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Open Banking And The Digital Customer

14 July 2020

By Martin Kisby, Head of Compliance, EQ Credit Services

Over the past few years there has been a shift in the way in which consumers access and manage their financial products. Post pandemic, we see this change increase in pace. Open Banking is the new catalyst, promising to give more back to the digital customer.

Martin Kisby Martin Kisby Head of Compliance, EQ Credit Services

Complete online solutions for loans, bank accounts and insurance have become common place within the financial services sector. With new challenger banks leading the way with a fully online consumer product, along with the speed and efficiency in which transactions can be completed, it isn’t surprising that the FCA’s business plan for 2019/20 indicates a review of digital solutions and the Open Finance concept (which includes Open Banking). We explain what Open Banking is, who is interested in it and how it can be used.

What is Open Banking?

Open Banking started its journey following the publication of the Competition and Markets Authority’s (CMA) Retail Banking Market Investigation in February 2016.

The reforms were designed to make the sector work better for consumers and small and medium-size enterprises (SMEs). Its aim was to ensure that banks would provide a better quality of service and offer fairer prices. Most of the industry is getting involved already with 84% of financial services companies actively investing in Open Banking products and services right now.

Open Banking is one of the most ambitious reforms in recent times. It is designed to ensure that consumers can choose the best product or deal from competing providers and give new innovative providers a better chance to grow.

In March 2017, the first stage of the CMA remedies were delivered these included development of comparison services for small businesses, the publication of SME lending product prices and the early stage development of the Open API standard. However, it wasn’t until phase two in Q1 2018 that Open Banking started to be realised. This included the development and adoption of an open API (Application Programming Interface) standard.

There has certainly been an increase in the adoption of Open Banking from October 2018 when there were 13.9m API calls made. In December 2019, this figure increased massively by 1800% with 250.5m* API calls made.

But why is Open Banking so important to consumers?

There are two key reasons why Open Banking is so desirable for consumers:

  1. The opportunity to access better products and services. For example, a better loan rate;
  2. Increased speed of applications. 73% of consumers have indicated that they would be willing to share bank data if they could receive funds from an accepted application within 24hrs or less.

In our annual research and collaboration with Credit Kudos, we identified that adults between 25-34 years are interested in the benefits of what Open Banking could bring them:

  • 75% are open to sharing data in exchange for convenience;
  • 60% would be willing to share bank transaction history in exchange for a better loan rate;
  • 72% are interested in flexible loans.

Concerns around AI

Another aspect of Open Banking is Artificial Intelligence (AI). AI provides the ability for systems to make decisions based on consumer’s credit and banking information. Interestingly, within this research, only 32% of respondents indicated they would trust AI to successfully determine their creditworthiness. This indicates that there is still some work to improve the effectiveness of systems and a need to cultivate consumer trust.

Key potential beneficial functionality of Open Banking

Unsurprisingly, in January 2020, the FCA issued a ‘Call for Input’ on Open Finance which included Open Banking. Within this document the FCA identified some key digital elements/functionality that could be delivered from the full introduction of Open Finance:

  • Personal financial management dashboards: To help consumers better understand their overall financial position;
  • Automating switching and renewal: To remove friction and encourage shopping around, therefore, getting a better deal;
  • New advice and financial support services: Making it easier to share comprehensive information with advisors;
  • More accurate creditworthiness assessments: Ensuring more suitable products being available.

Work in progress

Overall, the majority of consumers are on-board with the idea of Open Banking and Open Finance. However, concerns still remain that opening up holistic financial information could lead to data misuse, data loss, fraud and financial crime.

To ensure that these concerns are mitigated, financial services firms need to ensure that they are fully transparent with consumers on how their data is being used and ensure that their systems and controls for information and cyber-security are in place and tested.

Another potential issue is out-of-date data being used. If shared, such data could result in insufficient or inaccurate recommendations and products being offered.

Taking open banking further

On a positive note, extending Open Banking to Open Finance could see improvements within other financial services products. For example, the current average time taken to obtain a 1st Charge mortgage is between 4-6 weeks. Imagine this timeframe being halved or even quartered. The customer experience would significantly improve.

Within the mortgage application process, with Open Banking functionality, there may soon be little need to scan or send copies of payslips, utility bills and bank statements. Mortgage companies would simply utilise Open Finance APIs to obtain this information and in doing so remove what is probably the most frustrating element of applying for a mortgage.

There are other potential uses too. The search for car insurance could be made simpler. Rather than searching for the best deal, Open Finance could identify your current pay and identify better deals.

Today’s opportunity

It’s safe to say that Open Finance has the potential to improve a consumer’s financial services experience greatly. With 84% of financial services businesses actively investing in open banking, these opportunities should start to be seen sooner rather than later.

Contact EQ Credit Services to find out more

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