One of the downsides of competition can be complexity. Businesses in sectors like telecoms and energy, where fixed costs are high, have an incentive to offer cheap deals to people who switch and raise prices on those who don’t. Switching is often quite simple for those who do it, but many people do not realise they can, or realise that if they did they would often be able to save hundreds of pounds. People feel ripped off by this so-called “loyalty penalty”, and the government has resorted to price controls in response.
There may be a better way. When the Competition and Markets Authority (CMA) reviewed the retail banking market in 2017, it concluded that this lack of switching was one of the big reasons that incumbent banks were able to get by while offering, in many cases, a more expensive or less useful product than their rivals. Too many people simply default to their current account provider for loans, including credit cards and mortgages.
Instead of breaking up the banks, as some had hoped the CMA would do, it opted for an intervention that it hoped would make switching between bank products easier: Open Banking. This allows bank customers to share their data, including their transaction history, with third parties that they have approved and which are regulated by the Financial Conduct Authority. They can also approve third party services to make payments on their behalf, for example to make a payment to a merchant instead of using a debit card.
By enabling easier data sharing between financial products, the aim is for Open Banking to make it easier for bank customers to multi-home across whoever the best provider of mortgages, savings accounts, credit cards and current accounts are for them, and reduce barriers to entry for services using customer data in innovative ways.
So far, the infrastructure for Open Banking has been rolled out successfully, and some early problems around customer sign-ups, which initially were clunky and filled with intimidating warnings from banks, have been fixed with a much smoother sign-up journey now being introduced.
But more needs to be done: in a report out today, I and my co-authors at the Open Data Institute review Open Banking’s progress so far and make recommendations about how to improve Open Banking so it achieves widespread customer adoption. These improvements include expanding Open Banking to more financial products, so that (for example) people can automatically monitor their mortgage to see when a cheaper option is available, and beefing up the payments functionality so that it can be a true competitor to the incumbent card networks.
Elsewhere, Open Banking can support digital identity initiatives thanks to the “know your customer” information that banks are required to hold on their customers. If customers were allowed to share the information about themselves that they have provided to their banks via the Open Banking APIs, it would be straightforward to confirm their identity to third parties for things like credit scoring or age verification checks. This would eliminate the bottleneck that existing digital identity services have faced in trying to sign up and verify new users.
I fear that the government’s porn block will end up requiring all users of adult websites to use a single monopoly identity service (owned, incidentally, by the largest pornography company in the world), which would create a significant security and privacy risk – Open Banking could enable true competition in online age and identity verification, so that these services compete on the basis of their security and user protections.
Getting this right matters way beyond banking. This is the first attempt by competition authorities to use technology to rebalance complex markets in favour of consumers, giving them more control over their own data and allowing them to access third-party services that make markets simpler and easier to shop around in.
If it works, a similar model may be applied to sectors where the so-called “loyalty penalty” is really biting, like energy, telecoms and insurance. Open Banking alone can enable services that look at how much you are paying your energy company and alert you if this seems too much, but Open Banking and data about your energy usage, which smart meters provide, could give people a nearly seamless way of searching the market for the cheapest deal available to them and switching to that, with almost no action required by them. A similar process could take place across a whole range of markets – the work of searching and switching to better deals done automatically, and tailored exactly to each customer’s needs.
This should appeal to the new government as an alternative to price caps that works with the grain of competition, rather than against it. One cost of price caps, apart from giving businesses a way to tacitly collude on price, is that they can diminish competition as customers have no incentive to switch to better rivals. Markets get frozen in time, and consumers suffer. If, instead, we allowed customers to delegate the work of searching and switching to innovative third parties, we could get all the benefits of competition, without the costs of complexity.
Sam Bowman is a Principal at Fingleton
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