Financial data-sharing leaps ahead in the UK

Open banking—which allows consumers to link savings, budgeting and faster payments apps with their bank accounts—is leaping ahead in the UK. But consumer protection standards may need to jump to keep up with the trend.

Data released yesterday by the Open Banking Implementation Entity (OBIE) showed that the number of UK users of open banking services now exceeds two million, having doubled in just over six months, despite the disruption caused by the coronavirus pandemic.

The OBIE was set up in 2016 by the UK’s Competition and Markets Authority to deliver open banking. It is governed by the CMA and funded by the UK’s nine largest banks and building societies.

Open banking involves banks and third-party technology firms sharing consumers’ financial data, with those consumers’ permission.

It underlies a variety of services, including accounting, budgeting and financial comparison software and faster payments. These services are then delivered primarily through mobile phone-based apps.

According to the OBIE, there was a sharp increase in the use of money management apps during the pandemic, nearly half of which was represented by 25-34-year-olds.

“Open banking used to be the best-kept secret in financial services”

The OBIE said that a survey of 2,000 UK adults revealed that one in five started using online banking apps during lockdown and 54 per cent now use them regularly.

According to Imran Gulamhuseinwala, trustee of the OBIE, “Open banking used to be the best-kept secret in financial services.”

“We can now see that people want to exercise their rights over their data and will do so, as long as you make it simple and secure,” he said.

“Open banking-enabled products are rebalancing the market in favour of consumers and small businesses. Users are now able to engage more with their finances and are getting access to better products,” Gulamhuseinwala said.

The UK government has supported open banking as a way of giving consumers greater control of their finances. It now wants to extend the data-sharing approach to other sectors, such as non-bank finance, energy, communications, and pensions.

“A key mission of our strategy is to unlock the value of data across the economy”

“A key mission of [our] strategy is to unlock the value of data across the economy by creating an environment where data is appropriately useable, and available across businesses and organisations,” Paul Scully, UK minister for small businesses, consumers and labour markets, said earlier this month.

“Customers can already request data about themselves, but it is provided slowly, in hard-to-use formats, and often without the contextual information needed to make it useful,” Scully said.

Scully suggested that open banking could provide an example for other sectors.

“Making the process easier would facilitate innovation – enabling multiple utility bills to be managed in one place, prompts to be shared when better deals (that match customers’ preferences) become available, and reducing paperwork for small businesses,” he said.

However, the future success of app-based consumer financial services may depend not just on their speed and convenience, but also on the protections available if things go wrong.

“Consumers need help to exercise control and take responsibility”

Last year, the authors of an Open Banking report suggested that regulations in this area are inadequate.

“Consumer protection for both payments and data-sharing needs harmonisation and simplification,” aid Faith Reynolds, an independent consumer finance expert, and Mark Chidley, an independent SME representative, the co-authors of the report.

“Consumers need help to exercise control and take responsibility,” they said.

“At the moment, they cannot easily identify legitimate or illegitimate providers, or easily control how their data is shared or for what purpose.”

As an example of where consumer protection standards need improving, the two authors cited variable recurring payments (VRPs) made using open banking apps.

VRPs enable third parties to use a customer’s data to monitor his or her bank account and initiate a payment when certain conditions are met—for instance, when surplus funds in an account hit a certain level.

According to Reynolds and Chidley, VRPs offer more control to consumers than continuous payment authorities (CPAs), which are widely used by payday loan firms and debt collection agencies to recover funds from debtors.

“However, [VRPs’] value could be undermined if there is not sufficient consumer protection built into their design to bring them in line with the protections on card payments and the regulatory limits on their use for debt repayment,” they said.

Card payment protections have themselves been proven uneven by the coronavirus pandemic, which has raised questions about the refund rights available to consumers who had paid for services using debit and credit cards and then not received them.

Meanwhile, the Bank of England governor made it clear earlier this month that e-money—the form of money used by many of the payments service providers involved in open banking—is less protected than money in a UK bank account.

The signs are that consumer protection in the data-sharing economy is rapidly moving up policymakers’ agendas.

The UK’s Payment Services Regulator and its parent, the Financial Conduct Authority, have recently launched three new initiatives on payments and e-money, including a consultation on the consumer protections available to open banking clients.

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