By Andy Sleigh, COO of ClearScore
When the Competition and Markets Authority introduced open banking over 18 months ago, it promised to be a revolutionary development for the consumer, breaking the data advantage enjoyed by the big banks and catalysing innovation.
However, the reality is that adoption has been underwhelming. This is in large part down to the lack of awareness and understanding around what open banking is.
Our research has shown that 75% of consumers are unaware of open banking and are highly sceptical about sharing their data; unsurprising in an environment where data breaches and shaky technological infrastructure regularly hit the headlines.
Part of the explanation is the slow implementation of the technology by high street banks owing to outdated infrastructure. Open banking necessitates the sharing of data with a range of financial service providers, and in many cases this requires banks to update their platforms and data interfaces. This naturally requires an investment of time and cost, and so the biggest household names are not widely associated with open banking initiatives.
Our research has shown that 75% of consumers are unaware of open banking and are highly sceptical about sharing their data
Another crucial factor is that open banking offers few advantages to traditional banks and so consumers who embrace open banking might look elsewhere for services that large retail banks have historically provided.
This has opened up a great deal of opportunity to innovate within the FinTech space. But though FinTechs are way ahead of the curve in embracing open banking technology compared to traditional banks, there is a need to combine this innovation with benefit-led messaging to drive adoption and increase the financial well-being of its users.
How can the innovators encourage users to share their data
Serving the underserved
Consumers who are currently underserved by financial service providers stand to benefit the most from open banking. Those with established credit histories often already receive plenty of offers of credit, whereas those with lower credit scores are left unsupported. By adopting open banking, vulnerable and underserved populations could be mobilised in the credit space, with resulting financial freedom.
Our analysis estimates that most of the underserved population with a credit file is only creditworthy at a univaritate level, that is to say they only qualify for credit according to one of the following criteria:
- 60% of these users are on £20,000 gross salary or more
- 19% have no past default
- 56% have an open credit card
- 14% are homeowners
- 78% are employed
Encouraging these users to agree to share data via open banking would provide lenders with more data points to calculate risk and subsequently lend to them.
For financial service providers, this represents a massive opportunity. Opening up lending to just 5% of the underserved population that we surveyed could result in additional lending of an estimated £30 million per month. And of course, this figure has the potential to grow as consumers graduate to further forms of credit in later years.
most of the underserved population with a credit file is only creditworthy at a univaritate level
Better decision making
Almost all lenders that we spoke to stated a desire to use open banking for income verification to create new lending avenues and provide them with extra data for more granular decision-making around affordability. As we have shown, this is especially useful in calculating risk around underserved consumers about whom they have a lack of data.
However it also has the potential to benefit users who already have access to credit.
Technology has revolutionised many aspects of the way we live, but has not yet changed the way people manage their money. The result? Consumers continue to stay with their bank for a lifetime, putting up with low interest rates on savings, uncompetitive loans and high overdraft fees, where open banking could provide solutions that save both time and money.
The benefits of open banking are clear in this context for both consumers and lenders alike: consumers could find lending options open up to them when they share their data, and in turn, lenders could gain access to new customers. Lenders therefore need data from consumers to start building it into their decision-making, but they haven’t yet been able to create compelling ways to engage users in data sharing.
What would encourage consumers to share their data?
To drive adoption, those leveraging open banking need to talk less about the underlying technology and more about the tangible benefits to consumers. Naturally, the more data consumers are required to share, the greater the perceived benefits will need to be. The industry needs to start simple; ‘light’ or ‘one-time’ access to data may be an effective way to encourage consumers into their first experience of open banking.
Our research shows that consumers are more likely to exchange their data in return for concrete propositions. (For underserved consumers, their likelihood to share their data before and after they had seen the benefits increases by 9 percentage points.) We tested a range of product propositions to obtain a better understanding of the services that most resonated with consumers and would lead to them sharing their data in return.
Our research shows that consumers are more likely to exchange their data in return for concrete propositions.
The most popular suggestion is exchanging data for a more accurate credit score which truly represents their overall financial situation. There are currently 760,000 in the UK who are underserved by the market and could benefit from a service like this, and 83% of those surveyed would be willing to share their open banking data in exchange for a more accurate credit score.
Innovators will then be able to better support these consumers by painting a more detailed picture of their financial situation, including a view of their current accounts, credit accounts, savings and debt. This, in turn, can feed into a more accurate and transparent credit score – a scoring system that has traditionally been shrouded in misunderstanding around the contributing factors. For example, here at ClearScore, we’re developing OneScore – an app that will provide consumers with an in-depth view of their finances which will empower them to make better financial decisions based on their own proprietary data.
Another of the most popular propositions is bill recognition. At the moment, people can pay their bills on time for years without it ever being reflected in their finances. If these payments were to be made visible alongside a credit report, lenders would have extra proof of reliability, with the benefits being passed on to the user. 81% would be willing to share their data for this offering.
Innovators will then be able to better support these consumers by painting a more detailed picture of their financial situation, including a view of their current accounts, credit accounts, savings and debt.
Being accepted for credit is also important. If prospective customers knew they could provide more information about their finances in exchange for a greater likelihood of acceptance, lenders could get a fuller picture and adoption would increase. The idea of sharing data to get credit understandably proves popular, with 76% willing to exchange their data and a particular appetite among the underserved.
Trust is also a key factor. Our research shows that consumers’ likelihood to adopt open banking-enabled services increases by 50% with trust marks in place from their bank or lender, particularly when these marks are used at points of high friction, such as the moment when a user links an account and officially hands over their data. These could include FCA approval, user testimonials or third party reviews.
We are still at the beginning of what will likely be a long road to mass adoption of open banking in the UK. Yet this is a hugely exciting journey for both consumers and providers, and we are already seeing pockets of innovation emerging. A new age of open banking is around the corner.