Open Banking & The Consumer. What you need to know.

26-02-2019 | The Blog Series

Open Banking & The Consumer. What you need to know.

Since the introduction of PSD2 and Open Banking, a lot has been said about the repercussions for banks or other financial institutions. The increased competition, the accountability and the overall transformation that would need to occur in the industry were often the themes most commented on. A year on, and there is still little being reported about the consumer and their position in the new ecosystem. Prior to the Open Banking initiative, questions were asked, polls were taken and opinions were shared about how consumers would feel about sharing their data with trusted 3rd parties. One such survey, conducted by Accenture, found that two-thirds of UK consumers wouldn’t share their financial data with third-party providers. Perhaps more alarmingly however, was that 53% of those consumers said that they “will never change their existing banking habits and adopt open banking”. A PWC report, conducted in collaboration with the Open Data Institute, which looked at the first 6 months of open banking found that just 18% of consumers were even aware of it. The report, maybe somewhat enthusiastically, forecasts this to reach 64% by 2022.

Open Banking – In a nutshell

Many people are still unsure what Open Banking is exactly… And what is PSD2? And how are they connected? Let’s lay it out:

Firstly, Open Banking and PSD2 are the same things. In the UK the directive is known as Open Banking while in the EU, it is called the Second Payments Service Directive. What this directive demands, is that banks must offer standardized APIs for approved 3rd parties, providing Account Information Services (AIS) as well as Payment Initiation Services (PIS).

AIS is the opening up of direct access to customer’s account information data & transactions to (trusted) 3rd parties. This allows for services like comparisons and advice based on live information, as well as personal budgeting across all your accounts in a single app. FinTech unicorn Acorns is one such example. 

PIS enables providers to initiate a payment from an account held by another provider. This makes the transaction something more like a direct bank transfer, rather than going through the traditional card payment channel, or a direct debit. KLM has recently made this payment method available to their consumers in the UK, just over a year after the introduction of Open Banking.

Open Banking Model. Image Credit: XMLdation

Consumer Impact

So, after all of this, do we as consumers still have any idea how open banking is benefitting us right now? Let’s take a look at a few ways in which PSD2 has impacted our overall banking experiences, and how this could change in the not-so-distant future.

  1. Modularity 

    Open banking provides us with the opportunity to get smart about our finances, and to choose our preferred products based on their overall benefit to us. We’re no longer stuck choosing only the products from the bank we use for our day-to-day transactions, and it’s so much easier to have a complete overview of all our financial products, the transactions that we make and to also automate our savings habits within a single app. This transparency is great for tracking our personal budgets and while it may sound like a lot of work, after a short initial period of setting things up, we are left with a far less murky financial world to deal with. 

  2.  Competition 

    Open banking has opened the financial world to more competition than was previously seen. Price comparisons and switching services make it easier than ever to choose better or cheaper products with a competitor. This increases the number of choices we have, but will also lead to more efficient products being produced, in a bid to attract our business. The financial services landscape is rapidly becoming more consumer-centric and we’ll continue to see the rollout of products and services that challenge the status quo, placing the consumer in a prime position to gain the most benefit. 

  3. Accountability It’s worth highlighting that in a world where data is king, the risks associated with it are extremely high. Matt Cox, Head of Open Banking at Nationwide says, “In a world where the data is freely available and the consumer chooses where to do their digital banking, this raises some interesting questions around accountability… This is something we will have to decide upon collectively as an industry. Practically we need to ensure the security of that change of data… GDPR rightly ensures the way we get consent for sharing and securing that information is in line with what members [customers] expect.”

A huge concern for banks is the liability in the case of a hack. Consumers will essentially have to be trusting that the APIs are working effectively and in a way that won’t allow criminals to embed themselves between the banks and the trusted 3rd party applications.

Conclusion

With Open Banking slowly starting to become more mainstream in 2019, we will start to get a glimpse of how the technology works and how early adopters will implement it into their payment (and other) strategies.

What remains exciting to see, is what type of new products and applications will emerge from the new data streams available.

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