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The UK’s open banking regulation offers the promise of new, personalised services for customers, but its success hinges on how comfortable people feel about the secondary sharing and using of their data.
The regulation resulted from the European Union’s Payment Services Directive (PSD2), and came into force on 13 January 2018.
PSD2 is geared towards boosting competition in the banking sector through the use of technology, and paved the way for the Competition and Markets Authority (CMA) to introduce the open banking regulation to the UK.
The regulation, which took effect on the same day as the EU directive, instructs the UK’s top nine banks to share transactional data generated by their customers with third parties using application programmable interfaces (APIs), as long as the customer consents to their data being used.
In an Ipsos Mori survey of more than 1,000 UK consumers, 66% admitted to concerns about how their data will be used, but experts say this will change when credible use cases for open banking emerge.
Gabriel Schild, executive director for business transformation at Verizon, said banks need to prepare their APIs to ensure consumers can make full use of open banking-based applications.
For example, a financial technology (fintech) company could have an app that allows customers to view multiple bank accounts on one platform, but the banks will need to enable the customers to use it.
“It’s up to the banks to make sure there is an API in place and to make sure the data transferred through that API is safeguarded,” said Schild.
He also expects open banking and PSD2 to be more difficult for banks to implement than the EU’s General Data Protection Regulation (GDPR). That law, which comes into force on 25 May 2018, requires companies to be more transparent over how they use customer data.
“While GDPR is about enforcing new data processing legislation with fines, PSD2 forces banks to open their previously closed data ecosystem to new providers such as fintechs,” said Schild.
“The outcome of GDPR is clear, and its implementation is something banks should be able to master already, but PSD2 means a business model overhaul unlike anything banks have seen before.”
Customers “could almost monetise [their] data” with PSD2, he added, because if they share information about their mobile phone bill with a rival operator, for example, that supplier could respond by offering them a better deal.
Overcoming consumer concerns
While open banking promises to benefit customers, industry watchers say it could also make a significant difference to the economy. The Centre for Economics and Business Research (CEBR) predicts that the regulation could add £1bn to the UK’s GDP because banks can reduce the risk premium on loans and customers can spend the money they save in the economy.
But users may need some convincing before they agree to open banking. According to a study by Accenture, 69% of consumers may not consent to sharing their transactions. However, Chris Gorst, challenge prize lead at innovation foundation Nesta, says this data should be taken with a pinch of salt.
Nesta is using the innovation in open banking as part of the second phase of its Open Up Challenge, a competition that provides funding and support for small fintechs. Gorst said surveys like the Accenture one do not give context to respondents, who are therefore more inclined to withhold consent.
“I’m not sure surveys that ask customers whether they would share their data in a hypothetical situation are all that reliable,” he said. “After all, they don’t know what they’re getting in return.”
Read more on open banking and PSD2
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Caroline Plumb, CEO of cashflow platform Fluidly and one of the first-phase winners of Open Up, said people may be more willing to share their data once they see what is in it for them.
“What you’ll see is consumers will start to recognise the value exchange,” she said. “They’re never going to just hand over the data for nothing in return – why would you?
“But actually, as people start to understand and see the opportunities that they could get by aggregating and sharing their data and the value it can deliver for them, then consumers will do it more and more.”
Open banking is unlikely to be an overnight success, said Plumb, because it will take time to get banks and consumers on board.
“It’s not going to be an on and off switch,” she added. “What you’ll see is gradually more momentum and more interest building in the area and more capability, and that will start to unlock more use cases and start to deliver new experiences and new products and services.”
Yoyo Wallet use case
One example use case for open banking is Yoyo Wallet, which is working with Starling Bank to enable customers to make payments and collect loyalty points from food outlets, such as Planet Organic and Wrap it Up.
Yoyo Wallet CEO Michael Rolph said users need to agree to the company accessing their Starling card and transaction data, in line with the open banking regulation, for the service to work.
“When you say yes [to consent], you actually have to give that permission from within the bank [application],” he said. “What happens is you get redirected to Starling, where you give consent and then you go back into Yoyo.”
Consumers can complete this process in less than 20 seconds, he said, and then they will receive a digital receipt within the app after every purchase.
Starling announced this service in November 2017 and was the first UK bank to make its APIs available in this way.
Rolph said Yoyo also works with retailers and uses open banking to give consumers a full overview of their spending habits. Supermarket giants such as Tesco have already been doing this through their loyalty programmes.
“If you look at the most successful retailers, what they do really well is that they know who their customers are,” he said. “So Tesco has Clubcard – it helps to identify its customers, match them to basket data and market to them more effectively. That has led Tesco to being the most successful supermarket in the UK.”
Rolph pointed out that when retailers know their customers, “that is what being a pro looks like”. He added: “So that’s really what we’re focused on from a Yoyo perspective – through the use of open banking, to help retailers be more ‘Amazon’ or more ‘Tesco’ in their approach.”
Rolph said consent is not an issue when working with Starling Bank, because the vast majority of Yoyo’s users (75%) agreed to sharing their data.
So although consumers are currently showing some uncertainty about consenting to open banking, experts are sure that once more use cases become available, most of the public will jump on board. “The reality will be very different once consumers are provided with the services, applications and experiences that go with the request for consent,” said Rolph.