So Open Banking has been a thing for almost a year now. Yet many people ask me why it hasn't changed peoples lives?
It gets plenty of column inches, especially in Fintech circles but is anyone actually using this new capability to deliver benefit to people? Is Open Banking just a bunch of hype?
Firstly, let’s get one thing straight. People will never buy Open Banking.
Recent surveys show only 1 in 5 people know what Open Banking is. But, people don’t buy new technologies and the last thing they want to do is try to understand how they work. People don’t go out to buy a product or service, they buy a better version of themselves.
Open Banking is the enabling technology, regulation and intent that can improve peoples lives. But for this to happen the industry needs to shift its mindset!
There are too many Open Banking bigwigs using the wrong metric to measure the success of open banking. I hear a lot of banks discussing their strategies to protect their margins in the era of Open Banking and we all see Fintechs using Open Banking as the hook for big funding rounds and high valuations. None of these metrics should be used to measure the success of Open Banking.
It’s not about helping rich people get richer, it's about financial inclusion.
It's not about the best insights in an app, it's about helping people with everyday challenges, those with vulnerabilities, for example, helping someone with bipolar disorder block themselves from a spending spree.
Success is people feeling more confident about money using it as the enabler to a happier life. We have the opportunity to make money an enabler to a better life for everyone. Whether that’s through better budgeting, saving or investing, a clearer picture of affordability, access to appropriate finance or faster and more personalised debt advice. If we get it right we will all win - consumers, Fintechs and banks.
I’m going to talk about three key areas of our financial lives which can be transformed by Open Banking, based on OpenWrks collaborations that use Open Banking to enrich people’s lives.
Open Banking can be used to establish individual and household affordability within seconds. Combining data that sits within a bank statement with smart questions about circumstances, Open Banking significantly reduces the time it takes to establish whether a person can afford to meet mortgage repayments. Resulting in faster processes from application to decision, initial indication of approval before completing a full application and even alignment of affordability to the size of the house a person aspires to own. It won’t be long before Rightmove filter searches based on the monthly mortgage payment amount.
A typical lender will decline 20% of applications simply because they do not have sufficient data to establish whether a person can afford to repay the loan. This is due to a blind spot within the credit bureaus. This blind spot means that a large portion of the population has thin or nonexistent credit files. Unfortunately, this tends to impact the people who could benefit from a small credit line the most, for example, younger people and those new to credit. By using Open Banking to understand someone's affordability in more detail we can stop relying on averages such as ONS figures, best guesses from credit scores and income assessment tools and instead base a lending decision on what someone can really afford. Enabling us to improve access to finance for a proportion of the population that are currently financially excluded.
It’s becoming increasingly difficult for people to make ends meet every month. With a booming gig economy, 1 in 3 people experience significant income variance from one month to the next, yet typically expenses stay fixed. The cost of living is becoming more expensive with 16 million people in the UK having less than £500 in savings, leaving people with little or no resilience to financial shocks. By analysing a person budget over time Open Banking can be used to forecast weekly, monthly and seasonal variances in income. By combining this with evidence from their employer that the person went to work, advances in their salary can be made. So people are at an advantage in the event of an unforeseen expense (boiler breakdowns) rather than incurring overdraft fees, debt or simply to smooth payments throughout the month making it easier to manage a budget.
SMEs are busy people that prefer to stay debt free and fund their business with cash, but they are also ambitious and want to grow. However, SMEs typically apply for finance two weeks after they need it because of the slow, painful application process. Even if they started applying on time they won’t get a decision fast enough so will simply move on to the next challenge. Open Banking is enabling SME brokers and lenders to assess a company's solvency and cash flow within seconds. No long manual processes pouring over bank statements, instead simply combining Open Banking with online accounting data to get a complete picture. The SME gets a decision within 24 hours so they know if they can, hire that extra person, buy the stock they need for Black Friday even or open a new outlet.
SME use cases have a ripple effect. A business that borrows can grow, hire more people, support more families and generate more income for UK PLC.
Money management isn’t taught in schools. There’s no awareness of how much it costs to grow up and it's going to be even worse for the next generation because as with an ageing population the cost to finance life is rising. It’s predicted that the UK’s savings gap will reach £25 trillion by 2050. With Open Banking, people can save and invest automatically with the likes of roundups initiating savings by linking them directly to spending. This enables everyone to be better prepared for the future so that they can live for today.
People in debt are often under-served by innovation. Even once a person has overcome the embarrassment or shame of admitting they need support, they then go through an interrogation to evidence what they can, or more often than not, can’t afford. Once the painful I&E process has been completed the stress should be over. But then they enter a repayment plan which is fixed and hard to stick to. With Open Banking, alongside OpenWrks partner Tully, we are helping to change the way debt works. Tully’s flipping the I&E process to put the customer in control of building a budget they believe in. A budget they understand. A budget they can save and share. Open Banking also enables Tully to offer people a flexible repayment plan so for those with variable income, aren't stuck to a fixed repayment amount each month but instead pay a fixed percentage of their disposable income. This approach is helping those in financial difficulty take control and plan for the future.
These use cases are live and helping improve every day lives today. If we work together we can get these first order use cases singing so that people are more confident in managing their money. The power to use Open Banking as a force for good sits with all of us. We have the opportunity to create a legacy that as an industry and as individuals, we can all be proud of.
Let’s collaborate to make Open Banking work!