What Does Open Banking Mean to Consumers?

What Does Open Banking Mean to Consumers?

The Introduction of Payment Services Directive 2 (PSD2) brings a lot of change for financial institutions, but what does Open Banking mean for the consumer?

Open Banking as a concept is targeted such that individuals or large and small businesses can benefit from it. Many use the analogy of what the ‘Open Skies’ policy did for air travel in Europe. ‘Open Skies’ opened up air travel to a wider group of people through competition and resulted in a significant reduction in fares. In this blog we try to foresee what ‘Open Banking’ could mean to your average consumer.

Access to Accounts in one Place

The most obvious benefit will be an ability to see all of your financial information in one place. At the moment, taking the simplest example, when you have bank accounts with different banking institutions, you generally need to install and use multiple applications to see your accounts. When extended to credit cards and mortgages, many banks don’t always offer an ability to see these online. Consider that in the future, Open Banking will offer you an opportunity to see your current financial position in a single application on your phone.

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Quicker Credit Decisions

A direct consequence of having all of your data available in one place will be an ability for organizations to make quicker credit decisions. Consider the process of buying a bill pay phone; phone companies will generally want you to prove an ability to pay. By having all of your account information available online you will be in apposition to get an instant answer. Taking this a step further for a major loan like a household mortgage, again through the analyses of your account data it will be possible to know instantly what level of mortgage you will be able to afford.

Better offers from credit providers

As credit providers will have an ability to get a full view of your financial situation (with your permission), they can assess more easily how credit worthy you are and thus be in a position to offer better rates of interest. Taking this a step further, it will be possible to group individuals with a similar profile based on their account data. Such groups could then potentially publish their profile (without actually releasing personal data) and have credit providers bid on offering credit. This is likely to lead to even better credit terms for that group of individuals.

More Choice in how you pay

In its simplest form, open banking will offer an ability to pay for a purchase online or in a retail store not just using a credit card or PayPal but also directly from your bank account or a choice of bank accounts. It is also likely to lead to an increase in the number of payment providers that will try to differentiate themselves in some way. For example, some may offer speed of payment over cost; others may specialise in foreign currency payments. Others may offer a better paying experience in some way whether this is through the simplicity of their payments process or by adding to the payment experience in some way.


Will it all be plain sailing?

While open banking offers a lot of benefits, there are still significant hurdles to overcome. The key one is technical in that there is no single standard for communicating with each bank. This means that any user of the service will require customized development (and thus additional cost) for every bank they wish to work with. There are a number of initiatives in Europe to try to avoid this (e.g. the Open Banking Implementation Initiative in the UK and the Berlin Group in Germany), however, many banks are still implementing their own flavour as the PSD2 legislation simply states what must be done not how it should be done. While it is likely that over time a standard may emerge, this is likely to take a number of years.

In the next of these blogs, we will deal with what Open Banking and PSD2 will mean to banks.