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9 months in, how is Open Banking faring? - Part I

As we enter the final quarter of 2018, it seems a sensible time to take stock of arguably the year’s most exciting development in banking: the introduction of Open Banking back in January. Open Banking was the CMA's solution to the big banks’ dominance of the Personal Current Account market and all the products that hinge off PCAs, granting consumers the right to share their financial data with whoever they like.

There was plenty of government, regulatory and commentator fanfare about a ‘revolution in personal finance’, but what is the reality 9 months in? In this article, I look back at some of the benefits that we were all promised to see if the claims match the reality.

1. Ability to aggregate accounts

We were told that Open Banking would give consumers the ability to quickly, simply, and efficiently consolidate all their current accounts in one app.

For example, if you had a current account with one bank, a savings account with another, and a joint account with a third, you could sign up to a neat piece of software that could combine all this raw financial data – providing you with a quick 'snapshot' view of your consolidated finances in real time.

So, do we have this? There are certainly a number of apps that have successfully moved into this space. Money Dashboard, for example, gives consumers a 'unified' view of their finances and, in September, they announced that they had reached over one million accounts. They have also added ‘gold standard’ digital banks Starling and Monzo in recent months which certainly adds to their caché.

The BBC’s technology strand, Click, recently reviewed the service and gave it a thumb’s up which has no doubt driven traffic. The Beeb even raised the wisdom of sharing your log-on details with a third party. It noted that Yodlee, the company Money Dashboard uses for the purpose, serves most of the major US banks, so is “probably pretty secure”.

Similarly, Yolt, offered by Dutch bank ING, has also been one of the first to fully implement third party access integration across banking and pensions accounts. It has a growing roster of partner fintechs with which it connects ‘in app’. These are helping users look for better energy offers, cheaper international money transfers, and personalised home and life insurance policies.

There are a bunch of others like Acorn and Spendee, but it is perhaps the launch of aggregating tools by the big high-street incumbents HSBC and Barclays that proves that real momentum is building. HSBC's Connected Money app allows customers to see their financial data from accounts held in 21 other banks, including all of their major rivals. Customers can see current accounts, savings accounts, mortgages, loans and cards in one app, so long as they have an HSBC current account.

2. Increasing access to finance

Another anticipated boon from Open Banking was that it would create pathways for more consumers – especially those locked out of credit markets – to access banking services and specifically credit. For example, the ability of a lender to quickly and easily scan a consumer's banking history via Open Banking would enable them to more accurately assess the risk levels of people who may not have been able to access financial services in the past.

A number of companies have taken advantage of the availability of this new open data for affordability assessments. An example is AccountScore, a business-to-business service proving popular with lenders. Rather than relying on credit reference scores and other manual, slow, analogue forms of credit-checking, AccountScore enables lenders to understand the full financial situation of an applicant by harnessing and categorising their income and spending patterns more accurately.

And with a growing regulatory focus on ‘affordability’ judgements, services like AccountScore are likely to prove valuable to credit businesses having to prove the fairness of historic lending decisions too.

3. Reducing the cost of credit

Increasing access, and thereby reducing exclusion, was certainly one wished-for benefit from Open Banking, but what about bringing down prices by unleashing competition and innovation? This was surely the ultimate goal.

The high cost of credit for riskier consumers has been a concern for policy makers ever since credit cards started making in-roads in the 1970s. The laws of economics might insist that risk equals cost, but there have certainly been plenty of examples of bad practice in the industry down the years. The much-derided payday loan is probably top of the podium for that accolade.

The current preoccupation of debt campaigners is the unauthorised overdraft, and rightly so. It accounts for a huge proportion of the high-cost debt held by UK consumers and it is one of the priciest and least transparent forms of credit in the marketplace.

Which?, Citizens Advice, StepChange and others have recently started a campaign to get the costs of unauthorised overdrafts down. But there are also supply-side solutions powered by Open Banking that could have a positive impact.

One such is SafetyNet Credit, which was one of the first businesses out of the Open Banking blocks with a product that could eliminate the need for unauthorised overdrafts altogether. It provides an automatic line of credit that kicks in when the customer approaches the limit of their authorised overdraft facility. In so doing, it provides the extra credit that’s needed at a far more competitive rate and stops customers incurring overpriced, non-transparent, unauthorised overdraft fees.

But what of the security risk? Are consumers content to hand over their log-in details for the promise of cheaper credit? So far, they seem content to do so.

Like Money Dashboard, SafetyNet Credit gets the customer’s consent for ‘read-only’ access to their bank transaction data for a limited period. The quid pro quo is more accurate credit assessments based on full visibility what the customer is actually doing, as opposed to what a credit reference agency says they are doing based on only partial information. This brings default levels and cost down.

4. Personalised Wealth Management

How much you spent last month and what you spent it on is one thing. But what about the tough financial decisions that want to make put your head in the sand, or the oven?

We were told this is where Open Banking's most significant benefits would lie – in shortening nightmare mortgage applications, simplifying pensions, optimising investments beyond rainy day savings: stuff that previously required an expensive independent financial adviser, or a cheaper one tied to a single provider who you didn’t trust.

So what’s the verdict here? There are certainly lots of products out there.

