Who will benefit from using your financial data?
It’s not too hard for most of us to decide whether Tesco or Sainsbury’s best meets our grocery shopping needs. But to decide whether you’d be better off banking with Lloyds or NatWest requires a complicated calculation involving your monthly income and expenditure, the average size of your bank balance, your overdraft behaviour and your foreign exchange transactions together with the complex and opaque charging structure of the banks.
The most obvious symptom of the dysfunctional nature of competition in retail banking is that a high proportion of the banks’ costs fall on a minority of customers. Many bank customers get free banking: free transactions in return for keeping a relatively modest average positive balance in their account. But the banks profit from customers who keep large current account balances on which they earn no interest; from the disproportionately large fees paid by customers with arranged and unarranged overdrafts; and to a lesser extent from disproportionately large fees on foreign exchange transactions. There’s something troubling about a market in which a high proportion of the costs fall on a minority of the customers.
In recent years, there has been some progress. Some banks offer current accounts which pay interest on balances. Even so, the take-up has been less than expected, as many customers stick with a free account even though they’d get a better deal from an account with a monthly fee and interest on balances. The introduction of overdraft alerts has enabled many customers to avoid or reduce overdraft charges.
The Open Banking programme will speed up the rate of progress. The underlying technology, open application programming interfaces (open APIs), is what enables many current online applications, for example by allowing a website that sells train tickets to link to real-time timetable information.
Financial planning will become easier as we gain access to better advice about complex financial decisions. That’s good for those of us who want to choose the bank account that suits us best, and who have enough financial flexibility to shuffle money around to avoid high overdraft charges.
But what about those who are squeezed financially, who struggle on from week to week without a financial plan, and who may feel trapped in expensive overdrafts, payday loans, credit card debt, and rent-to-buy schemes?
We’re already beginning to see ways that Open Banking can address the needs of individuals in financial difficulty. Opening access to bank records will enable the creation of new debt advice and budgeting tools which will help the financially squeezed to manage their money and steer them to less expensive sources of credit. These are tools which individuals might access themselves or together with a debt adviser.
Third-party access to bank records can also help establish the credit-worthiness of people who have a thin credit record, for example because they don’t have a mortgage or other substantial loans and enable them to have access to cheaper lines of credit.
Open Banking will have effects across the full range of financial products, many of which are sold in ways which exploit known consumer decision-making biases, concealing true costs behind attractive headline numbers, or charging high prices for insuring small risks. Many bad-bargain products are targeted at poorer customers who have fewer options than the better-off. Providing better information about their financial options will help credit-constrained individuals avoid bad buys like domestic appliance insurance and rent-to-buy deals.
More information is not a panacea. As more consumers become alert and better-informed, sellers of financial products may offer even worse terms to the passive and ill-informed. For example, when more and more people use price-comparison websites to buy home and motor insurance at the lowest available prices, insurance companies may have an incentive to jack up the renewal premiums for those who don’t shop around. There’s a real risk that the financially disadvantaged will lose out. Both regulators and charities have a role in ensuring that doesn’t happen, ensuring the financially squeezed are not trapped.
Open Banking does not do away with the need for financial regulation, especially for families struggling financially. But better information and better tools in the hands of customers will reduce the need for intrusive regulation which always has the risk of driving products off the market.
In short, the fundamental objective of Open Banking is to deliver a radical increase in the availability and usability of good financial information and advice. The success of the programme depends on ensuring that the benefits are gained by all sections of society, not just the affluent bank customer.
Banking on Change is a publication which examines how we can develop a comprehensive policy approach towards financial inclusion. The report features contributions from the likes of John Glen MP, Peter Dowd MP, Anne Pieckielon, Chris Pond and Guy Opperman MP.
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