Can open banking empower customers?

With India's push to digital and new payment systems, we should be watching how Open Banking shapes up and how it overcomes multiple barriers while entering this technological utopia

One of the most pervasive services in our lives is banking. Opening bank accounts for the poor was the very first mission of Prime Minister Narendra Modi. “Financial inclusion”, the first step of which is a bank account, is an important agenda of the ministry of finance, Reserve Bank of India, international development institutions, and dozens of non-governmental organisations (NGO), which are marching in the countryside, hoping to bring millions into the fold of formal finance. And yet, banks, more often than not, harm their own customers. Bank charges are opaque and arbitrary, floating interest rates float up but not down, and highly incentivised bankers routinely mis-sell life insurance products to the elderly and uninformed, promising them that these are better than the fixed deposits they want to open.

After the 2008 crisis, caused mainly by US bankers and supported by European ones, there has been a lot of soul-searching on what should be done to fix rogue bankers running amuck and even bringing whole economies down (as happened with Iceland). Despite the efforts of certain US lawmakers, the US bankers have largely got away scot-free, given their vice-like grip over policymaking. Their business model has not changed and consumers remain exposed to the harmful products that bankers concoct. A new oversight body called Consumer Finance Protection Bureau has come up in the US but it was ineffective under Barack Obama and is a lame duck under the Trump presidency. 

Policymakers in the UK have gone a bit further in their efforts. Financial markets need to be “honest, fair and effective so that consumers get a fair deal,” is the stated objective of the UK regulator. For this, the Financial Conduct Authority (FCA) oversees the behaviour of all financial services companies that deal with retail investors and small businesses across different sectors. And yet, the behaviour of banks has not changed fundamentally. Five large banks (Barclays, HSBC, Lloyds, Santander and Royal Bank of Scotland) control 80 per cent of the retail banking market, leading to charges of market abuse. The UK also has something called the Competition and Markets Authority, which has been trying to foster competition and encourage innovation among banks.

It launched an initiative a few months ago called Open Banking, which forces nine of the biggest banks (the big five plus Bank of Ireland, Allied Irish Bank, Danske and Nationwide) to release not only all the data about its own services but rich customer data of spending and borrowing in a secure standardised format so that third parties can use it to create products such as apps. The customers, of course, need to agree to share their data. The experiment is important because it hinges on technology. With India’s push to digital, cashless payments and new payment systems, we should be watching how Open Banking shapes up.

The UK regulators believe that Open Banking will make it easier for customers to compare product offerings and financial results of different financial service providers. The new rules direct banks to use open application programming interfaces (APIs), so that customers can share their financial information with other providers, if they want to. Open APIs would make it easy to transfer accounts, manage payments, and run transactions through other banks and nonbanks. In theory, Open Banking is good news for bank customers. Banking thrives on creating barriers to switching. Note that in India, portability is possible in health insurance and mobile services but not in banking. Banks have declared it technically impossible and there are no discussions on how to get around the problem. With open APIs, switching could be easier. 

Unfortunately, there are multiple barriers to entering this technological utopia. One, only a small number of customers will share data and so, banking would remain the preserve of a few giants. Two, those who do share data could be bombarded with marketing messages, and run the risk of data leaks. Three, as happens with most digital initiatives, technology will exclude precisely those whom such projects are intended to benefit — senior citizens, those not tech savvy, and those with low incomes. Remember how Aadhaar has become a tool for denial and exclusion of genuine beneficiaries? Mick McAteer, of the UK’s Financial Inclusion Centre, says it is naïve of regulators to assume that consumers will have ownership of their data and turn the tables on banks currently giving them a raw deal.

Allowing 80 per cent of the market to remain with five banks and then looking for a technological magic bullet to empower customers is perhaps not the best way to make the banking terrain customer-friendly and fair. Banks must face the pressure of more competition from within. India has allowed just four new banks over the last 15 years. Instead of fintechs working with bank data, we need to allow a host of new banks, including online banks like www.simple.com.

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The writer is the editor of www.moneylife.in. Twitter: @Moneylifers