Is there Financial Inclusion in Open Banking?
The financial services landscape in the UK is undergoing major changes with “challenger” banks gaining traction and the Open Banking revolution promising to “create new competitive spaces”. How will these changes impact consumers and will they lead to more inclusive financial services?
An astounding 1.7m adults in the UK still don’t have a bank account. It can be difficult for people on low income to open one but there is also a reluctance to do so because people don’t trust banks due to a lack of transparency. Our research indicates that unaddressed information needs in financial services are not only poor customer experiences, but also that complex language used by institutions and a lack of access to relevant information when making a decision act as barriers to financial inclusion. For individuals on low income with little financial buffer, the risks of missing important information about their finances are simply too high. The people we spoke to as part of the first phase of Project Griffin expressed a distrust towards banks, seeing them as a necessity at best. This is far from the FCA’s vision of financial services that work to support people rather than hinder them.
Analysis of personal financial data can provide novel insights into the state of an individual’s finances and allow services and products to become more tailored and advice more targeted.
Is Open Banking the answer?
Expectations are high for the changes that the Open Banking and the EU Payment Service Directive 2 (PSD2) will introduce in January 2018. From a consumer point of view, the most significant change PSD2 brings is that it will enable the sharing of transactional financial data with third parties.
Opening up such a wealth of data will allow other companies, rather than only banks that hold the accounts, to use data in novel ways, creating new competitive spaces. Analysis of personal financial data can provide novel insights into the state of an individual’s finances and allow services and products to become more tailored and advice more targeted. In theory, private users will be able to use Personal Finance Management (PFM) platforms that aggregate their data across all the accounts and products they hold. Most relevant for people on low income, they could also provide real-time information on spending and help people keep on top of their finances. This is something that is currently not offered and informing it is a clear opportunity for design research. Perhaps, when paying by debit card getting an instant update on balance and information on remaining disposable income can support financial capability. The resulting higher transparency would make it easier to budget, reduce the risk of adopting financial services and potentially positively impact financial inclusion. However, first we need to build an understanding of how people on a low income manage their finances.
As 40% of consumers would be willing to share their data to receive tailored insights, traditional banks should feel under pressure to rethink their relationship with customers and possibly move away from a business model that is less transparent and open. If banks don’t address consumers’ information needs, challenger banks such as Monzo and Starling or PFM yet to emerge will do so. However, one can imagine that with overdraft fees providing £1.2 bn revenue per year to UK banks, it is difficult to change ways and the pressure must be high to be convincing.
Will innovation be good for the consumer?
In any case, 2018 is likely to be an interesting year for financial services with the FinTech sector will continuing to innovate. The question is whether this will be for the good of the consumer and how does one build a truly consumer-centric bank? How will traditional banks react? Will they hold on to their traditional business models? Will PFM apps improve financial capability, (re-)build trust and improve financial inclusion?
Open banking has the potential for more transparency in financial services.
Traditional banks will need to feel competitive pressure to improve their services.
Financial inclusion needs an understanding of low-income consumers and how they manage their finances.