Is Open Finance too open for building societies?

Open Finance is one of the most radical innovations in the financial services sector at present.

The Building Society Association (BSA) recently commissioned a piece of research on: The impact of Open Finance on Mutuals’ business models.

The BSA summary states that “In the savings market, a personal finance app could use Open Finance data to give personalised information, or potentially move a customers’ savings automatically to earn the highest available interest rates, or automatically transfer them to their current account to meet upcoming bills.”

The conclusion reached is that this would have “major consequences for the savings market”.

The suggested mitigations by the BSA are as follows:

• Requiring app and other third-party providers to notify savings providers prior to any transfer of funds and intended flows of customers and balances.
• Limiting the value of transfers out of any single savings provider, such as setting limits for the total value that can be transferred out per day.
• Permit savings providers to refuse transfer requests based on transparent criteria on current and future movement of savings funds.
• Ensure regulations are flexible enough to allow providers to respond to emerging shifts in funding markets.
• Ensure that the costs of complying with Open Finance regulation are fully proportionate and not excessive relative to the size of mutuals like building societies and credit unions.

The first four of these suggestions can all be described as making sure customers don’t withdraw their money too quickly.

With the final suggestion essentially being to make sure it doesn’t cost too much for the societies.

Is that really the message we want to be sending around Open Finance in the building society sector? It’s too open, and too expensive for us.

It’s a very valid concern on the capital controls required to keep a building society running (as deposits are needed to fund mortgage lending), but it doesn’t seem right that our first thought would just be to limit what customers are able to do, essentially closing up Open Finance.

Capital control measures in the form of limiting withdrawals from financial institutions have been used tactically throughout history. Typically, this has been used as a reaction to political events such as when Iceland restricted movement of money out of the country during the 2008 Financial Crisis, or when Greece imposed controls to prevent a bank run in 2015. These were used as tactical short-term solutions as a response to market conditions, and both resulted in longer term stagnation and reduction in confidence in the financial system.

Restricting use of Open Finance in the building society sector when it is growing everywhere else could have similar effects – leading to a loss of trust and satisfaction among building society members.

Capital controls also don’t address the root cause of the reason that a mass withdrawal could take place.

So, what should building societies be thinking about?

Rather than jump straight to restricting customers’ ability to move funding, why don’t we start by looking at the root cause of the possible funding loss. The root cause is that customers’ money may work harder for them, or they may get more value, elsewhere.

Customers should have a reason to stay with a society without being restricted. This could mean focussing on:

• Rates – Societies already provide competitive rates on a range of products, with improved rates for members willing to lock their money away for longer in notice or fixed term accounts. Doubling down on this rate differential will help societies attract the right type of sticky funding that won’t run at the first chance. Open Finance is also a 2-way street. If a customer has a balance in another current account that is earning little to no interest, societies could prompt that individual to transfer a portion of the balance into a notice account and tell the customer exactly what interest they would earn.

• Purpose – The mutual sector is incredibly purpose driven. More and more customers select their financial providers based on ethics. A 2021 YouGov survey showed that 27% of UK consumers pick their finance providers based on ethics, and 24% based on their stance on sustainability. Societies can focus on clarifying their purpose, and ensuring it is communicated and resonates with customers.

• Providing additional value – Many societies are currently wrestling with the challenging question of “how do I make membership matter?”. Giving members a reason to stay which is more than purely rate driven, will increase stickiness of funding and ease fears of mass withdrawals. This could be in the form of financial planning seminars, interactive financial education, savings pots, discounted estate agency or conveyancing fees, tracking your carbon footprint. Beyond this, Open Finance will allow a greater view of customer’s data including that coming from accounts held with other financial institutions. Societies could nudge customers who stray from their spending habits and help them get back on track with their financial goals.

• Helping with home ownership – Building societies have a core focus to help people with aspirations of home ownership. Often, we find that saving and mortgage customers exist in separate siloes within the society. Savings customers will either want to one day own a home, be nearing mortgage renewal, may be considering refurbishment financing, looking at how they can make their home more energy efficient, or looking to support a family member own a home. Societies could incentivise customers to save by providing benefits for their current or future lending needs. For example, Leeds Building Society give customers £500 towards their first home when they save with the society.

What this all boils down to is who owns the Open Finance relationship with the customer. Building societies don’t necessarily need to win the ‘rates war’, as those customers who jump ship for the best rate are a lost cause already, but they do need to win the war on the customer relationship. This means being seen as the customer’s authority when it comes to saving for the future.

What about the costs of Open Finance?

Industry wide regulatory changes shouldn’t fall solely in the laps of building societies themselves. The sector is served by only a handful of core platform vendors, which is where the majority of the effort would be required to expose APIs. Building societies should raise this sooner than later within their technology vendor working groups.

It won’t be as simple as merely relying on a vendor rolling out an API. There are at least three important considerations:

1. Configuration changes needed which the society themselves will need to implement, including data issues that will need remediating.
2. Operational changes to adapt to new ways of customers engaging with the society and their products.
3. Colleague and customer communications.

Look out for a future blog that dives into more detail on the implementation effort required for Open Finance to work effectively for building societies.

How should the sector view Open Finance when it comes to savings?

In my opinion, Open Finance should be embraced and not feared. Societies are motivated by member benefit, and Open Finance is just that. Yes, there are risks that if ignored or poorly managed Open Finance will result in societies losing out. But if well managed, societies, like other financial institutions that have been proactive, can be part of the growing success story.