With the implementation of the European banking regulations covered under the Second Payment Services Directive and the advent of ‘open banking’ just a few short weeks away, we are bracing ourselves for the impact on the financial services market.
Open banking will revolutionise the way in which consumers engage with their financial providers and the services they offer. It will enable customers to share their financial data with a range of banks and regulated third parties so as to compare and consume products in a way uniquely suited to their own preferences and behaviours.
It will also allow individuals to manage their accounts and bills through a single digital platform via the use of secure application programming interfaces — a radical and potentially empowering means of financial control.
Building consumer confidence
That said, the need for consumer confidence and consent (especially with regard to sharing sensitive data) will be central to the success or failure of open banking services. Recent research has indicated that popular acceptance of platform banking may be some way off, although customer and adviser appetite to digitally engage is definitely increasing.
For example, in a recent survey of 2,000 people published by consultancy Accenture, 53 per cent indicated their total unwillingness to change the way in which they banked, while 69 per cent said they would refuse to share financial data with a third party because of security and privacy concerns. This is a major obstacle.
Assuming open banking does prove successful, its impact on financial providers could be nothing short of explosive
With experts expressing reservations as to the stringency and effectiveness of third-party security against professional hackers, and the attendant risk of fraud this could imply, banks and other providers will need to work hard to win over hearts and minds.
They will certainly wish to avoid the same fate for open banking as experienced by the Midata scheme — a government initiative from around six years ago that encouraged consumers to share their account details with ‘comparison providers’ in return for advice and the opportunity to switch accounts to obtain a better deal. It effectively flopped amid security fears and public indifference.
There is no reason to doubt the incalculable impact open banking could have on the wider market if it managed to connect with popular opinion. However, if it fails to capture public enthusiasm, its impact will be akin to the sound of one-hand clapping — utterly negligible. We will just have to wait and see.
Assuming open banking does take off and prove successful (and, let’s remember, technological innovations can often take a while to bed down in the public consciousness), its impact on financial providers could be nothing short of explosive.
One of the major incentives for creating the scheme in the first place is to encourage competition between banks and other providers, and to improve customer services accordingly.
Many observers assume the mainstream banks will have the upper hand when it comes to ‘land grabbing’ new platform custom, thanks in no small part to their omni-visible high-street presence and depth of brand recognition. Yet others, including Bank of England governor Mark Carney, believe it is the API-based digital companies that could make the biggest impact in the long term.
Quite apart from their obvious ability to connect with market changes on both a fundamental and professional level, they will not require the same (potentially draining) investment levels to replace or upgrade outmoded legacy architecture as their high-street counterparts, and they should be able to offer customers a higher standard of functionality and useability.
At this point, of course, any other observation would amount to sheer conjecture. However, there is still a strong possibility that we could witness a radical reversal of fortunes in the banking arena over the next few years.
Watch this space.
Dave Edwards is commercial director at Personal Touch