One of the frustrations about the UK banking sector is that customers so rarely switch their accounts - just 3% of personal and 4% of business accounts move in any given year. That annoys banks, since it limits their ability to grow the business by poaching customers from their rivals. It also annoys regulators, since it allows incumbent banks to get away with less than optimal service and products since they know how few people will move on.
To try to force the issue, the Competitions and Markets Authority (CMA) published a report earlier this month, “Making banks work harder for you”, which set out a range of initiatives to get more bank accounts on the move. Right at the heart as a foundation measure is an open banking standard.
The idea is to do with banking data what has been done elsewhere - develop open APIs that allow authorised intermediaries to access information about bank services, prices and service quality and customer usage. The expectation is that customers will be enabled to manage accounts across multiple providers from within one new application; that new services could identify best-in-market products and services, just as already happens in other sectors like travel and insurance; and that customers could dynamically switch accounts to take advantage of better prices or to avoid charges.
A warm welcome has been given to the propsal from interested parties like the Open Data Institute, which commented: “Open banking offers huge financial value for the banks and fintech companies as they become more efficient in their interactions and, in turn, are able to offer customers what they need, when they need it. Building trust, increasing efficiency and open innovation in the banking sector can only be achieved when the banks, start-ups, consumer groups, and regulators work to a common goal.”
Anyone who uses an app to plan or manage a journey around London knows how Transport for London’s wholehearted adoption of open data has created an entire new eco-system of services for travellers. Likewise, the ability of Uber to position itself as a technology platform (rather than, say, a licensed taxi operator) depends on APIs to share information securely.
On the issue of data security, some parties have warned about the potential risks that could be created. According to Jes Breslaw, director of strategy at Delphix: “The opening up of customer data for use via APIs could offer huge opportunities to both banks and consumers alike. However, this brings significant questions on security during a climate of ever-increasing data breaches. In fact, the banking API brings out how reliant on secure data these new innovations really are. The applications that will leverage these APIs will require rigorous development and testing using real customer data from competing banks. How this will be done has yet to be seen.”
Like any data-driven technological advance, open banking will need to go through a proving stage and make big efforts to reassure users about security. Only then will the expected value creation start to happen as increased switching brings better competition. In the last decade, customers have clearly voted in favour of mobile banking over branch-based visits. The next question is whether they will also vote with their feet if the process becomes easy and safe enough.