Open Banking has started – should you care?

Open Banking – never heard of it? Or seen the headlines but your eyes glazed over?  It started on 13^th January 2018. Over the following months and years, it’s going to change banking and payments in Britain forever.

It is going to take a while – months or even years – before we know the full implications but find out what it might affect so you know what to look for.

It may be brilliant, it may be scary, it may be slow to take off, it may be revolutionary, it could be a damp squib, but it’s not boring.

What is Open Banking?

Banks control your data. That is how it always has been, so it seems natural and you may not care. But that data is valuable and it really belongs to you.

The background to Open Banking is the European Second Payments Services Directive (you may see this called PSD2). This says that banks and credit card companies must let customers easily and securely share their transaction history with regulated third-party providers. There is more about how this will work in practice below.

That may not sound amazing or revolutionary, but it has a lot of consequences. It has been compared to location data – when mapping technology is added to this on your mobile phone, few people could have predicted how many different areas this would affect, from Uber to Right Move.

Open Banking is coming in January, much faster than anywhere else in Europe, because the UK Competition and Markets Authority (CMA) sees breaking the banks’ monopoly of data as a means of forcing banks to be more competitive and offering customers more choice.

How will data actually be shared?

From January 2018, the nine biggest banks in Britain (RBS, Lloyds, Barclays, HSBC, Santander, Nationwide, Danske Bank, Bank of Ireland and Allied Irish Bank) will allow customers to share their data with other companies in a secure way. It was announced in the November 2017 budget that this is being extended to credit cards too, probably by late 2018.

Here are some details on the key phrases.

“allow customers”

Who gets to see your data is under your control. You don’t just tick a box with your bank to agree to Open Banking then anyone can get your data forever. When you want to share your data with another company, your bank asks you to agree that company should see your information and you have to renew your permission every three months.

“their data”

The data that can be shared is your banking transactions, this is roughly what is shown on your bank statements.

You can decide how much to share, perhaps the last month, or go back 6 or 12 months. Or you could continue to let someone see your data every day, so they know as much about you and your bank balance as your bank does!

“other companies”

Banks will only allow a company access to Open Banking if it is specially authorised by the Financial Conduct Authority (FCA):

• companies that are authorised as providers of account information services (AISPs) can only read your banking data, they won’t be able to make any payments from your bank account;
• companies that are authorised to provide payment initiation services (PISPs) can make transactions on your account. These could be to take payment for something or to move money between your accounts.

Why would you allow anyone to do this, you may be wondering…

You may be doing something very similar already if you use Amazon One Click – you buy an item and it’s directly charged to your credit card, you don’t have to go through and approve the payment separately. Open Banking will allow more retailers to do something similar by debiting your bank account, if they have the right regulatory approval and if you agree to it.

So it’s easy, quick, convenient… but if it’s too easy, do you sometimes buy something you wish you hadn’t?

“in a secure way”

There are three main parts to the security. First is the fact that banks will only allow access to FCA authorised companies. Second is the IT security behind all the transactions. And third is the fact that you have to specifically authorise the sharing of your information. This will work roughly as follows:

1. A company, let’s call it wizzymoney, asks you if it can access your banking data and you say yes;
2. wizzymoney shows a list of banks in an app on your phone;
3. you select your bank and are taken to a page provided by your bank (not wizzymoney);
4. you sign on in the normal way to your bank, so your bank knows it’s you;
5. your bank asks if you want to let wizzymoney access this particular data and how long for;
6. you confirm it to your bank;
7. your bank then lets wizzymoney see the data.

That may sound long-winded but it will be quick and seem like part of your banking app on your phone. Wizzymoney never gets your banking login details.

How might Open Banking help you?

Saying how Open Banking will work gives you little idea of what it could be used for. So here are some possibilities.

Give a better picture of your finances

One of the most simple uses of Opening Banking will be to make it easier for an app to bring together your data from, for example, your two current accounts with different banks, a savings account and two credit cards to give you a complete picture of your finances. It could also work for a couple allowing them both to see a combined picture without them needing to set up a joint account.

My guess is apps like Emma that show you a complete picture of what is happening across all your accounts will be among the early users of Open Banking. At the moment they work by screen scraping which means you have to give them your online banking passwords… and many people feel that is too risky. But with Open Banking, you don’t have to give away your banking logins – much safer!

