With the UK’s front-running position in open finance innovation, the groundwork has been laid for a fairer and more inclusive financial system. Explaining how open banking can help the UK and other countries in the world, we hear from Lord Iain McNicol, member of the House of Lords.
Fair and inclusive banking has not always aligned with the consumer experience in the UK. This was especially true following the 2008 global financial crisis, which strained trust between the banks and consumers. This relationship, almost 15 years later, is slowly beginning to re-appear in a way no economist could have predicted.
As the pandemic sent shockwaves across the world, another change was coming. An unprecedented number of people began to engage with their banks in a different way – allowing groups and communities access to advisers and their information online. This accelerated digital transformation and, with it, a heightened and different focus for banking, one that looked to the consumer to lead the conversation.
Emergence of open banking
Nowhere has this been more obvious than with open banking. With seven million users and counting, many of whom turned to open banking through its customer-centric and accessible approach, it has taken the world by storm. Gone are the days of endless red tape. Instead, open banking enables more effective delivery of essential financial services, reducing errors, and fostering a more inclusive financial services ecosystem for people and small businesses to grow.
It is also providing a much-needed way to alleviate the burdens associated with the increased cost-of-living. With the crisis disproportionately affecting the poorest in society, we have seen a marked increase in those who had little to no savings taking on larger sums of debts in an attempt to stay afloat.
However, open banking has tapped into a framework that overwhelmingly supports lower-income groups, helping users save an average of £497 in interest through loans offered. One open banking platform has also used the technology to tie up with benefit schemes, identifying £36.3million in unclaimed benefits that customers were entitled to each month.
Inclusion through variety
With 93 per cent of consumers now using online and digital financial services, open banking has encouraged better availability and improved performance for millions of users, streamlining services. By using simple dashboards to combine incomes, mortgages and bills into one place, for example, consumers have a clear view of their finances, allowing them to take action on mounting bills and rising costs.
Open banking has also let us build a more inclusive and open credit market by establishing digital IDs and wallets. For a long period of time, identity and address verification have been a key barrier for lower-income groups in accessing financial services. The emergence of software facilitated by open banking has helped consumers switch to providers and products seamlessly, allowing for ‘automated’ switching.
This has allowed refugees, asylum seekers, care leavers and the homeless to create new credentials, by linking ID to a biometric police record, enabling them to open a bank account.
Doing more to help society
With ambition at the heart of open banking, the opportunities are limitless. The framework that open banking provides allows firms to enable their customers to authorise the sharing of their transaction data, allowing access to new products and services. With open banking software built on the systems offered by fintech firms, the two complement each other, leading to innovation and growth in a way that has rarely, if ever, been seen.
This has already led to a boom in the digital transformation of fintech’s, with six of the top ten global fintech companies based in London.
Yet, the framework that open banking offers must – and can – do more to help the most vulnerable in society. With three million borrowing from illegal moneylenders or loan sharks in 2022, predictions suggest this will only increase as we enter the winter months. With an estimated 17.5 million in financially vulnerable situations, those failing to access the credit market are a prime target for rogue credit lenders.
Instead, mandated participation of industry incumbents across additional economic sectors, such as energy, water and telecoms, could help secure better deals for consumers and businesses alike.
Targeting the majority of Britain’s economy
With SMEs making up 99 per cent of Britain’s economy, they are prime candidates for an open banking framework, creating a holistic atmosphere where they can operate by combining their income, bills, revenue and profit – all in one place. All financial service providers have an obligation to enable British businesses to unlock their potential through open banking.
Far too often, there is a correlation between SMEs failing who do not have either the right credit or are denied it altogether. Currently, 60 per cent of SMEs in the UK fail in the first three years, often due to poor financial decision-making and lack of access to the finance and business insights they need.
Gone should be the days of exclusion from the financial system due to poor credit scores or lack of experience. With the right support and policy behind it, open banking, and indeed open everything, is the best bet for securing a new economic model for a changing world.