Thriving in the Open Banking Ecosystem
At the recent Open Banking Excellence event, I heard that the average bank offers around 300 products across their customer base. In a crowded market, it’s hard for a bank to differentiate themselves and offer a single market-leading product and so it’s virtually impossible for a bank to excel across them all.
Switching Current Accounts
In 2013, the UK’s Competition & Markets Authority (CMA) required that banking industry develop and launch the Current Account Switch Service (CASS). Adopted by 40 banks covering 99% of the UK’s current accounts, it was designed to streamline the process to switch your primary bank account between different providers. In 7 days, your balance and all your saved payees will be transferred to the new bank. Organisations that you pay by Direct Debits will be informed of the new account details and if your old account receives any incoming fund transfers, they will be redirected for upto three years (and this will be extended for another year each time a new payment is received).
It’s a great service; when I’ve used it in the past, it’s worked very well and, frankly, one unexpected benefit is that it is a far more convenient way to close an unwanted bank account that the provider’s standard procedure that normally involves visiting the branch.
It is disappointing therefore, that uptake remains lowand it was only used by 100,000 consumers last month, only a tiny fraction of the estimated 70 million current accounts in the UK. A lot of money is being left on the table by consumers who are living with banking products that are ‘good enough’ but not industry-lea ding. For example, if a young person could switch their savings from an account with 0.5% interest annually to one earning 1.5% the compound effect of that interest over 40 years could help them bring forward their retirement date.
How does Open Banking help?
I think the days where a person obtains all their banking products, e.g. current account, credit card, mortgage, life assurance etc., from a single provider is coming to an end. For example, if I bank with Lloyds but prefer the money management tools in the Barclays mobile app, then Open Banking will allow me to manage my Lloyds account without ever having to leave my preferred app.
Taking this a step further, there is no reason why I would have to a mobile app provided by a bank to manage my financial life. There are already applications hitting the market from Money Dashboard, Yolt and Grip that offer sophisticated Personal Finance Management (PFM) services independently.
These applications use two new technical standards that have been defined by the European Central Bank called Account Information (AIS) and Payment Initiation Services (PIS). When combined together, these two services allow third-party companies to offer a compelling view of your financial life. AIS enables your bank to share information about where you haved use your payment cards. PIS then enables the third-party to request that your bank perform outward transfers - with your explicit approval - to other bank accounts.
The Future
These PFM applications currently offer a holistic view of your current financial position that is totally independent of the financial institutions that hold your savings or finance the mortgage on your home. They can offer budgeting advice and recommendations to help you divert surplus cash to savings to build emergency funds for when disaster strikes.
I believe the next step is that these applications will transition into ecosystems where, for each segment of your financial life, you’ll be able to choose from two or three best-in-class providers for anything from credit cards to pensions and investments.
What does this mean for the incumbents?
The barriers to switching have never been lower than they are today. While uptake of CASS remains relatively low, it’s hard to get excited about the prospect of switching from one to another if the only reward is saving £92/year. However, as new entrants arrive in the market offering hyper-personalised financial management applications that actively improve all aspects of your financial happiness, it is going to be much harder for an incumbent to retain your custom unless they refine their product suite and start offering best-in-class options.
If they don’t, I’m sure there will be many other people who would jump at the chance.