The new banks such as Monzo and Starling will also be among the early adopters – their systems have been designed to work with Open Banking. The large established banks will be playing catch-up to some extent – but whatever bank you use, you are probably going to see it develop better mobile apps to compete with the new upstarts.

The combination of contactless cards together with the opaque rules about when credits and debits hit your current account is not good for people who are trying to budget on a limited income and avoid overdraft charges. I hope Open Banking will provide some much-needed tools for people to actually see what is happening to their finances in real time and on their phones.

A better picture means better at marketing to you

A lot of “free” tools will be developed to help you see how much you spend on different types of expenditure. Many of them will be aiming to make money through getting you to buy something  or switch providers:

• it looks like you have a dog, it would be a good idea to get pet insurance!
• your car insurance is due for renewal soon. You don’t buy much petrol, so look at low mileage insurance from XXXX
• Your gas and electricity is from YYYY who have high tariffs – have a look at this comparison site and see if you can save.

For people who tend to be loyal to the same brands, this could be useful. One of the reasons the CMA wants Open Banking is because it will make switching more likely.  For others who already switch, it may feel like more intrusive marketing.

A better picture of your finances for debt advice

I don’t think this is going to be arriving early in 2018, but Open Banking offers the possibility for a debt adviser to get a “historic” income and expenditure sheet for a client very quickly. This may not be accurate going forward, but it could be a useful tool in the debt advice process.

This could also be a way of someone showing a creditor that you can’t afford the normal monthly payment if you want to try to make an arrangement to pay.

Better checks before you get given credit

At the moment if you apply for a loan or a credit card the lender asks you some questions about your income, possibly about your expenditure and usually runs a credit check. For a mortgage, you already have to supply bank statements, but that’s not common for most other lending.

With Open Banking, a quick check on your last few months bank statements will provide some better evidence of whether the new credit will be affordable for you or not.

Of course lenders may still not get this right – banks who can already see your bank statements still increase overdrafts to unaffordable levels. But more information should improve lending decisions and that’s good. Unaffordable credit traps people in a spiral of interest it’s hard to escape from.

Retailers want to get in on this

A survey of large retailers has found:

• nearly one-third will be able to plug in directly to banks to obtain consumer information and initiate payments in January
• nearly 90 percent of the retailers will be able to do so by 2019.

Some of the reasons retailers are so keen are:

• they will be able to generate offers to you, for example, would you like to spread the cost of this purchase over a longer period? offered to customers as they are about to buy, after checking their recent banking history;
• initiating payments directly with banks will avoid current credit card or debit card transaction fees;
• using the verification through Open Banking could reduce fraud levels;
• potentially removing the need to queue at a till at all, just charging you for what you walk out of the shop with if you have passed biometric identification such as face recognition. This one isn’t going to happen for a while!

And there are possible new giants in this arena… if the idea of your supermarket or favourite clothes shop knowing all your banking and spending habits is a bit scary, what about Amazon, Google or Facebook, who already know so much about you.

The losers from Open Banking

You are reading this article… you are a lot more likely to benefit from Open Banking than people who don’t use the internet at all, who don’t have a bank account or don’t have a smartphone.

If users of Open Banking will get the best offers on loans, groceries, insurance, holidays, where does that leave the people who are excluded? Already there is a big poverty premium in Britain – the poor pay more for financial services, utilities and even food. And a digital divide – people without internet access or an email address are excluded from many good deals. Open Banking could make these problems worse, with all the firms competing for the best customers.

But will people agree to share their data? Will you?

Surveys have shown that people say they are very reluctant to share their data. For example, here is one that found

• 69 percent of consumers say they would not share their bank account information with third-party providers, and
• 53 percent said they will never change their existing banking habits and adopt open banking.

It also found – unsurprisingly – that younger people were more prepared to share.

But my guess is most of the people responding didn’t have much idea about what they were being asked. If you went back 10 years you would have found low rates of people saying they would be prepared to use banking apps on their mobiles, and that changed pretty quickly. And people may be more prepared to share data after GDPR comes in in May 2018 when they have more control over their data.

I also think there is little real loyalty to banks. People don’t switch accounts because it seems complicated, things could go wrong and the new bank would probably be much the same as the old one… not because they love their bank.

If you are asked to give a firm access to your banking data, I suggest you consider what the advantages are. Don’t sign up just because you use that shop often, you need a positive reason to do this. But if there is a good reason, then give it a go!

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