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News and Views

In January 2018 open banking reform will see the advancement of banking technology and greater transparency of customer information. We look at what this could mean for the UK banks.

Open banking is a project put forward by the UK Competition and Markets Authority (CMA). In 2016 it set about reforming the banking sector with moves to reduce the cost of banking and financial services through opening up the market. A key result of this mission statement was to make it simpler to transfer personal information between regulated parties. This will mean bank customers can give permission for their bank to share data, for example, customers can ask their bank to share their transaction history to approve a loan to specific providers. The hope is this will create a technology race, encouraging innovation and greater choice of financial products and improve how bank customers can manage their money. This should mean saving money on services, such as reducing account overdraft charges, in the same way that comparison websites have reduced the cost of insurance.

With the introduction of new technology and legislation there will be a period of uncertainty of how the industry implements this.There is also a risk in how this information is transferred securely and who will accept liability in the case of financial loss. As the concept is proven and customers make savings, there is likely to be greater take-up, much in the way contactless payment has seen greater popularity in 2017. There is a great risk that banks will lose revenue in highly profitable products. Under the new system, a banking platform could allow customers to use different products from multiple providers all within one mobile application.

Although these developments do not mean the banks on the high street will disappear, it is clear they will not have a captive audience. With greater transparency in the cost of services and simplification in switching provider, banks are open to greater competition. They could compete by introducing their own platforms and new services, but this will have an associated development cost in improving mobile applications and products. There is also likely to be some change to a bank’s business model as a rebalancing between automation of processes and providing a personal service takes place. There is likely to be reskilling of staff, but the true impact to the industry will be dependent on the speed of technology development and acceptance.

Conclusion

Banks have the resources and to an extent customer trust to remain a key manager of people’s money, but the banking business model could look very different in the future. They have a large fixed cost base, this will have to be lower to compete with not only the challenger banks, but potentially low cost service providers with payment technology such as PayPal and Amazon. This could be a significant change where being a large financial institution is no longer a defence against competition in the personal and small business banking market.