The UK banking sector is at the beginning of a journey that has the potential to change how people bank and force them to offer more.
Two separate, but closely linked, regulations are about to come into force. Both are designed to inject competition into the banking sector, through the use of technology and data.
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On 13 January, the UK will see the arrival of the second version of the EU’s Payment Services directive (PSD2) as well as the Competition and Markets Authority’s rules for open baking. Both regulations force banks to be capable of providing third party financial services suppliers access to customer data, if the customer agrees, via application programming interfaces (APIs).
Despite the fact it will affect everybody that has a current account in the UK, not many will have heard of it and most won’t notice much difference, for a long time.
But these changes could have large ramifications for banks. “This is potentially bigger than the ‘Big Bang’ of 1986 in terms of the way it will change things, but it is not going to be a big bang because it is going to depend on consumers taking it up,” said David Bannister, financial services analyst at Ovum.
In 1986, Margaret Thatcher and the Conservative government deregulated the trading sector and included the move to electronic trading. Referred to as the ‘Big Bang’ this made stock trading easier, increased competition, and attracted lots of companies to London.
The CMA’s open banking regulation and PSD2 will shake up the retail banking segment of financial services. All has been made possible through IT.
The EU’s PSD2 will enable third parties to access the customer data held by banks via APIs, if customer consent is granted, and offer services using this information. Payments could be initiated by third-party suppliers and account information viewed via them, or both. This would mean a third party could build services on top of an account and allow the consumer to use these rather than those offered by the bank.
The Competition and Markets Authority’s (CMA) open banking regulation created an open API in banking to give consumers more control over accounts. Through open APIs, third parties and multiple finance firms can use a consumer’s data to recommend the best service, including bank accounts.
“PSD2 and open banking change the nature of banking. At the moment you have all of your financial services roughly with one bank. You are not getting any advice from high street banks,” said Bannister. “The new regulation allows a whole range of advisory applications, consumer advice, offers and things like that all in one place. That changes your consumer or even small business relationship with a bank.”
The UK open banking rules has been tied to PSD2 timetable. There is not very much difference between the two in terms of what they do although there are some technical differences in the way that access is given to accounts. “They come from different thinking but have the same effect by heading towards open banking,” said Bannister.
By sharing data with other suppliers, consumers and small businesses can in theory manage their finances better.
Revolutionising money management
The British Banking Association said back in 2016: “Opening up data from everyday bank transactions has the potential to revolutionise the way consumers and businesses manage their money. Making more bank data openly available will make it easier for people to shop around for products tailored to their needs and get the best deals.”
For bank accounts specifically, the government introduced an IT system to make it easy to change bank accounts. But the Current Account Switching Service, as it is known, has had little take-up since its launch in 2013, despite promising to switch bank accounts in seven days rather than 30. This is because consumers and small businesses see little differentiation between banks. Open banking could in theory change this.
“Nobody really took the switching service up but open banking takes it a bit further,” said Bannister.
Gartner analyst Alistair Newton agreed that the new rules are potentially transformational but likely to take time to change the status quo. “This is a slow burner because you have regulations involved, business cases need to be proven and consumers need convincing. So there is a multiplicity of variables that need to be addressed before we get anything like critical mass.”
But banks that have not paid due attention to the changes could become little more than money stores, warned Bannister.
One clear advantage of the regulations, and the one that will emerge first, comes around the ability for customers, through their data, to have all their financial relationships aggregated in one place.
Suppliers, perhaps fintechs or the banks themselves, will be able to become these aggregators.
The implications of new technology
Newton said account aggregation is an attractive proposition, although it is less attractive today than it was three to four years ago. This is because since these new regulations were announced new technology has made it easier for people to put all balances together. “Now you can have all your financial relationships on an iPad for example, which can be accessed with things like touch ID, so you don’t have to remember passcodes so putting all this in one place.”
He said there is a risk versus reward comparison to be made by customers. “They will ask whether having all their data in one place increases security risk and whether making their data available will put them at the mercy of the sales teams at financial service. This will then be weighed against the benefits it brings them such as ease of use and receiving genuinely good offers.”
If the risk/reward equation doesn’t add up, consumers won’t do anything. “There is also a lot of psychology involved with customers,” he said. “Banks have to give them a very good reason to agree to share their data.”
Newton said there are three things that banks that want to be aggregators need to get right.
“The first thing to do is aggregate customer data, but be absolutely clear it is ring-fenced and they will not be regularly contacted by the bank offering services unless convenient. They will also need to reassure them the data will be safe and secure.”
Then banks should give customers access to tools that analyse the data, he added. “Most personal finance management (PFM) tools so far have only covered a thin slice of a customer’s life and they have fallen by the wayside. But if a bank has a full view of their financial life the next versions of these PFM tools can be more effective.”
The third step will be when a consumer asks the company that is providing the aggregation service, which may be the bank, to look at the data and tell the customer how they can gain value from the data. This forces the aggregator to be more than a bank and think like a data company.
Prioritising consumer choice
All this needs to be done with consumer choice a priority. “In all these steps the customer needs to be able to turn it on and off it they wish,” he said.
Newton said there is no reason why the major banks, which people trust, should not be the places people choose for account aggregation.
Bannister said consumers will be able to demand that their bank offer them new services. “It also means I can say to my bank ‘I’ve got an account with another bank can you get the data from that and put it on one screen for me?’”
Some of the bigger banks, including HSBC, seem to be taking that stance. “People will trust the security of the big banks for apps like this and they are going to be proactive and not just let their customers walk away,” said Bannister.
But some banks are lagging. “Some of the banks don’t get it, and they don’t think many people will use it because most they have not heard of open banking,” he said. “Those that have say they won’t use it.”
One IT professional that contracts in the banking sector said that meeting these regulations doesn’t seem to be a priority for banks. “This does not seem to be a big issue at the banks I have been working at, where outages and security dominate the IT department’s time,” he said.
“But I would be very surprised if banks weren’t ready for this as it is a long lead time. They would probably be at least almost ready with some leeway afforded in the early days.”
Banks request more time
Five of the UK’s biggest retail banks have already requested some leeway.
According to the CMA, some banks have asked for extra time to meet its rules. “Five banks told us they would not be able to release all of these data sets by the specified date, and we have therefore issued each of these banks with directions stipulating the timeline for the delivery of the outstanding data sets and the arrangements each must make for reporting progress to the CMA in the meantime.”
Newton said: “If you talk to the executive teams at the major banks, the effect of PSD2 is well understood. They see that an aggregator could step in and potentially disintermediate them, but the executive interpretation and reality when the rubber hits the road might be a mismatch.”