Open Banking is an initiative originally spurred by the Competition and Markets Authority following its review into the UK retail banking market. Back in 2016 the CMA found that "older and larger banks do not have to compete hard enough for customers' business, and smaller and newer banks find it difficult to grow "
This led to today's Open Banking initiative which is a new set of standards for the industry that allow consumers and SMEs to provide access to their banking data to third party firms, including regulated fintech firms. If a customer consents they will benefit from personalised product offers and the ability to compare various options through aggregation products. Opening up UK retail banking holds tremendous promise, but how will it impact the overall UK economy?
This is a question that interested us here at Trustpilot and we recently commissioned the Centre for Economic and Business Research to investigate further. Cebr's analysis found that by increasing the information available to lenders they are able to reduce the 'credit spread' and so charge more precise interest rates on products like mortgages. Through this very direct benefit alone, Cebr's economic modelling suggests Open Banking is likely to contribute £1 Billion annually to the UK economy by returning more money to consumers, which funnels back into the economy.
Clearly Open Banking promises many benefits beyond this, such as encouraging greater competition, fostering new fintech innovation and ultimately helping consumers to take greater control over their financial affairs. However, all these benefits, including the GDP contribution hinge on one key question: will customers consent to sharing banking data? It's a question that led Cebr to also include a more conservative forecast in its analysis, one that sees the programme delivering circa £680 million to the economy each year.
With the number of cyber security attacks, examples of data misuse and increasingly sophisticated scams there is some logic to people simply declining to provide their consent. Indeed research from Accenture recently found that 69% of consumers would refuse to share their data with third-party fintech firms under Open Banking. In reality we believe the picture is more complex and there will be a hardcore group of millennial early adopters that show the way, realise benefits and the majority will then take-up the service on a steady curve. Consider the early days of internet banking, a service which has since become near ubiquitous.
Building trust to make Open Banking a reality
In this context it's essential the financial services industry tackles one of its enduring challenges - a systemic lack of trust. Since the financial crisis consumer trust in banks plummeted and has only demonstrated a moderate recovery. YouGov's international Omnibus research found that 55% of Brits currently trust banks, not a bad number all things considered, but that just 36% believe banks act in customers' best interests. It is this questioning of underlying motives that could derail Open Banking. If people don't see what's in it for them and misunderstand it as a programme to give the industry even more control then the opt-ins simply won't come.
In our view the financial services industry needs to repair a decade of reputational damage that requires root and branch reform. Most institutions are now well along this path, with new leadership teams that prioritise prudence and customer service ahead of risk taking. For the new entrants they face a different challenge. The challenge of having little to no track record and being largely unknown to prospective consumers. Quite how the competitive dynamics play out and exactly how many people decide to move their accounts to a fintech player remains to be seen and is largely up for grabs.
At Trustpilot our traditional customer base are e-Commerce retailers that may not be known to a customer but that need a way to transparently demonstrate their credentials. We have absolutely seen this same need emerge across a range of sectors as they become truly digital. People are even buying their cars online now. As competition in financial services grows in the years ahead it will be those companies that understand there's nowhere to hide today that succeed. Indeed, doing business the right way, with customers' interests prioritised and then proving it by encouraging customers to share their experiences openly for all to see will be critical to rebuilding trust.
Glenn Manoff is Senior Vice President, Trustpilot.