A year on since the introduction of Open Banking, the industry overhaul that we were promised has to some degree been underwhelming.
With missed deadlines, low consumer awareness and companies slow to react – many of its critics would deem the reforms a failure.
But the truth is, Open Banking presents organisations with long term opportunity and if harnessed correctly, can provide immeasurable benefits.
Introduced in January 2018, Open Banking was launched to increase competition and innovation within the banking sector.
By enabling customers to share their bank account information securely with authorised third-party providers, Open Banking marked a shift in data ownership from the banks to the customers.
These changes were set to create opportunities for new products and providers to enter the market, increasing competition and resulting in a better overall experience for customers.
In order to understand the benefits Open Banking presents for consumer lending products, let's first look at the network of key players in more detail.
Open Banking is continually defining new ways for banking customers (personal and commercial) to interact with financial products and services.
The influx of digitally native challenger banks and new financial service providers has forced traditional players to rethink their approach to product development and user experience.
AISPs are registered Third-Party Providers (TPP) authorised to use customer bank account information in order to provide a service.
AISPs are granted read-only access to customer bank account information. The availability of this information means that registered AISPs can offer a range of services including the provision of money management tools, automated affordability checks, price comparison product recommendations, etc.
Registered Payment Initiation Services Providers (PISPs), if authorised by the customer, can initiate payments from the customer's bank account instead of having to go through a third party like Visa or MasterCard.
This can be highly beneficial for customers who regularly shop at specific online retailers, as it allows them to quickly make purchases instead of having to re-enter their card payment details.
Account Servicing Payment Service Providers (ASPSPs) are banks or building societies offering current accounts within the market place. ASPSPs are responsible for making APIs available to TTPs, allowing them to initiate payments or gain access to customer bank transaction information.
ASPSPs include the CMA9 – the 9 largest banks in the UK (covering 90% of the UK retail banking consumer base). These banks were ordered by both the Competition and Markets Authority and the UK Government to build standardised APIs by 13 January 2018 to allow registered TTPs to securely access bank information authorised by the customer.
The 9 banks are; AIB, Bank of Ireland, Barclays Bank, HSBC, Lloyds Bank, Nationwide, Danske Bank, RBS and Santander.
ASPSPs also include digitally native challenger banks including the likes of Monzo and Starling who have elected to produce relevant Open Banking APIs in order to comply with the standard.
By understanding the various players in the Open Banking ecosystem, it is clear to see that the reform is underpinned by the availability of APIs (Application Programming Interfaces). This technology allows two separate applications to communicate and exchange information.
Specific to Open Banking, API technology allows banks to securely share financial data with registered Third-Party Providers (AISPs and PISPs), if approved by the customer.
This widespread availability of vital banking information presents an opportunity for lenders to improve their customer journey and use banking data to provide products that are better suited to customer needs.
Despite this paramount opportunity, several lenders have yet to capture and utilise this information and streamline the onboarding journey to the benefit of the customer.
So, let's discuss how these benefits can be reaped immediately.
The customer onboarding journey is the first immersive experience that your customer will have with your consumer lending product, it is therefore extremely important to ensure a seamless application journey.
With the influx of information and the increasing choice of lending products on the market, customer demand is more elastic than ever before and every touchpoint matters.
Removing customer friction and providing a positive user experience is therefore essential in order to actively convert your customers.
With mandatory KYC and AML checks, Open Banking can help facilitate a seamless onboarding journey.
Deemed to be one of the most secure sources of identity information lenders can utilise registered AISPs to gain direct access to customers' bank account information. This can help eliminate long lead times associated with manual onboarding procedures and long application forms.
So how does it work?
As part of the application flow, customers are requested to login to their online bank account and grant authority for the lender to gain access to their bank account information.
The lender will then complete a real-time check to validate customer bank account credentials against application form information and cross check against bureau data.
By elevating the need for customers to provide paper-based documentation, dropout rates can fall significantly as the administrative burden is lessened.
