At the start of the year, new Open Banking protocols were predicted to shake up the banking sector and pave the way for widespread changes in the mortgage market. As the year draws to a close these predictions seem a long way off the mark. Like many industry predictions, Open Banking was described as something which would yield earth-shattering changes. In my experience though, the reality is that change is evolutionary and not revolutionary. Open Banking hasn’t turned the mortgage market on its head but I feel it will bring about change that we all need to be ready for.
Before examining some of the trends we are starting to see, let’s begin with a quick reminder of what Open Banking is all about and where it came from.
What exactly is Open Banking?
Open Banking is a series of reforms to how banks deal with financial information. It was called for by the Competition and Markets Authority (CMA) and comes alongside the second Payment Services Directive (PSD2). Both came into force on 13 January 2018.
Together they mean that all UK-regulated banks will have to let you share financial data such as your spending habits, regular payments and companies you use with authorised providers offering budgeting apps, or other banks – as long as you give your permission. The objective is to bring more competition and innovation to financial services which, in turn, is hoped will lead to more and better products to help manage people’s money.
What has happened so far
According to statistics from the Open Banking Implementation Authority (OBIE), there were 720,000 uses of open banking APIs in May 2018 and this increased to 1.2 million in June2. A report by PwC
As with any new technology there have been some early adopters, and while the implementation of new propositions and usage has been slow, the pace is increasing. HSBC were the first to launch an open banking app with their Connected Money4. Connected Money enables consumers to see all of their current, savings and mortgage accounts from more than 20 banks.
The Facebook/Cambridge Analytica scandal which occurred earlier this year caused great concern about the use of personal data. The general public are now much more aware of how data can be used (and abused) and understand it much better. Any progress in Open Banking will therefore be slow unless the industry can reassure consumers that data is being used to benefit them and is totally safe and secure.
What to look out for in the mortgage industry
The biggest impact Open Banking will have is to change the mortgage sales process. By enabling third party services such as online income verification and electronic valuations, which link directly into the lenders’ mortgage platforms, Open Banking will reduce the need for keying information and a reliance on paper documentation. This is clearly great news for brokers as it reduces the amount of time wasted in the search and application process.
According to the Financial Reporter5, 55% of lenders are hoping that Open Banking will increase efficiency and cut costs from the sales process. In addition, 62% of lenders are investing in mortgage hub technology and half are implementing, or actively reviewing, Open Banking functionality within the mortgage sales process.
If the processing time were deducted from a broker’s working day it would leave more time to concentrate on offering good advice and developing stronger service propositions with customers. At Saffron Building Society, we believe that technology will change the way that consumer finance operates in the future. While it will be more efficient to transact, people will need more guidance in an age when employment will be increasingly complex and unpredictable. We think that brokers will have a huge role in helping the nation’s homeowners to plan their long-term finances. If brokers adapt, and look at the broader financial landscape, they have the opportunity to offer invaluable support to homeowners.
In recent years financial planning legislation has failed, with the unintended consequence of removing advice from the mass market. Currently, only the wealthy now have access to good advice. But as the complexity of financial arrangements increases, we think the regulator will review the approach. This will open up a new segment for those with skills and experience in financial advising.
Evolution, not revolution
I think that the importance of Open Banking will increase relatively slowly. However, failing to react now can store up future problems for businesses and brokers. Laggards could be lulled into a false sense of security as nothing immediately will have changed, but those who stay ahead of developments and invest in skills and technology will reap large rewards. Those who prepare will minimise the risk of failure.