Finance · 4 October 2017

Trust deficit could block new entrants to financial services sector ahead of open banking

The EU Payment Services Directive will allow third parties to retrieve personal data from banks
The EU Payment Services Directive will allow third parties to retrieve personal data from banks

Entrepreneurs hoping to use open banking reforms to enter the financial services sector with new products have been dealt a setback, after new research exposed consumer suspicions in handing bank details to third-party providers such as online retailers and social media companies.

In January 2018, the EU’s Payment Services Directive (PSD2) will allow third party providers, such as online retailers and social media companies, access to consumer bank details providing consent is given. PSD2 – legislation agreed among EU members – represents a further development towards the open banking reforms led by the Competition and Markets Authority (CMA).

PSD2 has the potential to change the financial services landscape, opening the door for third party providers to offer new services to consumers in exchange for their bank details. For instance, the directive will allow a merchant like Amazon to retrieve personal data from banks, if the user gives consent.

It’s a development that will enable consumers to transfer funds more easily, compare products and manage their accounts without direct involvement from their bank.

However, new research has suggested this will be a significant challenge for such companies. After surveying over 2,000 UK consumers, digital consultancy Accentuate found that over half would never change their existing habits and adopt open banking.

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A fear of fraudulent activity was the biggest driver of the trust deficit. Some 85 per cent said the increased risk of fraud was the main barrier to them sharing bank account information with a third party. Data protection breaches and the potential for cyber attacks were also raised as major concerns by consumers.

Commenting on the possible challenges faced by third party companies in taking advantage of open banking reforms, Jeremy Light, a director at Accentuate, said consumer trust was of utmost importance.

“Open banking has the potential to transform consumers’ relationship with financial products, but it hinges on consumers’ willingness to embrace it,” Light explained.

“Until new entrants to the financial services sector can earn consumers’ trust, banks can draw on their extensive heritage to secure an important early advantage.”

Meanwhile, the findings suggested banks were well-placed to see out the challenge of new entrants to the financial services sector. Almost six in ten consumers said they would only trust their bank when seeking services such as mortgages or savings accounts. In contrast, only nine per cent would trust an online retailer when seeking the same services.

“With UK consumers placing their faith in traditional service providers, banks can capitalise on the opportunities to create new revenue streams and capture new customers, which the era of open banking provides,” Light added.

“If banks move too slowly to adapt to this transformed, open banking landscape, they could miss out on the platform-based business models and the strategies they enable. In short, banks will need to up their digital game or risk failing to meet growing consumer demand for a seamless digital experience.”

Generational divide

However, a generational divide emerged from the study, suggesting the appetite for open banking will grow in the future.

While only 13 per cent of the baby boomer demographic were likely to adopt open banking services, 42 per cent of millennial consumers and over half of respondents born after 1995 were willing to give online retailers permission to initiate payments directly from their bank account.

Researchers attributed the divide to a strong interest in younger people of interacting with their bank through social media and instant messaging services, and warned banks that tech startups and retailers were likely to innovate for greater customer experiences in this space.

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Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.