This week sees the beginning of a quiet revolution in banking which some have championed as one of the greatest shake-ups in personal finance in years, while others have warned it could have serious implications for people’s private data.
It’s the start of a new series of rules concerning “open banking”, where customers will be able to share their personal financial information with companies other than their bank, opening up opportunities to get better deals on mortgages, overdrafts and comparing insurance and broadband deals.
For eager enthusiasts, it will revolutionise banking, make the system more competitive, and give consumers access to the best products for them.
For the more sceptical, among them consumer groups, it could cause problems with the security of previously private data.
The new rules, set to come in on current accounts from next Saturday, could result in a substantial opening up of the banking market – where just 3% of people switch accounts, according to research by the Competition and Markets Authority (CMI).
But, so far, word of this quiet revolution seems to have eluded the public – a survey from consumer group Which? found that 92% of people had not even heard of open banking. So how will it affect customers?
What is it?
Financial data about how you spend your money, how often you are overdrawn and other details are currently held by your bank.
Under the new rules, the ownership of this data will essentially be transferred to the consumer, meaning that account holders will be able to give companies, other than their own bank, permission to access their details. Underlying this new regulation, which will spread across Europe this month, are EU rules that mean financial institutions must let customers share their data easily and securely. Extra measures are being taken in the UK to push through the changes, with the setting up of standards so data can be shared securely.
“The idea of ‘open banking’ is that it opens up data on your banking transactions. You’ll be able to share it with whoever you wish, the idea being that if companies know what you’re spending, they’ll be able to analyse the data and guide you to better deals, or better ways you can use your money,” says Helen Saxon, chief money analyst at MoneySavingExpert.com.
Nine UK banks are required to comply with the new rules – Barclays, Lloyds, Santander, Danske, HSBC, RBS, Bank of Ireland, Nationwide and AIBG. Five of these have been given more time to comply.
How will it affect consumers?
In theory, people will be able to use the services of more banks and approved financial bodies in a much more straightforward manner.
This could be opening your banking app and being able to see a list of all of your accounts, no matter the bank you are with – a process called “account aggregation”.
It could also mean giving a company that analyses financial details your account data in order to offer budgeting advice, or showing alternative deals on the market – in essence, a comparison system but for financial products.
Under “open banking”, users will be able to authorise third parties to access their banking details without having to provide login details, which is the case at the moment in order for apps that manage money to collect data.
According to the Open Banking Implementation Entity (OBIE), the body set up to deliver open banking in the UK, the applications can only use the details for the purpose they have been given.
Users decide what information they share and for how long. The process could result in one app or platform running all of your financial accounts.
“There are a lot of unknowns. The law changes on 13 January, but that’s just the start. There are already a few apps, like those that aggregate all your financial accounts or scan your current account and work out how much you have spare to save, then save it for you, which will benefit,” explains Saxon.
“This is because you’ll no longer be breaking your banks’ terms and conditions by sharing logon details with a third party, so the risk of you having to pay for any fraud resulting from this sharing is removed.”
Victor Trokoudes, the chief executive of Plum, a financial assistant app that analyses how people are earning and spending, says that banking products will become commodities or utilities as a result of the changes.
“People don’t know what the cost of an overdraft is … something like 40% of people in the UK have an overdraft but it is completely vague as to what the cost of the overdraft is for these people,” he says.
“The overdraft does not have to live within the current account. It could be from another provider and throw money in your bank account when it hits a low limit and, effectively, will replace the overdraft from the bank.”
Sounds good?
The moves have been welcomed by Which? as a way to bring more competition into the market and encourage switching.
“Switching rates are still relatively low and that is because people have not been able to see what is in it for them, personally, and open banking has the potential to do that, to personalise your ability to compare current accounts and say, ‘I’m £1,500 into my overdraft two weeks in the month, I am not getting the best deal, I’ll switch to the bank that does give me the best deal’. Or, ‘I am in credit by £1,000 every month, I am not getting the best deal from my new provider, I will switch to a new provider’,” says Gareth Shaw from Which?
Consumers should also be aware they are under no obligation to share their data, adds Saxon. “The most important thing to say, is: ‘This is just a thing you can do.’ No one will force you to share your data with anybody.”
The downsides
While consumers may feel empowered that their data is now in their own hands to do with as they please, with the potential to save money, it could also lead to unease, particularly when dealing with third parties that have brand names they might not recognise, says Shaw.
“One of the things to be mindful of is that consumers could find themselves in a complicated chain of providers. If you authorise one third party to access your money, and if there are potential losses, where does that fall?
“I think data regulators and financial regulators need to be really clear with consumers about how that is going to work. In order for consumers to really engage with this, they need to be confident that there are safeguards in place to protect them. There has been good progress on that.”
Saxon also points out that consumers should be aware that the information they get from a third party app may not be impartial.
“They may find you an energy deal that saves you money, but there’s no guarantee they’ve searched the whole of the energy market to find the cheapest tariff. They may just offer deals from companies who pay them for new business,” she says.
A spokesman for the OBIE says third-party companies which use open banking will have to be regulated by the Financial Conduct Authority and registered with them on a directory.