Open Banking: once in a generation opportunity?
Open Banking represents a once in a generation opportunity to transform the quality of information provided to consumers and enable them to take more control of their personal finances. But will it succeed?
By Ian McKenna, DigitalWealthInsights.com
With 40% of UK working age adults having less than £100 in savings, as identified last year by the House of Lords Financial Exclusion committee, there is a clear need to help consumers better manage their money. In 2015 a study by Able Skills identified the ability to create a budget as the number one thing British consumers wished they had learnt at school but did not.
There is no shortage of fintech apps available to help consumers take more control of their money. Services such as Bean and Chip use what have previously been known as personal financial management tools to provide a host of benefits for their users and help them avoid unnecessary additional expenses. Even smaller financial advice firms are also now able to offer their clients such personal financial management services either via practice management software suppliers like Intelliflo and True Potential or stand-alone client portal providers like Moneyinfo.
Banks may have good reason to be fearful of the impact of Open Banking. Recent research by Bain & Co of over 4,000 UK consumers identified that 63% of banking customers are willing to share information with another bank aggregator or fintech if it helps them get a better deal. This figure gets even higher for younger and more affluent customers, who generate a disproportionately high percentage of banks’ profits.
The more personalised insights fintechs and others can now offer could have been made available by banks for many many years, but giving customers better information, such as how to avoid going overdrawn and making their money last until the next payday, could hurt bank profits. In practice banks want customers to run out of money just before the end of the month, so they take expensive, but low risk, credit. This is a stark conflict of interest.
It may be better for consumers to obtain Open Banking services from their savings or pension providers, or even their financial adviser. Any organisation involved in savings needs to help clients make sure they have enough money every month to afford their contributions.
Whilst Open Banking is pressing ahead under the close scrutiny of the Competition and Markets Authority, sadly the same cannot be said for the parallel project in long term savings, the so called Pension Dashboards. After making significant progress in late 2016 and early 2017 with two prototypes having been successfully created in just a few months, the project was moved out of HM Treasury to the Department of Work and Pensions.
There it seems to have lost its momentum. A command paper on its future was due to be presented to the House of Commons in March, but this appears to have slipped into Q2. Frank Field MP of the Work and Pensions Select Committee recently advocated the pension dashboard should only be available from the new single guidance body, putting the new consumer body on a collision course with the investment and financial advice firms that will pay the quango’s bills, before it even opens for business.
Under the Treasury regime there was a clear requirement that the project be delivered using a federated approach so that any organisation that could demonstrate suitable credentials could provide dashboards, in the same way as any firms with the Account Information Service Providers (AISP) regulatory permission can provide Open Banking services. Delivering a service only available via a, yet to open, government help service would severely constrain consumer choice and miss a golden opportunity to give customers better access to their savings information.
The pensions dashboard project is rapidly assuming the characteristics to be the next failed government IT project with a telephone number size bill being written off by taxpayers. When originally conceived, as part of the Financial Advice Market Review, it was to be funded by the pensions industry. If pension providers and advisers are to be denied access to the service, how can they be asked to pay for it? So will the cost fall back on the public purse?
The FCA have, in the AISP permission, implemented regulations that could also be used to ensure all organisations providing pension dashboard services have suitable bonafides. If the DWP do go down the single dashboard route I would expect to see pension organisations build their own collaborative service. Further work has been done since the original prototypes were built by insurer-funded fintech Origo who have a service ready that could be rolled out in just a few months. It would be important for insurers to allow competitors to emerge so as not to fall foul of competition legislation.
Rather than treating consumers banking and savings separately, the pending failure of the pension dashboard project should be used as a stimulus to expand Open Banking to deliver a holistic picture of a consumer’s personal finances. This would be a real benefit to taxpayers and be a great example of the UK’s fintech leadership capability.
Ian McKenna is the Director of the Finance & Technology Research Centre, founder of DigitalWealthInsights.com and was an Independent Member of the HM Treasury Pensions Dashboard Steering Group