Will open banking help or hurt the poorest?

A pioneering change in British finance has arrived, and you can tell tech types are excited – because they’re using the U-word. “This is that Uber moment,” said Mutaz Qubbaj, founder of the personal finance platform Squirrel, “This is phenomenal because… it’s giving people ownership over their information.”

Qubbaj, like more or less everyone else working in the U.K. financial technology industry, was talking about “open banking.” This new set of reforms allow consumers to share private financial data such as spending decisions or repeat payments with authorised third parties other than their bank. That could bring huge new changes to the finance business. For example: tech companies are launching new products aimed at helping people manage their money, while the ability to control your data could encourage more people to switch banks. The UK is the first country to actually implement such a shift.

But while this might bring big change for people who use lots of financial services and have plenty of money to manage, what will it mean for those on low incomes, or those excluded from conventional financial services altogether?

Qubbaj spoke to Apolitical at a recent event as part of the UK’s Inclusive Economy Partnership at the NGO Nesta, where questions being discussed by government, corporations and third sector organisations included what open banking could do for the less well-off. Squirrel, his platform, offers users a bank account controlled by an app. It has you submit expenses and savings goals, and then it reserves the savings while paying out the expenses as required.

The aim is to give people better control over their finances and help them stay well in the black. But open banking, Qubbaj said, will allow the platform to significantly improve its service. For example, having full access to a new user’s past data could help Squirrel better predict their future behaviour to help them build a savings plan. Yolt, a different financial management app, has also said that open banking will provide a better service for its users.

Credit Kudos, a startup credit bureau, looks at its users’ banking data to develop a different kind of credit rating based on real spending and saving information, rather than past credit repayments. The rating, which Credit Kudos calls a “financial behaviour score,” could lead to lower interest rates for some customers. Open banking, the company’s CEO Freddy Kelly hopes, will help people to feel more comfortable sharing their information. “Our biggest barrier is trust, and people are very scared, rightly so, about financial services and their data,” Kelly said. Open banking, he said, provides a simple, safe way to do this.

(Disclosure: the UK Cabinet Office, which is part of the Inclusive Economy Partnership, sponsors Apolitical’s Inclusive Growth and Innovative Public Partnerships content channels.)

But despite the ideas already sprouting in the open banking field, David Beardmore, Commercial Director of the Open Data Institute, said more innovative initiatives are needed, especially on the issue of financial exclusion – when people who want to are unable to access a current account or other mainstream finance products.

“We want to see open banking lead to greater financial inclusion,” Beardmore said, “We fight for a fairer, more transparent, more equitable society and we see the open banking initiative being part of that mission.” But so far, he said, mostly “we’re seeing things that are addressing the more privileged end of the mass market.” Even concepts like Credit Kudos’s require the user to have a bank account in the first place. In the U.K., that would cut out the 1.5 million adults who haven’t got one.

For Beardmore, who said he wants to see “concrete” action taken on the issue, the solution could include organisations other than traditional banks using the opportunity provided by open banking to start providing some personal financial services. “It would come as no surprise to me to see the likes of a Google or an Amazon move into this space,” he said.

Meanwhile, Carl Packman, from London-based charity Toynbee Hall, warned that the advent of open banking could theoretically see more people excluded from some financial products. This is because the new rules will give banks access to a huge range of information about financial behaviour, he said, and currently there are no clear standards in place to determine which of it is and is not appropriate for judging a customer’s financial reliability.

“It has the potential for banks to be able to segment the market further, and could mean that those firms could actually just cherry pick the most commercially viable consumers,” Packman said. “If you are a smoker, or if you drink alcohol, I think most people would say that that’s not necessarily a measure of whether you are able to afford your credit commitments… but it could be that the lender deems that to be too great a risk.”

More research is needed into what would and would not constitute appropriate credit data, Packman said, with the potential for the UK’s Financial Conduct Authority regulator to establish rules on this.

“We absolutely welcome this open banking initiative, we were instrumental in bringing it about in the first place,” said Beardmore, “but we also want to make sure that the benefits of open banking are felt by the whole population, not just by… the wealthier or better off.” It’s the start of Britain’s – and the world’s – experiment with open banking. Whether it helps or hurts the poorest is something governments must closely monitor.

(Picture Credit: Pixabay)

Josh Lowe
Josh.Lowe@apolitical.co