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Open APIs will help to inform customer choice in the current account market, says CMA

The use of open application program interfaces (APIs) in retail banking will help to inform customer choice in the current account market, a leading regulator has said.03 Jul 2017

Alasdair Smith said he is confident that the planned open banking reforms "will have a truly transformational impact on the competitive landscape in UK retail banking over the next decade".

Smith chaired an inquiry team set up by the UK's Competition and Markets Authority (CMA) when the regulator opened an investigation into the retail banking market. The CMA published its final report following its investigation in August 2016 in which it set out requirements for banks to adhere to new open banking standards by 2018.

The new standards are intended to allow businesses and consumers to share their own transaction data from their current accounts with other banks and third parties and to manage multiple providers through a single platform. Open APIs are seen as pivotal to the operation of the new standards.

In a speech at the BBA's retail banking conference last week, Smith said open APIs "will put customers in charge of access to their banking data, will encourage the development of new services and new providers, and will make it much easier for customers to make the right decisions for them".

He said that while open APIs will not provide a 'silver bullet' to the competition issues the CMA identified in its investigation, it explained how he believes they can help combat the "central problem".

"When the CMA or other agencies seek to improve the working of markets by encouraging consumer switching, the criticism is often made that we are blaming consumers for the fact that markets are not working well and putting on consumers the burden of improving market outcomes," Smith said. "That’s emphatically not the case with open banking."

"Many banking customers cannot make the right decisions about choosing accounts or services not because they are lazy or under-motivated but because they cannot access the information needed to be a smart customer. This is the central problem of competition in personal banking and by addressing this problem head on, open banking will make it easier to be a smart customer," he said.

The open banking reforms therefore can "radically change the competition landscape", he said.

Smith said: "Two groups of personal current account customers make disproportionate contributions to the revenue of retail banks: those who have high average current account balances, and those who make frequent use of overdrafts, especially unarranged overdrafts. If these two groups of customers find better resting places for their credit balances and better-value sources of emergency borrowing, there will be a competitive rebalancing in the market; indeed it’s possible that the FIIC (free-if-in-credit) personal current account could disappear."

"Note that there’s no contradiction between our view that FIIC should not be banned and the possibility that competition might drive the product out of the market: we believe that the survival of the product should be decided by the market (that is to say, by customer decisions) not by regulators," he said.