Switch bank? In the future you won’t have to
Imagine a world where it doesn’t really matter who provides your current account, your ISA or your mortgage, and yet you always get the best deals.
Imagine if you had a single place to manage all your financial products, regardless of type or brand. Is this a financial fantasy?
Not so. What I’m describing is possibly 2 to 4 years away and it is being ushered in by some interesting1 regulation; “Open Banking” promises to change not only how customers interact with their banks, but the fundamental banking business model as well.
Banks will be required to develop open APIs (application programming interfaces) that allow software developers to create applications that can interact with a bank’s transaction data, if explicit customer consent is given. This is already being done by newcomers like Monzo, and it means that the developer community can compete in creating applications that meet your needs as a customer. For example, you could aggregate your banking products into one app; integrate your accounting software with your company credit card to identify expense and tax data; or integrate your tube journey history, your geo-location (from your smart phone) and tube map software to optimise your journeys and automatically request refunds for delays. The possibilities are endless, and a bank can’t do everything.
Why does this turn the banking business model on its head? Take your average high street bank, who lure you in with a free current account. For nothing, they will open an account and furnish you with payments and apps. This comes at a cost for the banks, but it’s typically worth it; fees for current account add-ons generate £139 on average per annum per current account.
However, in a world where I aggregate all my financial products into a single banking platform (or app) I won’t go to my bank for an add-on, such as an overdraft. The platform will identify that a micro-loan from another lender is cheaper, and gain my permission to save me money. I won’t need to switch ISA every year. The app will know the best deals in the market based on my historical usage and process the switch automatically, requiring only my approval. My credit balances won’t sit idly in my current account. My platform will squirrel them away to a more profitable account, making sure I agree. Wouldn’t standard security processes still apply before the platform accessed these new products and providers? Yes, but security and identification procedures (or KYC) could be achieved through electronic identification and verification (eID&V) carried out by the platform itself: FinTech providers such as Revolut do this already. Hence the prospect of paying back the cost of my current account through add-ons becomes unlikely, and a new business model is needed.
In fact, a customer may not pay any attention to the bank that sits beneath the platform and the products at all. Parallels can be drawn with Apple Pay, where some customers won’t know that RBS and Visa are still executing their payment. A similar parallel can be drawn with the insurance industry too; some customers are more aware of the aggregator’s brand (e.g. a meerkat) and the insurance company (e.g. an elephant) as opposed to the actual underwriter of the insurance product (erm, an admiral? e.g. Admiral Insurance Services EUL).
In the future, if I’m not happy with my bank I won’t need to switch. I’ll just reconfigure the settings in my banking platform, and let the platform do the rest. The best user experience will demand that I can do this in a few swipes and touches of a small screen. I can’t wait.
- In this case I’m referring to the below initiatives. Though there are differences, they broadly take the industry towards ‘Open Banking’:
a. Revised Payment Services Directive (an EU directive, also known as PSD2)
b. The Open Banking Standard (produced by the Open Banking Working Group, setup at the request of UK HMT)
c. Remedies for Retail Banking (from the UK Competition & Markets Authority’s Market Investigation into Retail Banking. Final Report published August 2016)