The government yesterday (9 August) released a report two-years in the making that concluded older and larger banks have not had to compete hard enough for customers’ business, meaning the growth of smaller and newer banks like Atom and Metro has been stunted.
To remedy the situation, the Competition and Markets Authority has issued a set of reforms to be implemented in the next two years which will see banks have to get on board with something called ‘Open Banking’.
Soon, the likes of Lloyds and Barclays will have to allow customers and small businesses to share their data securely with other banks and third parties via an open API.
This requirement for banks to make their data open will ultimately lead to the ability for others both in and out of the sector to (with permission) create apps built on consumers’ data. In theory, this should open up the market which has been monopolised by the biggest players.
And for customers, the hope is that it will enable them to manage their accounts with multiple providers and give them more control of their funds and things like overdraft charges as well as making it easier to compare financial products.
"The reforms we have announced will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks," said Alasdair Smith, Chair of the retail banking investigation.
"We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy [...] We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs."
While some challenger banks have said the two-year review has not gone far enough to dismantle the deeply embedded control top banks have over the industry, the report's recommendations have nonetheless delivered banking its own Uber moment with disruption undoubtedly on the horizon.
Opportunity, not a threat
The banking sector has long blamed its legacy systems and decades old processes for the slow progress when it comes to even the most basic digital services and, when it suits, have been quick to hide behind financial data protection laws.
This means they simply haven’t been subjected to the threats from disrupters that established energy, insurance and transport organisations have in the shape of, for example, price comparison sites.
But Nick White, senior vice president of group product at Monititse, a digital agency specialising in the financial sector, argues that banks now have a compelling reason to act and pump more investment into innovation to ensure they are moving with the rest of the industry, rather than road-blocking it.
“The CMA’s proposals will force the industry into progressive banking,” said White. “Whilst this news may be deemed as a threat to some banks these changes should be viewed as an opportunity. Banks can themselves become the trusted third party aggregating account information from their competitors. They can innovate in the way they engage customers and put them in control in order to improve their NPS [net promoter scores]. It isn’t all bad news.”
The concern has also arisen that come 2018 there will be the temptation for data-led behemoths like Google and Amazon to get involved in the consumer information side of the sector. Their reputations may have been sullied in recent years but in spite of themselves banks built up trust among consumers and this heritage in the sector is something they can harness.
“It’s one thing for a newcomer to build a solution that sorts through the price of airline tickets – it’s a low risk proposition,” explained Dominic Mills, chief technology officer at digital agency Zone, which works with Halifax.
“But that’s not the case when you’re offering a personal-finance solution and, potentially, advice to consumers, and banks already have the in-built credibility here.”
But for banks to offset any disruption by lauding their experience in personal finance, they must first prove the utility they can offer customers through digital. And that means embracing this new open standard from the get-go.
“Any organisation [should be able] to offer, within a couple of taps on a mobile phone, new personalised products and services. And given they will be based on an accurate record of the consumer’s entire banking history, this can bring a whole new approach to responsible lending. If it’s easier to establish who meets what criteria, there should be lower risk – which should mean lower rates for all,” added Mills.
“High street banks have the capacity to do this, and the smart ones will be ready on day one, launching new digital platforms that can take advantage of the new open platform, immediately offering customers – both existing and potential – products that take into account the new wealth of information available.”
From the consumer point of view, this will not only to lead to an increase in the quality of banking apps available but be on the receiving end of an increasingly personalised service. .
“I can see it leading to apps targeting specific segments of the public – whether that’s a higher security app for older, less digitally-savvy people, or an app which gamifies the saving process for the youngsters of Generation Z,” suggested Dennis Jones, chief executive of Judo Payments.
“Overall, this is likely to kick-start greater investment in security and education to consumers, many of whom still erroneously believe that mobile payments are less secure than card or cash. With 2018 fast approaching, we can expect to see more competition, better customer service and more and more innovation as we welcome in a long overdue revolution in mobile banking.”