Are you open to open banking?
The three major Open Banking implications nobody is talking about.
Broad brush strokes. That’s how I’d describe the conversation I’ve been hearing about the Open Banking regulatory changes (PSD2, CMA, GDPR) on course arrive at the doorstep of UK financial services next year.
Though we know what the new rules will say, how they will play out once put into effect is, to some degree, a matter of wait and see. But with that consideration in mind, there are some changes that seem widely overlooked in the larger conversation, despite their potentially massive impact.
They include the end of a billion-pound revenue stream for banks, a shift in the importance of inflation, and possibly the end of free retail banking. Just like what we offer to Barclays and other financial services clients at Start, here are some insights not to lose sight of in uncertain waters ahead.
Before we get too far into it, let’s recap what the new regulations mean for banks in a nutshell.
Description: European legislation for all FS companies to make customer data accessible on demand.
Main Impact: FS companies must allow third parties to build services on top of banking systems.
CMA Open Banking
Description: UK legislation to the UK’s nine largest banks make customers’ data available on demand in standardised format.
Main Impact: UK’s 9 largest banks must adopt common technical standards for making customer data accessible.
Description: European legislation on the use of customer data.
Main Impact: Companies will only be able to use data for the specific uses outlined when permission is granted and must ‘forget’ customers on request.
01. Digging a billion pound hole: the end of overdraft penalties.
Given the scope of the changes ahead, there’s a strong chance 2018 will signal the end for unplanned overdraft fees. Good news for those of us who’ve ever felt the sting of being out of money and penalised for it. But not so much for UK banks, which typically rely on the fees to pull in over £1bn a year (Source Link, 2014).
That diagnosis has to do with the advent of Open Banking legislation which allows API-enabled third-party companies (fintechs, entrepreneurs, startups…) access to banks’ data in order build a whole range of new services for consumers. Meaning that in theory it’ll be possible to build a product that lets customers avoid overdraft penalties – permanently.
How would it work?
Imagine an app were to come to market that allowed friends to connect and provide each other with financial support if one of them unexpectedly overdrew their account.
If a member of the group were to go overdrawn, the remaining members would be alerted, and offered the chance to cover their friend’s shortfall for a specified amount of time (lenders’ accounts would also be monitored to make sure they had enough money to cover the loan). Assuming a covering transfer was successfully completed before the bank tallied up the balance on the account, all penalties would be avoided.
To motivate such an ecosystem, small financial incentives could be offered to service providers and possibly those covering the costs too.
The crux of this idea is that the company who builds the API-enabled service is able to deliver a significantly better experience (i.e. overdraft fees vs. no overdraft fees) and at a fraction of the usual cost.
For the banking public (read: most everyone), this kind of service could do more than simply reduce the penalties and inconvenience of going overdrawn, it could help people better manage their money. The social awkwardness of going overdrawn in front of your all your friends at once should be, on its own, enough to drive major behavioural changes in even the most frivolous spender.
This (for now) imaginary service would evaporate a major revenue stream for banks. But it would present opportunities as well. The key is working with a partner capable of developing a proactive strategy that mitigates the risks and capitalizes on the opportunity. The kind that we provide at Start.
02. Inflation becomes as meaningful as interest rates.
One interesting thing about retail banking customers is their tendency to obsess over interest rates whilst remaining somewhat indifferent to inflation.
Expect that to change when the Open Banking era arrives.
I’m thinking specifically about the ability to get individually personalised inflation rates (I’m officially trademarking the term ‘Pinflation’ today).
What is inflation?
Inflation is, “the rate at which prices increase over time, resulting in a fall in the purchasing value of money” (Source Link, 2017) . Therefore, understanding inflations is vitally important in understanding your current financial situation, and in planning for the future.
At the moment, national inflation rates are calculated based on a ‘basket of goods’, a projection of how much the prices of goods and services bought by households rise and fall. Because no one can say exactly what those numbers are, we’re left with an interest rate based on a national average that’s essentially representative of everyone and no one, seeing as we all spent money differently and feel the effects of inflation differently.
Imperfect as it is, people have put off figuring out just what inflation is or how it impacts them, in part because the sustained low rate of inflation relative against the second half of the 20th century has numbed us to it.
But – get ready – that will change fast as Open Banking takes effect and the actual figures become widely available.
Why things are different now.
Three things are likely to challenge this complacency towards inflation by the retail banking customers. First, as mentioned above, the Open Banking policy lowers the barriers for fintechs to open consumers access to personal inflation rates.
Secondly, once the actual national figure can be calculated and compared against the ONS’ arbitrary ‘basket of goods’, the media will have a field day.
Finally, after eras of measuring inflation by RPI and CPI we can expect to see a new era of ANPI & PIRs (Actual National Price Index and Personal Inflation Rates).
As we move from an era of inflation rates based on projected figures to rates based on factual ones, one thing is for sure: things will change. Does that mean they’ll be higher or lower? Place your bets. Either way it’s important for anyone in the financial services to consider how it will impact customers and colleagues, and create an effective communications strategy around it.
03. The end of free retail banking services.
There has long appeared to be an informal understanding between the Government and the banking industry. One by which the government grants relatively few banking licences (paving the way for near-oligopolistic tendencies, not to mention big profits) in exchange for banks providing basic services to the public for free. But with Open Banking this unwritten agreement looks to have been broken.
For banks, the cost of free services is actually high.
In the UK, unlike many other countries, receiving basic retail banking services for free is a deeply ingrained cultural norm. The benefits are straightforward enough; we can leave up to £85k of our money in a guaranteed safe haven and manage it through branches, telephone and online channels. We can also make payments, get cash from ATMs and access more complex financial services should we need them.
However, the downsides of this universal service are less clear. For one, we’re are less likely to receive good service on account of having a few, largely similar, banks to choose from (we’re less likely to switch providers from one service to another when they’re all free). We’re also made to overpay on other services to subsidise the universal ones.
Beyond universal financial services.
By ushering new era for banks, whatever unofficial understanding there may have been between them and the Government has been severed. New entrants are already flooding in, cherry picking the most lucrative services and customers thereby reducing the margins and profitability of traditional banks whose ability to offer universal banking services now finds itself threatened with extinction. Given all that. It’s not unreasonable to suspect free services to disappear in the future, leaving the most financially vulnerable people to be hit hardest.
Although the UK may be addressing the problem of banks being too large to fail, new the regulatory changes may instead deliver banks too small to serve the country as a whole for free. There will soon be opportunities to fill the gaps left behind by universal services.
So what to do now?
It’s a uniquely fascinating time for the banking industry as it goes through such immense changes and it is likely that there remain many more surprises ahead.
At Start we revel in exploring this space to share critical insights with our clients, including Barclays who trust our insights to stay one step ahead.