Open Banking: UK's big financial experiment

It’s being called a revolution in banking.

So-called Open Banking kicks off on Saturday in what amounts to a gigantic financial experiment in which Britain is leading the world.

Under the scheme, nine of the biggest lenders operating in the UK – Lloyds, RBS, Barclays, HSBC, Santander, Danske, Allied Irish Bank, the Bank of Ireland and the Nationwide Building Society – must open the information they hold on the transactions history of their customer, should that customer give their permission.
That information is then made available to third parties who have signed up to the Open Banking register set up by the Financial Conduct Authority (FCA).
These third parties, which as well as challenger banks and financial technology or ‘fintech’ companies are also expected to include utilities and other businesses, will, assuming the customer has given their approval, be able to securely access that customer’s account and analyse their finances in order to offer them new products and services that have been tailored to their needs.
An example of how this might work in practice could be a supermarket developing an app that enables a shopper to see their bank balance and receive offers on groceries and other goods as they wander around the store.
Open Banking has its origins in an investigation two years ago by the Competition and Markets Authority (CMA) into the retail banking sector.

Image: Research suggests most Britons would be reluctant to share their data
It concluded that there is insufficient competition in the sector, with smaller and newer banks struggling to grow or attract customers, resulting in too many customers paying more than they should do for banking services and not benefiting from new services.
The FCA, the UK’s financial regulator, hopes Open Banking will drive competition, bring down costs and lead to innovation in banking services.
It comes in alongside the Second Payment Services Directive (PSD2) from the European Commission, which rolls out the new data-sharing rules across the EU, although some countries, such as the Netherlands, have not yet made it law.
So Britain is effectively acting as the pioneer and the thinking is that, as it is going first, Britain can set the standard elsewhere.
Singapore, Japan and Australia, as well as the rest of the EU, are all in various stages of following Britain’s lead, with Hong Kong also expected to follow.
Yet Open Banking may not prove to be as revolutionary as it is being billed.
For it to work, customers will have to agree to make their data available, something many Britons may not want to do.
A survey by management consulting firm Accenture late last year found that two-thirds of people would be reluctant to see their data shared with third parties, due to concerns over privacy, while 53% said they would never change how they bank.
Reports that the new arrangement may prove a honeypot for scammers and fraudsters could result in even more people than that refusing to make their data available, especially given the traditional inertia in the UK, where people are statistically more likely to get divorced than switch bank.

Moreover, although the plan is eventually for credit cards, savings accounts and other products to be included in Open Banking, the initial phase of it will cover only current accounts.
Nor are all the banks ready to participate.
Only Lloyds, Nationwide, AIB, Danske and parts of Santander will be ready to go straight away, with Barclays, RBS and HSBC not participating until next month and Bank of Ireland not until September.
Nor has the FCA yet given full permission for all the companies that have applied to join the Open Banking Register to access customer data.
But there is clearly scope for huge disruption to the banking market.
Retailers, in particular, could prove to be beneficiaries.

Image: There are potentially terrifying implications for some big banks
Open Banking could enable them to offer better and cheaper services by taking payments directly from a customer’s bank account, cutting out middlemen like credit card companies and the ‘merchant acquirers’ (mainly the banks) that underwrite card transactions and charge a fee for doing so.
The big hope is that fintech companies such as Plum, a savings account provider whose app analyses a bank customer’s transactions, calculates an affordable amount for them to save and then deposits their money for them, will thrive under the new arrangement.
Britain is the fintech capital of Europe and so the hope is that start-ups will flourish, creating jobs and prosperity.
The big concern, however, will be that Silicon Valley giants such as Amazon, Google and Facebook will wade into the market and, as they have in other sectors, wipe out competition quickly.
That could have terrifying implications for the big banks, which could see their status relegated to that of a dull utility, hitting their profits accordingly.
That has already proved to be the case in China, where the banks have lost market share to WePay, a payments service offered by the country’s biggest social media platform, WeChat and AliPay, the online and mobile payment platform run by Alibaba, the country’s biggest e-commerce company.