The Competition and Markets Authority (CMA) is introducing a package of reforms designed to increase competition in the retail banking market. One such reform is termed ‘Open Banking’. It is due to be introduced on 13 January 2018, however a recent Which? survey highlighted that a significant number of current account holders questioned had not heard of the concept. So what exactly is Open Banking?
What is Open Banking?
Every time a customer uses a debit (or credit) card, data is generated and is then held by the issuing bank. When shopping around for financial products and services, customers will, most likely, approach their main bank first and choose the best option it has to offer. There is a lack of desire for customers to move away from what they know and this led to the CMA investigation into competition in the financial sector. The CMA concluded that smaller banks and those new to the market are finding it difficult to compete with the established names in the banking sector.
Open Banking is designed to tackle this lack of competition and diversity in the market, making it easier for customers to seek out the best deals in a way that is tailored to their financial situation. Of 70 million bank account holders in the UK, only 3.5 million have ever switched banks. It is evident that larger banks are able to access the market much more easily and so the CMA hopes that Open Banking will allow smaller banks to enter the market and improve competition and innovation, in turn benefitting the customer.
Open Banking will enable customers to securely hand over the financial data held by their bank. This will be done through the use of secure software, known collectively as APIs. The software has already been made publicly available and third parties (approved by the CMA) have started to build mobile applications which take advantage of the Open Banking system.
Applications are already available that will allow users to view all of their bank accounts in one location, they can then budget, receive alerts when they are close to credit limits or overdraft limits and keep track of any direct debits and bill payments that may be due. Open Banking will also be used to allow for easier applications for mortgages, credit cards and other finance products as a decision can be made almost instantly based on how the applicant’s finances look as a whole.
Companies will be able to use the information retrieved via Open Banking to offer more tailored financial services and products which will provide customers with more choice.
