The Role of Open Banking in Protecting Vulnerable Customers 

The Role of Open Banking in Protecting Vulnerable Customers 

Simon Cherry
by Simon Cherry

In 2024, becoming a digital-first Financial Institution (FI) is not just an advantage, but a necessity for most that wish to both retain and gain customers. The emergence of Open Banking has compounded this, becoming a catalyst for innovation and customer-centricity. When discussing the benefits of Open Banking, the theme is often around how it can improve customer experience: by providing greater insight into a customer’s financial position, allowing payments across different financial ecosystems, and being able to compare and switch to different products more easily. However, from the perspective of an FI, Open Banking presents an unprecedented opportunity to redefine their approach to customer care, especially through the detection, monitoring and supporting of vulnerable customers.  

The financial sector, with its complex array of products and services, often poses significant challenges to vulnerable customers: defined by the FCA as “someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with the appropriate levels of care.”  The final part of this definition is key – customers become even more vulnerable when firms do not act with the appropriate level of care. But to act with appropriate care, you first must be able to identify those customers who need it. This is where crux of the issue lies: traditional models will be able to pick up on what could be considered the more obvious indicators of vulnerability, for example old age and lower income, but without a more holistic view of the customer, the more subtle indicators are likely missed. In fact, research conducted by Experian found that whilst 53% of adults in the UK show some signs of potential financial vulnerability, only 3% are recognised by service providers. Given that the cost of essential items such as food rose by 7% in 2023, it is highly likely that more and more people will be showing signs of vulnerability.  

Enter Open Banking. By harnessing the power of data sharing and analysis, FIs can now access a wealth of customer information, providing a clearer picture of individual circumstances and needs. For example, transaction history can reveal patterns of erratic spending or reliance on pay-day loans providers, possibly indicating financial distress. Similarly, frequent and large payments to betting companies whilst being consistently overdrawn could potentially signal a gambling issue, rendering a customer more vulnerable. By analysing these data points, FIs can proactively identify customers who may require additional support or services, paving the way for more personalised and considerate financial care. 

Demonstrating Compliance with Consumer Duty  

The adoption of Open Banking not only aligns with the ethical mandate to protect vulnerable customers but also serves as a move to comply with the Consumer Duty regulation. Having come into force at the end of July last year, the regulation mandates that financial services must act to deliver fair outcomes to all customers, including more vulnerable individuals.  

The FCA’s recent report on good and poor practice in relation to Consumer Duty highlighted the need for Financial Institutions to improve their ability to track vulnerable customers across multiple product sets and fill gaps within their data around this. Using the data provided by Open Banking is the best approach to address this issue and take it a step further by allowing FIs to track vulnerable customers across product sets both internally and outside of their organisation. This helps to provide a more nuanced understanding of customer needs. Using this understanding, FIs can design and implement strategies that not only mitigate risks through early identification of vulnerable customers but also enhance the overall experience for them, ensuring they obtain fair outcomes and demonstrating both alignment and commitment to Consumer Duty.  

Implementation Challenges and Solutions 

For those that have not begun their Open Banking journey, implementation can come with a host of challenges, ranging from technical integration complexities to privacy and data protection concerns. Incorporating Open Banking APIs into existing infrastructures can be daunting, necessitating investments in technology and expertise. Moreover, ensuring the security of shared customer data and maintaining compliance with stringent regulatory standards, such as GDPR, adds additional layers of complexity.  

To navigate these hurdles effectively, FIs should prioritise building robust and scalable IT systems, along with implementing comprehensive data protection measures and conducting regular security audits. This will be crucial in maintaining customer trust and ensuring a smooth transition to Open Banking.  

As well as the above, arguably the simplest yet most effective way that FIs can deploy Open Banking to support vulnerable customers is to partner with vendors that have developed bespoke solutions in the space. Credit Canary for example, uses Open Banking data to forward plan on the affordability of existing loans. Customers consent to full data access, meaning Credit Canary has a full view of all in-goings and out-goings. Using this data, if it becomes clear that a customer will not be able to afford their monthly loan repayment, Credit Canary acts early to restructure the loan to make it affordable.  

On the topic of customer vulnerability, Jim Fell, CEO of Credit Canary told us this:  

“At Credit Canary, we’re not just navigating the future of credit; we’re reshaping it to prioritise the well-being of our most vulnerable customers. By leveraging cutting-edge data integration and predictive analytics, we ensure lenders can offer timely support, transforming financial uncertainty into stability. It’s not just about transactions; it’s about fostering resilience and empowerment in the face of economic challenges.” 

As part of their wider ESG offering, our SHIFT Open Finance member CRIF are developing KPIs that can be used as data points to help identify vulnerable customers. A dashboard will then provide a clear view of the number of vulnerable customers an FI has and how many of those are receiving the correct support and outcomes. Not only is this a great way to monitor the performance of vulnerable customer support, but it also helps to demonstrate consumer duty compliance relevant to vulnerable customer outcomes.  

The above are just two examples of the many number of innovative fintechs deploying Open Banking and other technologies to support vulnerable customers.   

Conclusion  

Open Banking is a key component in creating a more inclusive and protective financial services industry. By leveraging the rich insights offered from holistic customer data, FIs have the unique opportunity to not only comply with regulatory mandates like Consumer Duty, but proactive and much needed support to vulnerable customers, ensuring that everyone, no matter their current circumstances, has access to better financial solutions.   

If you’d like to discuss further on solutions to support compliance with Consumer Duty or want to know more about how Open Banking can be used to support vulnerable customers, please feel free to email me at simon.cherry@woodhurst.com  

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