In this guide we'll look at what Open Banking means for customers and how they can benefit from the data sharing it provides.
As well as this, we'll also look at the problems that have emerged and ask whether Open Banking is fulfilling its potential.
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What is Open Banking?
Open Banking came from a European Parliament directive in 2015 known as PSD2. While that's a wide-ranging directive, the most important element for this guide is the opportunities for data to be shared between different providers.
For customers, this gives them a more comprehensive view of their finances and allows fully protected integration with third-party tools such as budgeting apps.
The Competition and Markets Authority (CMA) ruled the biggest banking groups in the UK would have to allow licenced third-party companies access to their data, and this came into force in January 2018.
It's worth pointing out that, while the CMA ruling only applies to the nine biggest banks in the UK, PDS2 applies to account providers of all sizes.
What's happened so far?
We discussed the ruling back when it first came into force in 2018, but we pointed out at the time that several providers were running behind schedule.
Allied Irish Bank, Danske, Lloyds, Bank of Scotland, Halifax and Nationwide introduced customer data sharing on 13 January 2018. However, HSBC, Barclays, Santander, Royal Bank of Scotland and NatWest all missed that deadline and were given extra time to comply.
Part of the problem with the Open Banking revolution is that banks obviously want to use the opportunity to benefit their systems rather than simply allowing third-party apps, many of which charge their own subscriptions, to benefit from data sharing.
So, after trialling their platform in October 2017, HSBC launched their Connected Money app in May 2018 which allowed customers to view their accounts from 21 participating institutions.
Lloyds Banking Group followed in June 2019, bringing savings and credit card accounts from within the Group together inside their banking app.
Also hampering the success of Open Banking is the decision by some major banks not to allow access to elements like savings accounts and credit card balances to third-party providers. Permissions on these have also been reversed in some cases when payment functionality has been removed from accounts as Open Banking regulations are implemented.
So, we had the bizarre situation where customers before August 2019 could access RBS and NatWest savings accounts within apps like Emma and then the functionality removed due to the banks changing things on a technical level. Emma appealed to the Financial Conduct Authority (FCA) but, at the time of writing, this issue still hasn't been resolved.
It seems the battles around Open Banking are taking time to resolve, and the transparent system is was designed to create hasn't yet emerged as providers protect their own interests.
Who's involved?
As of January 2020, there are more than 200 providers signed up to Open Banking. These are all listed on the official website, but we've listed some of the prominent ones below.
Account providers (banks and building societies) include:
- Bank of Scotland
- Barclays
- Coventry Building Society
- Halifax
- HSBC
- Lloyds Bank
- Marks & Spencer
- Metro Bank
- National Westminster Bank
- Nationwide Building Society
- Revolut
- Sainsbury's Bank
- Santander
- Starling Bank
- Tesco
- Co-operative Bank
- Tide
- TSB
- Virgin Money
- Yorkshire Building Society
Along with this, numerous third-party providers have been regulated by Open Banking, and they're able to offer services under the regulations. Although many of them are highly business focused, these are some of the popular customer-facing ones:
- American Express
- Clear Score
- Cleo
- Emma
- Flux Systems
- Intuit Quickbooks
- Spendee
- Tandem Bank
- Yolt
- Zeux
These providers offer different things including budgeting apps and payment services, but they rely on the power of data sharing and the Open Banking principles.
Benefits of Open Banking
For customers, the major benefits of Open Banking come from the data sharing opportunities which can give customers greater clarity over their finances and help towards their decision making.
These benefits include:
- Single view of accounts in one place
- Personal finance management
- Debt management tools
We look at each of these in more detail below.
Overview of accounts
A major element of the Open Banking initiative is to allow customers to see all their accounts in one place. The reasoning behind this is that it gives them a more comprehensive overview of their finances and this leads to better decisions (see below).
As we've noted, however, this has been beset with problems, and there's no guarantee that signing up to a third-party service will give a customer visual over all their accounts. Nor are banks' own apps necessarily able to import that information themselves.
This means that one of the key tenets of the Open Banking revolution isn't being fulfilled, although third-party applications are still able to offer overviews of current accounts and many savings and credit card balances.
Finance management
Open Banking is designed to enable customers to better manage their finances by providing the overarching view of their accounts as discussed above.
So, budgeting apps like Cleo, Wally, Bean and Money Dashboard work on the premise that users can look across the spectrum of their finances and see where their money's going.
On a basic level, these apps allow users to see which places they're spending the most money so, if they have an expensive takeout coffee habit, the app will show that and likely nudge them towards curtailing it.
