Open banking – the use of application programming interfaces (APIs) to connect banks with other financial services providers – promises many benefits, at least, in theory. But, looking back at last year, it failed to gain traction with many either failing to understand what it offers, as well as raising concerns around data security risks.
The initiative is now two years old having launched in January 2018, when the Competition and Markets Authority (CMA) told the nine largest UK current account providers to open up their data. The move was permitted via the revised Payment Services Directive (PSD2), which mandated the right of access to payment account data to boost innovation and competition within the payments market.
The aim is for third parties to access the information, in a standardized way, to provide better and more tailored services and products along with improved budgeting.
Consumers lack the knowledge
Consumers still appear to know very little about open banking with survey conducted by Which? last year finding that three quarters of people had never even heard of it. Meanwhile, 70% said they would be unlikely to consider sharing their financial data, with the main reasons being that they were already satisfied with their current arrangements (64%) / they had data privacy concerns (41%).
According to Jenny Ross, editor of Which? Money:
“Open Banking could be revolutionary for giving consumers greater control over their finances and more choice over products and services – but two years on, huge numbers of people are still in the dark over what it is.”
“If Open Banking is to ever be a success, regulators and industry must do more to promote the benefits and demonstrate that customers are properly protected from data breaches and scams in order to boost trust in these services.”
Businesses are wary
Meanwhile a recent survey from the Federation of Small Businesses found a majority of small firms were ‘wary’ about sharing banking data electronically. Since being introduced two years ago, only 15% of SMEs are sharing their business bank account data with third parties and where this is occurring, it is mainly to update accounting software.
Although open banking should mean SME owners can better manage cashflow and benefit from more competitive financial products, around two thirds of those surveyed said they would not consider doing so, with four in 10 saying they believed sharing banking data was unsafe. FSB chairman Mike Cherry said:
“We’ve always said that done right, the benefits of open banking will be huge. However, the financial crash casts a long shadow. A lot of small business owners still don’t trust lenders to do the right thing.”
The FSB has called on the FCA to ensure open banking interfaces are “absolutely watertight” and agrees the regulator also needs to do more to raise awareness.
FCA sees wider role
The FCA is taking an active role when it comes to open banking. Last month it issued a ‘call for input’ on plans to extend open banking rules to create a broader model of ‘open finance’.
Even if there are security concerns, the regulator is seen as favoring the move since it should allow consumer and businesses to more easily compare products and providers. The FCA is seeking feedback by 17 March 2020 and will publish a feedback statement in summer 2020.
The call was welcomed by Keith Richards engagement managing director for the Chartered Insurance Institute, who said:
“It’s positive to see the FCA looking at ways to make the insurance market, and financial services as a whole, more productive. Open finance also has the potential to increase the chances of vulnerable consumers not only receiving the appropriate cover they need, but also at an affordable price.”
But he added:
“The FCA needs to take full account of the data security risks of open access, what and who protects data sources at all points along the chain, and ensure it is a system with in-built mechanisms to provide help and redress, should things go wrong.”
For now, more education is needed, and open banking needs to reach a tipping point so that understanding grows, and the industry shows it really can keep data safe.