If you haven’t heard it yet, Open Banking is a term which you will come across in the following months. So, what is it and what’s in it for us?
Most of us have accounts and loans with many financial providers. You may have a current account with the bank you’ve been with for years, but have savings and credit cards elsewhere. Currently, there is no trustworthy way to see your balances all in one place, because financial providers do not share your information with others.
Open Banking will change all this. From January 2018, new legislation will require major banks to share your real-time banking data securely with third parties if you request them to. New and existing providers can then provide you with apps with a wealth of new services. These could show all your account balances in one place, tell you if you could save money by switching to another provider, track your spending, help you avoid fees or overdrafts and alert you when current mortgage or savings deals finish.
The Government’s hope is that Open Banking will increase competition in banking and encourage better services. Only 3% of us switch current account in any year1. Previous initiatives by the Government have failed to change this, so could this be a game-changer?
The Unlimited Group recently held a seminar on Open Banking, where consumer research was shared. The results and video of the discussion can be found here. Not surprisingly, the results show there is a low awareness of Open Banking so far. However, there is substantial interest in the development, with over four in ten consumers interested and one in ten are very interested.
Early adopters are likely to be younger tech-savvy men and people with children. What interests them is convenience, time saving and improved control of finances.
While the early adopters are likely to be juggling limited finances, we believe there could be a market amongst affluent older consumers who can then see all their investments and pensions together in one place. In the longer term, as the responsibility for retirement saving is shifted to the consumer, we believe there is potential for financially aware consumers of all ages to want to see all their finances in one place, so they can manage their pension pots.
So, who would they trust to deliver such services? Asked to choose from a range of brands, the existing banks are the most trusted (over 70% would trust), but trusted brands from other sectors would be considered by many, such as John Lewis (44%) and Aviva (41%). ‘Challenger’ banks such as Atom Bank have a lower level of trust – presumably due to lack of consumer knowledge. Interestingly, while Google would be trusted by a substantial 39%, only 23% would trust Facebook.
Whether Open Banking will lead to more switching for current accounts will depend on whether consumers feel the benefits are worth switching for and how well their existing bank responds by providing improved user experiences. One scenario is that more consumers switch to challenger banks to access their innovative, user-friendly mobile services. The opposite scenario is that all the Big banks introduce these services themselves successfully – perhaps by buying up fintech companies – which would improve the customer experience, but do nothing to break the dominance of the Big Four. The middle scenario is that consumers leave their money where it is and use third parties to help manage it.
Our view is that this will be a slow burn. As with mobile payments progress will follow a ‘tech adoption curve’. Early adopters will decide whose platform ‘wins’ and for Open Banking to ‘Cross the Chasm’2 to become mainstream, it may take a generation if older people are happy with their existing banking arrangements.
A key issue will be how it is paid for. Consumers want digital services free. Existing providers may absorb the cost into existing charges. New banks could potentially fund the service if they attract new customer balances. However, it remains to be seen whether third-party providers without banking or loan customers could pay for it without charging. As the panel at the Unlimited seminar suggested, it could be the comparison sites who clean up, as they have deep pockets and the ability to fund the service through referral fees.
If you are interested in answering these kind of questions, we at Marketing Sciences Unlimited are experts in researching what drives a market-leading customer experience and how to build trust in financial markets.
Nigel Hufton is a Research Director and expert on the UK financial sector
2 Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers, Geoffrey A Moore. 1998