. For example, a solution to the problem of high borrowing costs caused by unauthorised overdrafts, by SafetyNet Credit, provides an automatic line of credit when customers near their authorised overdraft limit, but, so far, there’s little evidence as to whether it’s made any real difference. As open banking is showing us, consolidation alone isn’t enough to drive behaviour changes; we need real, practical applications that can automate, simplify and transact real-world events.
Aims and pitfalls
Undeniably, open banking is meeting many of its original aims – such as personalisation, innovation and greater personal control – but its predictable technical hurdles are making it harder for larger providers to keep pace. In terms of products to benefit customers, development is complex and slow, and many practical applications are yet to be implemented.
Open banking is incredibly similar to the pensions industry in terms of its aims and challenges – it’s the perfect parallel for predicting how successful the pensions dashboard will be – and anyone ignores its lessons at their risk.
Daniel Taylor, Client Director