22nd February 2018
Paul Montague-Smith, a director in Grayling’s London office, looks at whether APIs will be a game changer
Do you like your bank? Chances are you don’t – at least not in the same way as you might like your Netflix or mobile phone. Chances are you’re rather indifferent to it – if you think about it all. You’ve probably got annoyed and perhaps even complained if you’ve faced a hefty charge for slipping over your limit. But never enough to bother moving to another bank, because they’re pretty much all the same, right? And if you’ve got an overdraft, would you get the same facility if you moved?
If that sums up your experience and attitude the statistics suggest you’re in the large majority. Switching rates in the current account market remain stubbornly in the low single figures – far lower than in energy and telecoms. Even with hundreds of pounds of cash rewards on offer for moving your account, you’re likely to stay married to your bank longer than your partner.
As a result – according to the Competition and Markets Authority – there hasn’t been enough competition and customers have been paying too much for their banking, unable to easily compare products and work out if they are getting a good deal. What to do about it has long been a source of debate and frustration in politics and the media.
Core to the CMA’s answer is the introduction of Open Banking, which officially launched last month alongside a new EU Directive known as PSD2. Heavily criticised by the House of Commons Treasury Committee for not being radical enough when it was first proposed, Open Banking is being touted as having the potential to transform the retail banking industry, increasing competition and innovation. So what is it and what might it mean for consumers and banks?
The rise of APIs
You might not know what it stands for, but you use APIs to order your Uber, get the best price for that flight to Turin and talk to the world through Twitter. They are the basis of the digital economy. By creating a standardised interface they allow the sharing of data. Through Open Banking you’ll be able to permit regulated businesses to access your banking data, opening up a whole host of possibilities. You’ll be able to compare your current account, savings and borrowings against other providers at the touch of a button, without needing a PhD in maths. You’ll be able to see all of your accounts in one place, easily make payments between them and to other people, and benefit from money-saving budgeting tools and alerts (avoiding those annoying charges). You’ll be able to easily share your data when seeking financial advice. And you may also be able to get better deals on your utilities.
Trust and security
Open Banking will only take off if consumers have trust and confidence in it. While its launch has been accompanied by concerns about the opportunity it presents for phishing, the underlying security behind Open Banking is strong. You own and control your data and can switch permissions on an off at any time. You don’t need to (and shouldn’t!) share your bank login details with anyone. Only FCA regulated firms can be approved by you to access your account data and all requests by firms to banks are checked with a centrally controlled directory. And if you have a dispute about an unrecognised payment or something else, the bank has to reimburse you first and sort liability with any other party later.
Reshaping the industry
While it will take time to take off (not all of the main banks are even ready to meet the new standards yet) Open Banking could indeed lead to a step change in competition and innovation.
Knowledge through data is one of the biggest barriers to entry in any market. New regulated providers – fintechs, smaller challenger banks and others – will be able to offer new products and services with the benefit of hard transactional data.
The big high street banks will need to at least match them in delivering innovation, convenience and service that delivers value. If they don’t, they risk becoming merely pipework in the financial services system. And with the FCA taking a fundamental look at the free-if-in-credit banking model, high street banks in the UK face a rapidly evolving landscape that could continue to challenge their revenue streams. Many – like Lloyds – recognise this and are rising to the challenge, developing new service propositions and partnering with fintechs like Yolt.
The implications could be far-reaching, including accelerating a decline in use of bank branches and seeing the unbundling of overdrafts from current accounts. Some, therefore, may not necessarily be welcomed by all. But the UK is leading the world on this and the development of Open Banking has the potential to lead to better value and more choice and control over our finances. It could also open up more competition in other sectors like energy. Open Banking could well be transformation in retail financial services, as well as an important foundation stone in a wider open data revolution.
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