The government is planning to open application programming interfaces (APIs) in banking so technology companies can offer services that give consumers a better understanding of bank offers.
In the same way IT platforms such as Comparethemarket.com have transformed the process of buying insurance, the government hopes technology companies can increase transparency of banking services through information enrichment.
The government has called for evidence about how open API’s could "enable financial technology companies to develop innovative solutions to allow customers to make better comparisons between different banks and financial products".
Regulators have tried to inject competition into the retail banking sector with a system that enables consumers to change bank accounts more easily. The seven-day account switching system, which launched in September 2013, has been praised.
However, its success has been limited, with some experts claiming consumers are reluctant to change banks because they cannot see differences in the services they receive.
The regulator reported a 19% increase in the number of accounts switched in the 11 months since the service launched in September 2013. But was it worth the investment? The service was launched in September last year. In the first eleven months of its operation, from 1 October to 31 August, 1.1 million account switches have been made – an average of 100,000 a month.
If that rate continues in September, the number of switches in the last 12 months will be 1.2 million, which shows no change on 2012, when there were 1.2 million current account switches. This dropped in 2013 when there were 1.02 million.
More on banks
The payments council also revealed 70% of the public are now aware of the new service, 61% are confident in what the new service is and how it works, and 88% of consumers who have switched accounts felt there was little effort involved on their part.
Gareth Lodge, a financial services analyst at Celent, said the seven-day account switching service is a positive move, but there has been no real increase in the number of people switching.
He said the Banking Commission can no longer point to the difficulty in changing accounts as being the reason people do not change their bank. Rather it is the fact that banks do not differentiate that is stopping people switching.
But open APIs could enable companies of the Comparethemarket.com ilke provide information-enrichment services. This could inject real choice and competition, forcing banks to invest more in technology to improve customer services. Companies such as Google and Facebook are applying for licences to offer certain banking services but will not want to become banks.
True competition in banking is more likely if there are independent advisories pitting banks against each other, supported by easy account switching.
This is what needs to happen if banks are to bring their IT up to date. The threat of falling revenues will make a good business case for replacing outdated legacy systems. Banking IT outages such as the one suffered by the Royal Bank of Scotland in 2012, has made improving banking IT a priority for financial services regulators, but even the huge £56m fine that RBS received for the failure might not be enough for banks to replace dated systems.
Without that competition, retail banks will only modernise when their legacy systems collapse – or if regulators force them to change.
Banks need to face a competitive threat similar to the London Stock Exchange (LSE) when the trading sector was liberalised and it faced losing a significant portion of its business. It ripped and replaced its legacy in-house developed trading platform.
Will open APIs achieve this?
According to recent research from Infosys and French retail-banking association EFMA, 45% of banks rated the threat from technology companies as "high".
Researchers questioned executives at about 100 banks around the world. “After technology companies, the most significant threat is perceived to come from telcos and startups,” said the report.
The research revealed the perceived threat from technology companies had “increased noticeably”, compared with last year.
The report said that, although large IT suppliers pose the biggest perceived threat, it remains to be seen whether this concern is justified.
“In spite of the fact that banks fear technology companies the most, we need to wait and see the impact of developments such as Google Wallet and Apple Pay," said the report.