Competition is better for the consumer. We see this time and again in our everyday lives.
We’re already encouraged to shop around to get the best deals on everything from the calls we make to the energy we consume.
Open banking – which comes into force just two months from now – is set to do the same for the finance sector, creating both opportunities and threats.
From January next year, all banks must provide an online interface that allows other finance providers to access an account holder’s transaction data, if the individual gives their permission. It’s a huge development for the finance sector – one that many believe is overdue – and its impact will be felt particularly by credit providers and their prospective customers.
Currently shoring themselves against a raft of competition, big banks will have mixed feelings about the change, particularly as their rivals could now tempt customers away with better and more personalised offers.
In some ways, the big banks might prefer their existing account holders to opt out of sharing their transaction details so that their rivals don’t have access to customer information. They’ll also be watching what the alternative lenders have up their sleeves.
With smaller customer bases and less data to refine their credit models, these less established players have had to operate on the margins. But now, with access to everything the major players’ hold on any consenting consumers, the potential for these minnows to capitalise on the changes is huge. Able to move faster to adjust their software and update their offerings, we could see them rapidly benefit from the new scheme.
For the average person on the street, the inner workings of a new financial regulation are unlikely to create much of a stir. But the greatest potential of open banking could be to herald personalised lending, which impacts everyone.
Lenders should be able to make use of any consenting individual’s financial information. Providing a much more accurate picture of someone’s financial behaviour can help decide whether to lend, how much, and at what interest rate.
Of course, consumers are likely to have mixed feelings about open banking. On one hand, it will help some people who may have struggled to gain access to finance due to their limited credit history – so called “thin file” cases.
Through their account records, lenders should be able to see that they have the financial capacity to repay loans even if they haven’t been extended credit in the past.
For others, it may have a detrimental effect. If their transaction information reveals them to take financial risks, lenders may be more inclined to turn down their credit applications than they might have been previously. So it is possible these people may be reluctant to open themselves to the additional scrutiny.
Clearly, the impact of open banking will come down to people’s willingness to share their financial account information. Having been educated to protect their personal data, many consumers will already be reluctant, and it’s possible we’ll see an initial swathe choosing to opt out of sharing their account data.
It’s difficult to predict what the implications of open banking will be yet. But we can say 2018 is already on course to be a very uncertain year.
With Brexit looming large, if we want to make the most of open banking’s potential, the financial sector must collectively educate the public on its benefits.