A new type of poverty premium?
Open Banking is creating new ways for customers to interact with their bank accounts. Banks will be able to share data securely with third-party providers through Application Programme Interfaces (API). This data can be as generic as the type of bank account and its features, or as detailed as the very small details of each and every transaction travelling through the account. But what does this mean for us? And do we need to be cautious? Christians Against Poverty (CAP) is part of the Open Banking Consumer Forum and here Daniel Kelly, Creditor Engagement Manager at CAP, shares some of the biggest opportunities and risks of this new tool.
Open Banking comes with endless possibilities - money management apps, financial dashboards and better price comparisons, to name a few. For those digitally engaged customers, Open Banking can make managing finances easier and more enticing. Already developed are applications using algorithms to identify how much someone can afford to save, automatically saving small amounts of money from a current account into a savings account. Other products alert customers when they exceed self-set budgets. We hope to see many more products taking this opportunity to improve financial capability.
Although Open Banking has a wealth of possibility, for those digitally excluded or vulnerable, it may create or exacerbate existing problems. Interestingly, according to the Office of National Statistics, only 63% of the UK population use online banking, leaving 37% without the ability to access any features of Open Banking. It was also found that one in five of CAP's clients do not have personal internet access at home or on their smartphone. A lack of access for those digitally excluded could mean people end up paying for a more expensive product, because they cannot compare prices online or receive nudges when a better deal is being offered.
One pitfall being that the people who may benefit most from having access to personal finance management platforms are also the people who are least likely to be able to access them. As more customers turn to digital channels, the incumbent banks need to become leaner in the face of greater competition. It could also mean a further withdrawal of face-to-face contact and branches in towns and cities.
Poverty premium of data
The term 'poverty premium' is used in the case when those on lower incomes end up paying more for the same service or product. There could be is concern that this may start to happen in a very different way with Open Banking; while most poverty premiums talk about the financial cost, this poverty premium is one of data.
Consumer credit firms use data to assess the affordability and creditworthiness of their customers. In addition to credit reports and the data gathered through questions, Open Banking would allow a complete analysis of the customer's entire bank account; every transaction and every pattern of spending. While credit will be willingly offered to prime customers, who are those customers with good credit scores, sub-prime customers may find themselves having to hand over far more personal data. They will be paying a poverty premium of data to access the same services.
The more data creditors have access to, the more risk is involved. There is a risk that this information about the consumer, accessed through Open Banking for the sake of an affordability check, is used against their best interests. For example, with access to the last few months of someone's bank transactions, machine learning would be able to identify patterns of difficulty. They will have the ability to watch the cash flow of the customers' accounts and identify a regular time of the month when someone is most likely to be in need of credit. This information could be used to plan advertisements to target the consumer when they are most likely to need credit. At the peak of the payday loan market, one of the biggest issues we saw was the cycle of repeat borrowing was fostered. This tool could allow new financial products to do the same, to a much greater effect.
Under GDPR, new requirements will ensure that customers provide explicit consent, but for those needing emergency credit, the need for quick cash will become the all-consuming goal. Ticking the terms and conditions, answering questions and handing over troves of valuable data become hoops to jump through in order to acquire the credit you need. Under these circumstances acquiring explicit consent does not necessarily mean acquiring an informed and thought-through consent.
It would be too simplistic to say that Open Banking is either a good or bad thing. Open Banking is only a tool, one that can be used to the benefit or detriment of the market, the public and our clients. However, whilst in its early stages, we ought to appreciate its potential. We all need to ensure that those on low incomes and the vulnerable are protected as Open Banking continues to gain momentum in the financial industry.