In the UK, individual savers, corporates and charities are currently sitting on more than £1.5 trillion of "inert cash". £700 billion of this money is held by individual customers alone.
If the returns on these funds could be improved by just 1%, £15 billion would be released back to savers and ultimately benefit the UK economy. The products are there, the banks are now there, so what's stopping this from happening?
The evidence that savers don't have the motivation to seek these higher returns is unsurprising. The process of pursuing competitive returns on cash is extremely tedious and time consuming. It requires constant monitoring and switching accounts with products being launched and withdrawn every day. However, the advent of Open Banking Phase 2 could be a catalyst to empower customers to seek more attractive rates for their cash deposits, leading to a more competitive and technologically enabled banking landscape.
Recognising there was too little competition in the UK banking market, the Competition and Markets Authority (CMA) ordered the UK's nine biggest banks to share their consumer data. This process was termed Open Banking. The first phase, carried out in March 2017, started by releasing structural information. Banks shared information on ATMs, branches and personal and business financial products, creating a new transparency within financial services.
Although the first phase of Open Banking primarily created opportunities for third parties, the second phase will create more visible change for consumers. The second phase of the Open Banking initiative will come into force in January 2018, and will create a more competitive banking landscape.
The aim of Phase 2 is to give account holders the option to securely share their current banking data with other banks and third parties using API (Application Programming Interface) technology. Essentially, customers will be offered different means of access to their bank data without using their bank's online service. It gives customers the option to manage their finances outside of traditional banking services, which in turn allows them to make more informed decisions on their cash and other financial investments.
Banks will be required to share more customer information than ever before and FinTech companies are harnessing the opportunity to innovate in a previously impenetrable sector. Already, new developers are working to provide payment, investment and lending services with higher functionality and lower costs than the existing banking services.
Digital-only banks are likely to benefit from the innovation as they have been built with Open Banking in mind. They are free from rigid operational structures and designed to rapidly develop their own modern technological architecture. This ability to swiftly adapt and innovate while integrating offerings from other players will likely result in a prime, competitive service. Banks that don't adapt risk losing out if they can't accommodate the new, more user-friendly API technologies. The UK is starting an era of more competitive banking where new banks enter the market every year, offerings become increasingly transparent and consumers have a variety of products and providers to choose from.
Greater competition will change the banking culture for consumers. There will no longer be a 'one-size-fits-all' approach to personal and business finance. Where a personalised experience has long been demanded in other sectors, banking is finally having to catch up. Third-party access to current banking data will spark an overhaul of current services where customer data can be better understood and better serviced. New providers will target sections of the market whose financial needs are not being met, and we'll likely witness diversity in the banking landscape as third parties pursue the opportunity to gain a slice of market share. To compete, industry players must start to offer a similar level of service. For UK savers, this enhanced competition alongside ease of product comparison and execution will initiate a stronger culture of account switching to get the best returns and service on cash deposits. A new level of competition could mean the UK savings market may well get the boost it needs.
Consumer apprehension is key, particularly when it comes to financial services. Open Banking means consumers will now receive confidential, personalised options for their finances and have the option to more easily pursue better returns. In simple terms, it will be easier and faster to improve the returns on the UK's savings.
Giles Hutson is CEO of Insignis Cash Solutions.