On the mortgage front, there’s a dizzying and growing list of new robo-brokers out there -- Habito, Dynamo, Mojo and Mortgage Gym amongst them. Traditional broker London & Country also launched an online application process late last year.

Each service has a different approach to online mortgage advice, from chatting to a bot on mobile, to using Facebook messenger to speak to a broker, or communicating through WhatsApp. The hope is they give a suitable mortgage recommendation at the end of it, and much quicker. If they’re not using Open Banking yet, they will certainly be eyeing it.

Leading the field in pensions consolidation are companies like PensionBee which is working on integrating with banks and money apps ahead of industry plans for pension dashboards. Its customers are also able to see their live pension balance within the Yolt, which opens access to a further 300,000 registered UK users.

The Government’s pensions dashboard plans were thrown into doubt in the summer with suggestions ministers had decided the industry should fund the set up costs. Nevertheless, pensions remain a big prize for whoever can crack consolidation conundrum via Open Banking.

In investments, companies like Wealthify have recently partnered with Starling to offer ISAs and low cost investments in a number of funds that contain shares, bonds, property and commodities. Similarly, Moneyfarm offers general investment accounts that promise low fees, a range of expert-managed investment options and, crucially, much better value that incumbent investment companies.

Conclusions?

All taken together it's fair to say that Open Banking has realised lots of the benefits that it originally claimed: repatriation of data, more access, more control, more personalisation, cheaper services, and more innovation.

Progress may be slow in some product categories (and particularly the more complex ones) but momentum is building. There were 3 million uses of open banking APIs in July 2018, according to the Open Banking Implementation Entity, up from 2 million in June and just 720,000 in May. There are 67 regulated providers of APIs, made up of 44 Third Party Providers and 23 Deposit Account Providers.

Is it the revolution that Government boasted about in its more immodest moments? Not yet. We have made lots of progress – but we are still long way off the ‘open data economy’ of which Open Banking is seen to be a forerunner.

Update: In response to reader feedback, I added more detail to this article on 26 October.

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Comments: (5)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 23 October, 2018, 15:02Be the first to give this comment the thumbs up 0 likes

Nice post, especially since I've been writing about Open Banking myself: Open Banking Needs A Blockchain Boost

I was shocked to read this passage in your post: "Is the financial benefit worth the risk of handing over your log-in details? People seem content to do so thus far."

MINT and other PFMs have been enabling budgeting and other functionality in return for access to Internet Banking credentials for over 10 years. Open Banking was supposed to eliminate the need for handing over wholesale login details and instead work on the basis of need-to-know info accessed via API-based architecture.  

Any idea why SafetyNet Credit is asking for login details? With such an operating model, how is it even compliant with Open Banking / PSD2?

Ralf Ohlhausen
Ralf Ohlhausen - Pay Practice - Stuttgart 23 October, 2018, 21:39Be the first to give this comment the thumbs up 0 likes When comes the day when people will finally understand the difference between credential sharing and screen scraping? And please note that PSD2 allows credential sharing and redirects, as well as screen scraping and APIs.
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 24 October, 2018, 11:23Be the first to give this comment the thumbs up 0 likes

When comes the day when people finally understand the difference between technology and solution for a business problem / compelling value proposition? If I need to share my credentials with a third party app under PSD2, why do I need Open Banking? I could've got all the functionality touted by Open Banking via MINT et al for the whole of the past decade. For that matter, why do third party apps need Open Banking? They can happily operate like MINT et al without the need for any regulation.

Ralf Ohlhausen
Ralf Ohlhausen - Pay Practice - Stuttgart 24 October, 2018, 11:49Be the first to give this comment the thumbs up 0 likes

Because the EU authorities (rightly!) decided to bring such activities under regulation so that they can get i) security audited before getting the license, ii) supervised on an ongoing basis to ensure that credentials are not abused, iii) forced to obtain a liability insurance, iv) mandated to identify themselves, so that banks can deny non-licensed access, and v) everyone must now use SCA, so that the sharing of static credentials (first factor), which are not secure anyway, is now secured with a second factor.

A 5-click, 5-screens payments flow, redirecting users around web sites, is not a compelling proposition and if TPPs are not allowed to do better, then they can't compete against existing bank-owned APMs of that type.

Originally, it was the whole idea behind PSD2 to secure a MINT type business, not to kill it.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 24 October, 2018, 15:07Be the first to give this comment the thumbs up 0 likes

All these things from PSD2 are nice but they're not of much use for a bank customer when banks / mainstream media warn them about data breaches and urge them to exercise cautious while sharing their data with TPPs.

Even the author of this post doesn't seem to be impressed with these measures since he clearly sees a risk in "handing over your log-in details". Ditto me. As I pointed out here, "as a bank customer, all I know is, if I give consent, someone other than me will be able to get into my bank account." and no amount of assurance will assuage my concerns of unauthorized access. If and when my account is hacked, I doubt if I can turn to EU - even Donald Rumsfeld didn't know what number to dial if he wanted to talk to EU. Especially when my bank warned me in advance.

End of the day, if I share my credentials, it will only be because I get a compelling value proposition and not because of any PSD2 clauses.

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