One thing that drew me to open banking is its potential to create non-zero-sum outcomes.
A non-zero-sum outcome is a situation where one person’s win does not mean another’s loss. In contrast to a zero-sum outcome — where, for there to be a winner, there must also be a loser — a non-zero-sum outcome scenario makes it possible for all parties to gain.
Open banking for good
Ideally, this is what open banking aims to achieve. On the one hand, it opens up the playing field to more competition and innovation, increasing the size of the overall economic pie. On the other hand, it makes banking more inclusive and accessible, ensuring that more and more people get a piece of that pie. Essentially, a non-zero-sum outcome is one that helps the economy but also helps society at large.
There is little doubt that banks today provide a form of social good. But they could do a lot more. Thanks to digital and mobile technology, the cost of running a bank and distributing bank products has gone way down. Suddenly, it has become possible to offer financial services to people who never had them before, or much better services to those who have perhaps been let down by banks in the past.
At its best, that is where open banking is leading us. A world where banking is used not only to generate wealth but to do good.
On this episode of the Mr. Open Banking podcast, we sit down with Faith Reynolds. Faith has been an open banking pioneer since the very beginning, having had multiple roles in the financial space. Faith has worked on a multitude of unique challenges aimed at making financial services better, ranging from enforcement and redress through to accessibility, vulnerability, and other issues concerning financial inclusion.
Three areas of improvement for social good
According to Faith, there are three main areas that financial services need to improve on to do more social good than they have been.
- They need to be more aligned with what consumers need.
- They need to invest more productively, especially so that SMEs can access the loans they need.
- Lastly, they need to invest more intentionally by considering factors like climate change and the environment.
“We need to make sure it’s getting to the right places and being invested in the right way so that we are creating a society that works for everybody and actually respects the climate that we need to survive.”
Through technology, banks are providing finance that is a better fit for more kinds of customers. They’ve made money more productive, more mobile, and more fluid, so that it can be channeled more easily and effectively.
However, there is still a long way to go. With these new tools, banks can do much more to help individuals, small businesses, local communities, and even the planet to prosper safely and sustainably. And open banking has a big role to play.
The Consumer Manifesto for open banking
That’s why, in 2018, Faith and her colleagues at the Finance Innovation Lab, along with a host of partners penned the Consumer Manifesto for Open Banking, an inspiring one-page statement that opens with the following words:
“Open banking should be a force for good which promotes financial inclusion and widens access to more useful, affordable, and understandable financial services for everyone.”
According to Faith, the manifesto can be boiled down into a single word: respect.
In the past, serving particular customer groups would require expensive changes to technology or regulations. However, today’s technology enables data to be used for good in cheaper, faster ways. It’s now far less expensive for companies to provide niche, personalized products at lower rates.
The manifesto also looks to open banking to introduce financial services and products that make sense and are easily digestible.
“As a consumer myself, I really want products and services to be upfront about how they’re paid for and how they’re going to use my data.”
Faith says banks and providers who use their data should be respectful of those who have shared that data. They must be open about how they’re using it and how they’re generating value from it. And that exchange of value needs to be fair. That’s what respect is all about.
However, there is a big difference between more effective financial products and getting products to those who have never had them at all. That’s why this socially beneficial aspect of open banking is quite multifaceted.
Vulnerability, accessibility & inclusion
If we peel the onion, we discover that open banking for good means different things to different people, often introducing a whole new lexicon that can be difficult to navigate. We asked Faith to provide a roadmap of some of the most common terms that come up in these conversations.
The first is vulnerability. A vulnerable consumer is someone who, because of their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care. This means that its existing financial products might make their situation worse instead of supporting them.
Faith identifies the four drivers of vulnerability:
- Health: disability, illness, or inaccessibility to services.
- Life events: bereavement, job loss, or divorce, for example.
- Resilience: a low ability to withstand financial or emotional shocks.
- Capability: poor knowledge of financial matters or low confidence in managing money.
While these circumstances can make someone vulnerable, Faith says it’s important to remember that overly complex products and markets can create vulnerability too.
“The market can make people vulnerable because it’s complex. It’s difficult to navigate. There’s now an extra layer of decision-making around whether or not I should share my data or what might happen with my data when I don’t understand the implications of the downstream.”
In fact, the UK’s Financial Conduct Authority (FCA) calculated approximately 2.4 million people who are vulnerable at any point, with 50% of the population able to experience vulnerability.
This brings us to the second term: accessibility. In other words, can you get to the products you need? When you get to them, are they even offered to you? And, as Faith mentioned, do you understand the products you’re getting?
The third term Faith explores is inclusion, which asks, can you use the product effectively? Has it been designed with you in mind? Sure, you may have it, but are you getting value from it?
“For me, inclusion is more than just holding a product. It’s being able to use it and get value from it.”
More often than not, today’s financial products fail these tests of vulnerability, accessibility, and inclusion. The fact is most banks simply don’t design their products with lower income or other specialized needs in mind.
As Faith describes, it’s often quite the opposite. Because the tools are not built to fit their needs, lower-income people often end up paying more for financial services than anyone else. This is an effect known as the poverty premium.
We have to do better. And thanks to technology, we now can. Part of the promise of open banking is to show the way.
Opportunities and challenges of open banking
Much of Faith’s subsequent work since the manifesto, such as the 2013 white paper “Consumer Priorities for Open Banking,” identifies open banking to remedy some of the inclusion challenges.
For example, open banking allows people to see their balance before they issue payment. This is an opportunity for people who are typically on the edge of financial services to engage in digital payments and not shy away from using their cards for fear of a decline. It’s like the data is being used to drive certain socially beneficial behaviors.
“There is the opportunity for improved financial decision-making because people can see all of their finances in one place, and they can get insights into how they’re spending.”
Still, Faith says there are challenges ahead. Financial services need to demonstrate that sharing data is worth it, sophisticated products need to be developed, and consumers need to know that it’s safe to connect their accounts in this new way. Essentially, open banking needs a communications campaign.
“Consumers need to know that you have data and it’s your right to share it with whoever you please. There are some great ways in which you can get value from sharing your data. And when you do, know that it’s safe and secure.”
One does not have to look far to find critics of capitalism. Many people look at the existing financial system and feel that it is opaque and unfair, the scales tilted towards those who already have the most.
Banks are often bundled into these criticisms, with accusations that they make society less fair and less just. In many places, trust between banks and their customers is at an all-time low.
It doesn’t have to be this way. The very idea of banking is one of the most powerful engines for economic growth that human beings have ever devised. It has led us to the building of great civilizations, untold scientific discoveries, and, ultimately, the creation of the modern world.
But, more recently, banks have found themselves a little stuck. Technology has pulled ahead of them, while their offerings remain anchored to a hundred years’ worth of friction and legacy. As a result, they are leaving many people disappointed and a lot of other people completely in the dark.
Open banking and change
Open banking aims to change that. By enabling the secure exchange of financial data, it makes building custom-tailored products cheaper and easier, offering the right services to help people who are left financially vulnerable.
Faith believes that the key is raising the bar on how open banking success is measured. Her work continues to emphasize loudly how open banking can be used for good:
To get banking to more people in ways that make sense to them, to drive behaviors that make us more financially literate and secure, and to discover new ways that banks can genuinely improve the lives of those who use them improving their relationship with their customers and restoring trust.
Open banking enables banks to become what they are meant to be at their best — engines of capitalism, but also engines of social good.
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