Larger amounts can be saved by looking at the subscriptions a customer has. Often, seeing them all in one place and recognising how much they add up to every month can encourage customers to cancel them. The perennial example for this is the unused gym membership, but there are plenty of others like magazine and streaming subscriptions.
In conjunction, all these features of budgeting apps allow customers to see their overall incomings and outgoings, along with how they can be altered.
It isn't only third-party operators who are getting into finance management options, with many banks offering spending and budgeting tools within their own apps. This is especially true of challenger banks like Monzo and Starling Bank.
NatWest took it one step further when they launched Bo in November 2019. It's a prepaid card aimed at younger customers and includes the ability to separate money into piggy banks in the same way as Monzo offer pots for their customers.
However, despite being backed up NatWest's banking licence, Bo is still only a prepaid card which doesn't allow salary pay-in or direct debit functions. That makes it less functional than some of their rivals.
Debt management
Another notable function of many third-party apps is the ability to show customers how much they're losing in banking fees, especially overdraft fees.
Apps can provide overdraft alerts in the same way banks are now mandated to, and since these come via the app, they may be more useful than bank notifications.
Some apps will also recommend different overdraft products and provide tips on how to obtain lower interest rates and overdraft rates.
It's worth remembering, though, that apps are not necessarily showing customers the best deals for them and may recommend products that potentially aren't suitable. Checking loan deals via independent searching is still the best option for impartiality.
Is Open Banking secure?
One of the major concerns that emerge when customers are thinking about banks sharing data with each other and with other third-party providers is how secure the services are.
The first thing to note is that every company enrolled with Open Banking is regulated in their own country, meaning the FCA in the UK.
That's why before any bank or app asks you to share information about current accounts, savings or credit cards, it's important to search on the Open Banking or FCA websites to check if a company is legitimate.
Users have to explicitly consent to share their data with any app or organisation, and they'll be redirected to their bank or building society to ensure the authorization process is complete and secure. So, this is very much an opt-in process and there are hoops to jump through before accounts can be visible anywhere else.
In addition, all companies enrolled in Open Banking must comply with all relevant data protection laws, and there will be strict fines for any company breaching them. Under General Data Protection Regulation (GDPR), companies can be fined 4% of their turnover if they don't take their data protection responsibilities seriously.
There's more about the safety of mobile banking apps in this guide.
Is it working?
The hurdles we've mentioned in this guide are likely to be resolved, although whether that happens rapidly or not is dependent on the banks themselves and how effectively the regulator enforces the principles of the Open Banking revolution.
There's a behind-the-scenes Dispute Management System that can help mediate between Account Service Payment Providers (ASPSPs) and third-party providers (TPPs) to resolve disagreements between providers, so hopefully that will help to smooth out any wrinkles developing in the system.
Perhaps a more important question would be whether the functionality offered by Open Banking is making a difference to the way people view their finances, and that's rather more difficult to analyse.
Although the Financial Ombudsman Service (FOS) publishes details of complaint figures about different types of financial products, there is no separate category for Open Banking disputes yet, possibly because they're covered by various other categories. This can make it difficult to see if the system's working.
However, it is interesting to examine the complaint figures for the products and services Open Banking purports to make more transparent, to see if the need for Open Banking is as acute as its supporters suggest.
So, for Q1 2019, the most recent data entry in FOS's searchable records, there were 5,076 new cases related to current accounts, and 48% of resolved cases in that period were upheld in favour of the complainant.
For overdrafts/loans, the figures were 1,549 and 28%, while 2,730 and 36% were the figures recorded for credit card accounts.
It's clear from the complaint numbers being upheld that there's an argument to be made for the kind of choice advocated in Open Banking. It would be safe to say, though, that we haven't reached the point yet where Open Banking is working as well as it should.
Looking to the future
Customers are demanding more choice and transparency from all the services they use, and the financial sector is responding to this. For example, the ability to switch current accounts is being highlighted more frequently, although the figures switching still remain low.
Banks are obviously keen to keep their customers, leading to them working within the rules to limit how much access third parties can have to their data. As these situations resolve, we might see more competition emerging and more people taking advantage of Open Banking.
There's the expectation that Open Banking in the future will provide opportunities for companies to enter the financial sector who we might not readily associate with financial products and services.
This can be viewed as a positive move, enabling further competition and allowing customers to choose the best deals around while making informed decisions.
However, it's important that customers are engaged with Open Banking and understand what it means and how it can benefit their finances. Without those benefits being more effectively conveyed, the revolution promised by Open Banking will fail at the crucial hurdle - helping customers make more informed choices.
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