Open banking is a framework of standards and protocols which was thrashed out by the Open Data Institute on behalf of HM Treasury to enable specified data to be sent between banks and Financial Conduct Authority-regulated third parties (all authorised by customers themselves).
Right now, it is limited to demanding our nine-largest high street banks open data connected to customer current accounts. The data is limited to simple banking records, including location of branches and exact details of current account banking products. Within the next two years, credit cards and other products will be added.
This does not sound very revolutionary but it becomes more seismic when you take a longer view.
Open banking is also a framework for enabling customers to share their personal transaction data safely with other banks and authorised third parties via open application layer interfaces.
The General Data Protection Regulation adds the other key set of personal data safeguards.
Once banks make details of all their different personal and business current and savings accounts available, it becomes easier for customers to shop around for the best deals, potentially using personally authorised third-party firms to automatically switch accounts to optimise returns.
Starting to feel like MoneySupermarket for banking products? You are not far off. It certainly creates scope for a much more open market in banking. But open banking goes much further, it makes it possible for the vast quantities of account transaction data to be shared, once permissions are given by the customer. This data will cover everything we spend, lend and borrow: from electricity bills and mortgage payments to what I spend at Starbucks every month.
Open banking makes it possible to share data with third parties who tailor financial products to meet specific needs. It could help solve the ‘thin file’ problem, in which millions of people are unable to obtain a mortgage because they do not have enough credit history for credit rating agencies to provide a credit score good enough to secure a mortgage.
It should also make it easier for the nearly 7m self-employed and gig economy workers, who struggle to obtain mortgages now that ‘self-cert’ mortgages have disappeared.
It is entirely conceivable that we will be able to do our banking with digital-only banks who manage our money automatically via intelligent software. Excess funds sitting in low-interest current accounts will be automatically flipped to higher-interest savings accounts or moved to your stocks and shares Isa and then dynamically invested in the best-performing funds in a pre-selected list that matches your risk profile.
The key for those offering a genuine advice service to wealthy clients will be to capture the advantages that automation can bring their clients, while at the same time providing a personalised oversight of the whole process.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