However, there is still progress to be made around this technology, as current Open Banking standards do not require banks to validate the account holder name. That means existing API responses provided by banks only validate that the account as genuine.
Work is being carried out with the CMA issuing version 3 of the standard to upgrade this to a mandatory requirement, which is due March 2019. Until then, much of this information is being scraped.
As of 1 November 2018, new rules by the FCA (PS18/19) specified that lenders must make a clear assessment of affordability and credit risk to justify the basis of decision before issuing a loan to the customer.
Essentially, prior to lending and additional to credit risk (risk to the lender for issuing credit), lenders must also ensure that the customer is able to pay back the money without adversely impacting his/her overall financial situation.
Although the FCA recognise that creditworthiness is not an exact science, lenders are expected to have adequate processes in place which prohibit any lending that may be unaffordable in the future.
With enhanced regulatory scrutiny to ensure appropriate checks are being undertaken, lenders are being required to spend more time manually shifting through customer specific information.
However, Open Banking technology can help facilitate faster lending decisions.
By obtaining real time access to a customer's bank transaction information, lenders can make smarter and more efficient decisions around customer creditworthiness by obtaining proof of customer income and outgoings.
Lenders can also more efficiently filter out higher risk customers, minimising their overall financial liability.
The affordability assessment process is made more sophisticated not only during the onboarding process but throughout the lifetime of the credit customer.
By obtaining ongoing access to account information over time, lenders can make more sophisticated decisions around credit limit increases as well as better timing customer payments requests to ensure that they are met.
Open Banking technology can also help enable lenders to provide a better customer service journey.
Through access to real-time customer bank account information, lenders can share smart in-app reminders with customers to help them better manage their finances.
For example, if a customer is approaching their maximum discretionary spending limit, the lender could prompt them with a message to suggest curbing spending in order to meet their monthly obligatory costs, which include monthly credit repayments.
These intelligent notifications will not only serve the interest of the lender, as customers are less likely to overspend and not meet mandatory repayments, but it can also help the customer better budget, avoid fees and remain in control of their finances.
Access to rich bank account transaction data can help lenders go one step further and provide customers with bespoke credit products tailored to their specific financial needs.
Direct access to customer bank information will not only give lenders a more comprehensive idea of customer affordability (which is useful when administering credit limits and assigning appropriate interest rates), but it will also help lenders understand what consumers spend their day to day finances on.
For example, knowing that your customer travels to the EU twice a week means that you can offer them bespoke products with favourable exchange rates and oversea cash withdrawal rates.
This information also creates the opportunity to cross sell other financial products directly suited to the customer's needs e.g. travel insurance for regular travellers.
With so much potential to innovate the customer experience through the Open Banking reforms, it is important to get customers onboard and comfortable with sharing personal banking information.
A recent study undertaken by Splendid Unlimited revealed that less than than one in four people had heard of Open Banking, and of those who had, only one in five knew what it entailed.
These findings clearly highlight a lack of customer understanding around Open Banking and as such directly impact the uptake of the technology.
For many consumers the thought of sharing bank transaction information is an uncomfortable one, due to concerns around security. Unsurprising, given the extent of recent data security breaches by large organisations like Facebook, British Airways and Google+.
Therefore, it is important that for lenders who do choose to adopt Open Banking technology in order to streamline the customer experience, communicate openly with the customer around the benefits and security measures in place.
By making it clear that access to bank account information is authorised only by the customer and access can be revoked at any time, many customers are likely to come onboard.
Open Banking is here and ready to be integrated.
From a more efficient onboarding experience, to improved affordability and budgeting systems, the benefits of the technology are clear for both customers and lenders.
Initial reluctance amongst consumers is, however, inevitable and it will take time to overcome, but the long-term gains of adopting the technology make it worth the wait.
Punneet plays a key role in the strategy consulting projects in Fintech, Traveltech, Retail banking and innovative digital products for multinational organisations. Her background includes market and trend research, financial modelling and strategy implementation for both startups and large organisations. Prior to joining the Strategy Desk team, Punneet was a Senior Associate at PricewaterhouseCoopers.