The future of open banking, financial health and a Fair Banking Act

Welcome to this edition of Times of Change providing you with a round-up of some recent developments we’ve found interesting.

?? Join us on 28th April for our next Half Hour Briefing with Martin Smith from Cennox where we'll be exploring the future of retail and banking.

David & David

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??The future of open banking

The long-awaited report from the Joint Regulatory Oversight Committee (JROC - or ‘mega committee’) was published this week with recommendations for the next phase of open banking. We have yet to fully investigate the paper but the committee’s recommendations contain a roadmap of priorities over the next two years, covering six key themes:

• Levelling up availability and performance
• Mitigating the risks of financial crime
• Ensuring effective consumer protection if something goes wrong
• Improving information flows to third party providers (TPPs) and end users
• Promoting additional services, using non-sweeping variable recurring payments (VRP) as a pilot.

The report does not provide a final decision on the future entity of open banking, which will be frustrating to some and early analysis suggests that there is little on proposed actions to improve customer education and awareness, which is crucial for consumers to make informed choices. (This was raised as a key issue in our recent Half Hour Briefing.) Overall, it seems like the future of open banking will continue to be unclear and bumpy for those involved. Watch this space for more analysis and interviews on the matter.

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??Financial health?

If you follow our work you’ll know that we think open banking will only be deemed a success if it supports vulnerable citizens who are margianlised by the current offer of financial services. Unfortunately, this cohort is under researched and how they could benefit from open banking (and open finance) is largely based on anecdotal evidence. It was, therefore, with great delight that we noticed the publication of a new report from COMUZI, funded by Impact on Urban Health, that explored how open banking technology could be used to improve the financial health of people on low incomes with health conditions.

Working with residents of Lambeth and Southwark, the 18 month research project partnered with Stockwell Partnership, Fair Money Advice and Shelter London. This enabled them to produce some hard evidence of the transformative potential of open banking. The report ran in two phases:?

1. A study based on interviews to map how financial stress and health problems were interrelated. This provided key themes for the financial issues faced by the local community: Money Management, Shopping Around, Housing Standards, Maximising Income (for example, through benefits and grants), Debt Management and Savings.
2. A trial using free to use open banking apps that claimed they could help with one or more of these themes.?

The report is a must read for anyone interested in open banking and financial health and includes some much needed recommendations for different stakeholder groups (e.g. policymakers, banks, open banking apps, charities and local groups). For us, some of the most important findings include:

• Open banking solutions can’t address the fundamental issue of poverty. For example, one participant said “You can’t budget your way out of poverty” and the project was unable to suggest a free app that could help maximise income through benefits and flexible work, or help with paying down debt.?
• In-person support is crucial. The study found that participants benefited from support setting up the apps and did not see the benefits of using the apps until the last weeks of the study. The researchers were available to answer questions and help with technical difficulties, which gave participants confidence and meant they kept going with the apps rather than give up when they encountered issues early on.
• Awareness of open banking was low. The study found that most participants said they didn't know anything about open banking but agreed that they had helped their capability around financial matters improve. In terms of raising awareness the study found that truthful and realistic marketing messages would engage them best compared to overzealous marketing messages which ‘promised the world’ and delivered results below expectations.?

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???Is it time for a Fair Banking Act??

Another issue we’re happy to see receive some top quality policy work is financial exclusion. A coalition of civil society groups published a new report that argues for the implementation of a Fair Banking Act that would require mainstream banking institutions to disclose their performance on financial exclusion and create a system for clear ratings that show which banks are doing well and which need to improve. The proposal enables banks to improve their ratings by expanding the provision of affordable and ethical lending to underserved communities, providing fair services to those who are underserved/ excluded, or creating partnerships with co-operative or other purpose-driven banking institutions. The latter enables these specialised organisations to expand their services and support for financially excluded people and businesses.

This proposal has been a long time coming. As the report finds, in 2019 43% of businesses that applied for finance in highly deprived areas were rejected, compared with 25% from less deprived areas. Research has also found that lending to SMEs has declined in areas where branches have closed. Purpose-driven banking organisations, such as Community Development Finance Institutions, credit unions, ethical banks, building societies and emerging regional mutual banks, can and should support those who don’t fit the mould of the ‘perfect customer’. These organisations play a much greater role in financial services in other countries. For example, 59% of people bank with a credit union in the United States, compared with just under 5% here. The sector is so small that it can’t compete with the reach of high-cost credit businesses and illegal loan sharks that can offer a quick fix with potentially serious consequences.?

The proposal is inspired by a similar piece of legislation in the US, The Community Reinvestment Act, that secured $271bn to low and moderate income communities in 2020. Introducing a version in the UK is one of those ‘common sense’ policies and has the potential to offer a wide reaching solution to financial exclusion, something that the UK is crying out for. In fact, the Act could be widened to ensure financial exclusion is at the heart of the development of open banking.