Open banking: a better tomorrow?

Written by: Chris Menon Posted: 09/08/2018

BL57_OpenBankingWill the advent of data sharing between financial providers really make life easier for customers and small businesses?

The UK launched its Open Banking initiative on 13 January this year, but most people, aside from those in the finance industry, seemed oblivious to it. But now that a little time has passed, it’s worth asking: just what is Open Banking, who might be affected and how? 

Put simply, Open Banking is a system of data sharing where a bank customer (consumer or small- to medium-sized enterprise) consents to sharing their banking data or financial information securely with third parties. It should also allow these bank customers to instruct authorised third parties to make payments on their behalf.

So far, the nine biggest current account providers in the UK – Allied Irish Bank, Bank of Ireland, Barclays, Danske Bank, HSBC, Lloyds Banking Group, Nationwide, RBS and Santander – have been required to release their data in a secure, standardised form, which can then be safely and securely shared with third parties, such as apps and websites. Together, the nine banks are estimated to account for 85-90 per cent of UK current accounts.

Although the 13 January deadline was missed by five of the banks and Nationwide, they have now complied, aside from a couple of small banking sub-brands such as Santander’s private banking subsidiary Cater Allen, which received a year’s extension.

At the moment, Open Banking only applies to personal and small business accounts, but it will be extended during the course of 2018 and 2019 to cover other online payment products, such as credit cards and e-wallets.

The Competition and Markets Authority (CMA) brought in Open Banking with the intention of increasing competition and innovation in retail banking and financial services. There’s also a lot of support for these reforms from consumer groups, new and established banks and building societies, as well as fintech service developers. 

The requirement from the CMA coincides with the EU legislation, the revised Payment Services Directive (PSD2), which requires all EU payment account providers to provide third-party access. The main difference is that, whereas PSD2 requires banks to open up their data to third parties, Open Banking dictates that they do so in a standard format.

A spokesperson for the organisation set up by the CMA to create software standards and industry guidelines for Open Banking explains: “In its simplest form, Open Banking makes account aggregation – viewing several accounts from different banks in a single app or website – easy.

"It should also make comparison services faster and more accurate because they can read your requirements directly from your account, rather than relying on you to fill in necessarily partial forms.”

Opportunity for innovation

While this explains how Open Banking could improve the services we already have, it may also make completely new services possible. 

For instance, Nationwide’s website says: ‘Imagine, for example, that an organisation develops an app that monitors your spending and you let it make payments on your behalf. It could then monitor your Nationwide current account and spot opportunities to save you money, such as clearing the balance on your credit card so you don’t have to pay interest. So long as you say yes, that organisation could even make that payment for you.’

The Open Banking spokesperson says it could even lead to UK consumers getting convenient, affordable advice. Instead of going through the hassle of filling in loads of forms, you’d simply allow a third-party account access and let them do it for you. “Open Banking should give everyone the kind of detailed, sophisticated financial advice that’s usually been the preserve of those willing and able to pay for it.”

Further benefits might be that small businesses could automate routine filings of their accounts and it might make it easier for them to obtain overdrafts to grow their businesses.

To achieve this potential, however, still requires a gargantuan effort from a financial services industry not generally admired for its IT systems, integrity or skilful handling of consumer complaints. 

So is everything in the Open Banking garden rosy? Gareth Shaw, Money Expert at Which?, notes: “Open Banking has the potential to offer consumers more control of their finances and boost choice, but it also comes with potential risks around data privacy and security. Regulators and industry must ensure that customers are properly protected from data breaches and scams, which is vital if consumers are to use these services with confidence and trust.”

There are safeguards for customers. Importantly, you don’t have to share your data if you don’t want to, and you can continue your bank arrangements as usual.

If you do wish to share your data with a third-party provider, it will need your explicit permission before it can access your data. For example, once you give the provider consent to access your financial data, it will send a request to the relevant bank.

The bank will then check that the third-party service provider is authorised by the FCA. Assuming the provider is authorised, the bank will then share your data with the third party. You can revoke permission at any time.
  
