Payments Blog

Open banking will reinvent financial services

March 15, 2017

Ahead of the Competition and Markets Authority (CMA) requiring banks to implement Open Banking by early 2018, the innovation it could enable was the buzz on the first day of the Retail Banking Innovation Conference

Open banking is part of a series of measures being driven by the Competition and Markets Authority (CMA) to increase competition in banking to consumers and businesses. How? By opening up their platforms securely to other banks, third parties and consumers to increase visibility and allow for the development of added value services.

An Implementation Entity has been set-up - tasked with agreeing, implementing and maintaining open and common banking standards – and some deliverables have already been met.

However, the final deliverable – the release of Business Current Accounts (BCA) and Personal Current Accounts (PCA) transaction data sets by January 2018, which is the transposition deadline of the second Payment Services Directive (PSD2), is where it gets interesting, as it enables the sharing of transaction and payment data.

So what can we expect?

Innovative, web-based, quick decision-making on things like business loans, mortgages, shared transaction lists for couples where they have individual accounts. Sound interesting?

But there’s more  - Apps and notifications to warn consumers they’re about to slip into their overdraft and incur charges and comparison websites that take your transaction data and generate the best current account, travel card, personal loan and credit card. The CMA says that just 3% of personal and 4% of business customers switch to a different bank in any year. This is despite, for example, personal customers in Great Britain being able to save £92 on average per year by switching provider, with savings of around £80 a year on average available for small businesses.

The banking model needs reinventing and the open banking reforms will allow both them and their rivals, fintechs like allpay, and challengers to develop financial products and services that meet the needs of today’s consumers. And, to an extent, it’s already happening. Previously you could get charged a lot of money by a bank for an overseas transfer. Today, companies like Transfer Wise allow peer to peer transfers abroad easily and quickly at low cost.

For the banks, base rates are unlikely to move north of 1% in the short term and most are saddled with an ageing branch network, with declining transactions. Experts predict there will be a 40% reduction in branch visits in the next five years. Back in the 1990s, there were nearly 20,000 branches. Today there are 9,900 branches with an annual loss of circa 500. The cost of maintaining the network is circa £10 billion; the cost of closing them is £15 billion.

Experts suggest that the big national banks will only need circa 650 UK branches in the next five years in areas with the biggest concentration of retail customers. As such, its clear Post Office branches will have a major role in supporting banking transactions moving forward following its partnership with the big banks.

The future, most at the conference agree, is that open banking will increase the suite of financial products and services on the market to support customers and that banks, as oppose to providing compartmentalised products and services, may simply become the rails or the signpost to a financial service provider who can deliver what the customer wants. 

As Jonathan Hall, TSB’s digital director said: Uber is the World’s largest taxi company, but owns no cars. Facebook is the world’s most valuable media company, but creates no content and airbnb is the largest accommodation provider, but owns no property...Could the biggest financial services company offer no loans, savings or current accounts?