Will Open Banking revolutionise financial services?
This past weekend, a so-called revolution took place, as Open Banking was launched. As with most significant changes to the UK financial landscape, the enshrinement of Open Banking into law has been met with both acclaim and criticism in equal measure. On one hand, an alleged game-changer to give the customer more control of their finances, and facilitate convenient money saving on a variety of fronts. The counter-argument, meanwhile, is that it will pave the way for fraudsters to run amok.
So, the question becomes… will Open Banking be a force for good?
What is Open Banking?
Under these new laws which came into effect last Saturday, the nine major lenders in the UK - Lloyds, RBS, Barclays, HSBC, Santander, Danske, Allied Irish Bank, the Bank of Ireland and the Nationwide Building Society - must now share details such as income, transaction history, debts and more with third-party internet companies (such as competing firms or price comparison sites) if it is at the behest of the customer. Other, smaller lenders are expected to follow suit on a voluntary basis.
These rules for data sharing will also apply to banking logins and passwords where applicable (under a separate EU directive), while the plan is for Open Banking to incorporate information on prepaid cards, store cards, credit cards and e-wallets (eg: Apple Pay or Paypal) over the next 18 months.
It must be emphasised that none of the above can happen without your express permission, and this will need to be given individually to every entity with whom you wish to share this personal data. In other words, there is no blanket-sharing option. This agreement will also lapse after 90 days; after which the firm will need to acquire your permission to continue using this information. You may also opt out at any time with immediate effect by contacting the third-party directly.
Why would I share this information?
In an age where data protection and personal privacy have become ever-more precarious, looping in more people and/or companies on sensitive information may seem counter-intuitive. However, the idea behind it is that providers across various sectors will be better equipped to deliver more relevant and meaningful savings opportunities to consumers by virtue of having more specific knowledge of their current finances and being able to put forward deals in a secure, standardised way.
Many experts believe that Open Banking has its origins in the dominance of the Big Four high-street banks (who control almost three-quarters of the current account market), and the disappointing uptake of the Current Account Switch Service. Despite offering customers the chance to switch bank account easily and seamlessly within seven days (and the generous switching incentives presently being offered by providers), less than 3 percent of Brits are estimated to have utilised this service last year. By thrusting further information in front of the account holder on both the ease of the Current Account Switch Service and the various switching deals on offer, it follows that competition within personal banking will increase, and the customer stands to gain.
Of course, Open Banking covers more than just current accounts. Price comparison sites, for example, will now be well placed to alert you on potential savings on bills such as broadband and energy, along with deals on credit cards, loans and more. It is also anticipated that Open Banking will encourage a wave of new budgeting apps to assist consumers in avoiding going into debt – or, if they’re already there, cutting down on things like overdraft charges, loan repayments, or credit card interest.
As for online lenders such as Lending Works, it will also enable us to expedite the process of loan underwriting, as we will soon be able to verify an applicant’s income quickly and easily if they grant us access to their current account – rather than having to post or scan statements to us.
What level of risk is involved?
Given the high-profile data breaches we’ve seen in recent years, it is understandable that many people have reservations about increasing the number of eyes on their personal information. And Open Banking will surely pique the interest of fraudsters. Transactions alone can provide plenty of detail about a person and their finances, which could strengthen a fraudsters’ hand in tricking individuals into divulging further information – thus increasing the risk of identity theft.
The other threat will come from hackers, who will be operating in a new world where financial information, and even banking login details, will be circulating in greater volume.
There is one important point to note with respect to online banking usernames and passwords. If you agree for your bank to share your information with firms which are on the Open Banking register, such firms will not need to have your account login details disclosed to them. Instead, the company will receive your encrypted data directly. Only firms in the UK who are authorised and regulated by the Financial Conduct Authority are entitled to use Open Banking in this manner.
If you wish to share your information with third parties who are not registered with Open Banking, this will require the sharing of your account login details, and this firm then logging into your bank account. Banks are also unlikely to compensate you for any losses incurred as a result of fraud or cyber-attack in such cases (whereas they are obliged to reimburse you for losses involved with data sharing between your bank and a company who is on the Open Banking register).
So, should Open Banking be embraced?
The genesis of the idea is commendable: British consumers collectively waste millions of pounds each year as a result of misguided loyalty to banks and other utility providers, coupled with a lack of awareness of more cost-effective alternatives. Open Banking is a bold way of addressing this and forcing these behemoth companies to fight harder to attract and retain customers.
It will also open the door to fintech firms and apps who can better integrate bank accounts into everyday purchases, thus maximising convenience. And, for those who choose only to share their data with FCA-regulated companies on the Open Banking rota, your exposure to loss is, theoretically, virtually zero, given your grounds for compensation if you fall victim to fraud.
Hence, on balance, we believe the broad range of potential benefits Open Banking brings significantly out ways the concerns, and once its adoption reaches its potential, customers will be winners because of it.
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