Of course, you’d still need to be on your guard, as it’s possible for third parties to get approval surreptitiously, as Katherine Hitchens, a Partner at law firm Babbé, explains: “Although you do have to give express consent for your data to be disclosed, this can still be tucked away in the terms and conditions of the third-party provider, so any such terms and conditions should be read carefully.”

While she acknowledges that the consumer expressly consenting to data sharing “provides some legal comfort”, Hitchens questions whether the consumer would read the full terms and conditions before clicking on the ‘I agree’ button. “Even if they do read the terms and conditions, would they be able to fully understand them, especially if they contain specialist IT references or terminologies?” 

She adds. “One can but hope that the involvement of government bodies in the UK, such as the FCA and the CMA, to regulate the actions of banks and third-party participants in this market will provide adequate safeguards. If it doesn’t, customers will have recourse to the Financial Ombudsman.”

Future direction

Open Banking could herald much bigger changes in the future. Hitchens points out that in addition to the consumer benefits it could bring, it will also “radically change the competition landscape in banking as it forces banks to open up their traditional banking market to innovation and competition from non-banking entities”.

Adam Riddell, a Director at Crystal PR, firmly believes Open Banking is part of a much wider trend, as organisations realise that by embracing transparency they can effect positive change. 

“The UK is a leader in this – in 2015, it was one of only 17 countries to sign and formally adopt the six principles of the International Open Data Charter. We’re already seeing open data used in a variety of ways – Citymapper in the UK helps travellers plan journeys through real-time open data portals, for instance,” he enthuses.

Ultimately, the success of Open Banking will depend on consumers trusting and using the system. Yet, there are inevitably going to be concerns around data privacy, security, and financial exclusion. 

Even regulated firms, where you’d expect the most rigorous security, aren’t immune from cyber attacks, as shown by the Equifax data breach. Moreover, bank account transactions include highly sensitive personal data about spending habits, political affiliations, medical care, family and friends.

Katherine Hitchens also points out that Open Banking, while ensuring access to a wider group of service providers, won’t necessarily ensure that those providers offer them the best deal. 

However, she acknowledges: “In general, the increase in product comparison sites and software should help with price transparency overall”.

Despite this, David Song, Principal, EU Personal Finance Policy at UK Finance, is optimistic about the future.  “The changes could help to open markets that don’t yet exist and encourage new market entrants,” he says. “Some of these new entrants will offer services to assist those in financially vulnerable circumstances. We don’t yet know all of the opportunities that will arise as a result, but we could see huge benefits for customers.”

Yet even he warns that all of these won’t happen overnight. “As with the FCA and other parts of the industry, we see that the development of Open Banking is likely to be a ‘slow burn’.”

Certainly, Open Banking should encourage more competition in financial services. However, it’s a moot point as to whether the advances will come as quickly or be as great as some in financial services profess.

Open Banking in the Channel Islands

According to the Jersey Financial Services Commission, there’s no requirement for Jersey to adopt Payment Services Directive 2. Moreover, a spokesperson admits: “At this stage, the JFSC has not yet begun to consider whether it would be appropriate to adopt PSD2 or another similar legislative regime to require such Open Banking initiatives. We will, however, continue to monitor developments in this area, both within the EU and in other jurisdictions.” 
   It’s a similar case in Guernsey. A spokesperson for the Guernsey Financial Services Commission confirms: “The issue of Open Banking has been much discussed in Guernsey – for example, it featured at the Commission’s 2017 Annual Seminar. Open Banking could be facilitated in Guernsey by the fact that retail banking here is dominated by the same UK clearing banks that are implementing Open Banking in the UK. However, Guernsey operates under its own laws and further work would be necessary to come to any conclusions about the implementation of Open Banking in [the island].” 
   Nevertheless, Katherine Hitchens, Partner at Guernsey-based Babbé, expects international banks operating in the Channel Islands to be able to make such services available to Channel Islands customers in due course. As far as domestic institutions are concerned, she advises: “Care needs to be taken that the Channel Islands, as the UK has already done, provides participants with sufficient guidance and standards to be able to develop Open Banking here. 
   “Given that Open Banking relies on trust, it’s crucial that its framework is sufficiently robust to ensure that consumer confidence is obtained and retained.”

 


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