How banks are lobbying to deny everyone the real potential of open banking
This article was written by Mike Kelly and originally published on Linkedin with some spirited discussions and replies.
Open Banking has the potential to change the game in banking and radically improve how the financial system works for people and businesses by giving them (not banks) ultimate control over how their financial lives are managed.
Open Banking hasn’t yet realised its potential because of one key missing piece of the puzzle — the ability for financial apps to automatically move funds around for you when they detect there is a better deal available eg. moving your money to where you earn a better savings rate, shifting funds around to prevent unnecessary penalty charges, or even daily micro investments into Bitcoin.
Lacking this “last leg” convenience with the automated movement of funds is a deal breaker for most customers who don’t want to instruct each movement manually. That’s why it is so key to open banking achieving its potential. It’s what innovators really need from open banking for it to help with moving customers from old finance to new finance.
This automated movement of funds between a customer’s accounts is known in banking lingo as “sweeping” and enabling it in the UK was an explicit part of the Competition and Market Authority’s objectives from the open banking solutions they are mandating banks to deliver.
Naturally, the banks don’t want all the customer benefits from sweeping to be realised because it would put them under increasing pressure to either offer their customers much better deals and fairer treatment, or face customer’s financial apps moving their money elsewhere.
This is why, ever since open banking was announced, banks have been trying to convince the regulators that they should not be mandated to deliver sweeping. And for a few years the banks succeeded at this by scaring regulators into continual delays by telling a completely bogus story about how sweeping cannot be done in a safe way and represents too much of a risk to their customers.
Open Banking was struggling to explain clearly to regulators why these stories were bogus and so, realising the importance to the UK of getting sweeping over the line, I agreed to spend 2020 within Open Banking analysing the risk, showing it is safe for customers, and developing a recommendation for the CMA on how open banking should deliver sweeping.
My work at Open Banking culminated in two reports that went through an extensive industry review process over several months by banks, regulators, fintechs, and consumer representatives.
In short, nobody was able to find fault in my analysis and recommendations — so in July 2021, after reviewing all the consultation feedback, the CMA concluded that the banks should be mandated to offer a full sweeping solution for their customers by the middle of 2022.
When this was announced, it felt like a homerun for the UK — however the opposition to sweeping had not given up! And since myself and many other key people involved in delivering sweeping had moved on from Open Banking, the opposition saw an opportunity to take another shot at derailing sweeping… simply by re-raising old arguments that had already been addressed during the previous industry consultation and hoping nobody noticed.
They should have simply been told no and that the decision had been made. But, puzzlingly, policy folks in and around Open Banking decided instead to let the banks have their way and reargue their case but this time behind closed doors and without proper industry consultation. In my opinion, this terrible decision needs proper scrutiny.
One extremely questionable decision and eight months of bank lobbying later, the UK is now facing a huge step backwards from the sweeping solution that was agreed between the CMA and industry back in July 2021.
The banks and their supporters within open banking are now proposing to water down sweeping by restricting the ways customers will be allowed to use it.
Their proposed redefinition of sweeping aims to prevent customers from sweeping money into any types of payment account that aren’t operated by traditional banks. This benefits the banks mainly in two ways:
- It keeps customer funds trapped within the grasp of the small clique of traditional banks, preventing customers sweeping funds into their accounts with competitive fintechs. Shutting out competition.
- It makes the sweeping experience almost unusable in practice by preventing sweeping to fintech accounts that work as a hub conveniently linking together several of a customer’s accounts.
To better understand the second point, think about a customer that has 8 different accounts their financial apps need to sweep between. In order to be able to sweep between each and every account, the customer has to grant a consent for each connection; allowing the app to move money from one account to the other. The consents would look something like this:
So a customer would have to go through the process of granting 56 consents (28 pairs, in two directions) in order to setup their app for sweeping between those 8 accounts.
As you can imagine, this is not a viable user experience and sweeping would not succeed if restricted to this model.
Now contrast that with the use of a hub account, the consents look like this:
Here, there’s only 8 consents needed; one for moving funds from each account to the hub. No need for additional consent for movements from the hub since its provided by the app itself. It should be fairly obvious why this approach is much more user friendly!
Sweeping to hub accounts is included in what was agreed by the CMA in July 2021, but the redefinition that banks are now lobbying for would rule it out.
