Insights

30/11/18

Behavioural economics meets Open Banking: Once open banking is up and running, will people switch?

Open banking is the application of a national Consumer Data Right to the banking industry. It will allow customers to request that their data be transferred to third parties and is expected to facilitate more competition (by facilitating entry of new providers). 

See our previous Insight for more detail about implementation of open banking in Australia.

The success of open banking is dependent upon customers switching banks.  It is generally taken as a given that if open banking makes the process of switching easier, and there are products available that are more innovative and tailored to the customer, then customers will switch.

However, customers in Australia are generally reluctant to switch banks. Dr Rob Nicholls, a senior lecturer at the University of NSW Business School, states that banks have known for a long time that customers don’t tend to switch institutions and this is something that drives the behaviour of the banks. A 2017 survey of 2026 customers found that 40% were still signed up with their childhood bank, with one in 10 saying it hadn’t occurred to them to switch, and a further 9% saying they couldn’t be bothered.

So will people switch?

Case Study: Open banking in the UK

Open banking commenced in the United Kingdom (UK) on 13 January 2018 and there were 80 providers enrolled as at 28 November 2018. Despite operating for almost a year now, YouGov Custom Research found that:

  • only 28% of adults in the UK are aware that open banking exists; and
  • only 12% of people said they would be prepared to share their financial data in order to access new and innovative products.

It appears that the “big 5 banks” – Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander UK – still dominate the retail banking market in the UK, with a collective share of 80%. Neobanks, such as Monzo and Atom, have a market share of less than 2% each. 

The YouGov Custom Research also found that:

  • 77% of people said they would be concerned about sharing their financial data with companies other than their main bank; and
  • 63% of people said they are satisfied with the service from their current bank and are not interested in using banking services from other companies.

The “extra effort” required to shift customer attitudes

The experience so far in the UK shows that having the necessary regulatory infrastructure in place may not, in and of itself, achieve open banking’s aims. This is consistent with other insights from behavioural economics.  To put it simply, we know that people tend to stick with what they know because change is hard.

Therefore, for open banking to be successful there also needs to be a certain amount of social infrastructure to make customers aware and willing to participate in open banking. For this to occur there needs to be a shift in customer attitudes towards:

  • the banking industry in general, particularly any perceptions that banks are the only ones capable of offering good financial services; and
  • sharing data with other providers, particularly to overcome any reluctance there may be concerning the sharing of that data.

Some sections of the community might respond better to open banking than others. For example, Gen Z, referred to as “The Sharing Generation” that’s “All Technology All the Time”, may be more willing to share their personal financial data if there is something to be gained. Other customers who are comfortable with integrating technology (i.e. online banking, using fingerprint passwords and using smart watches to record personal data) into their lives may also be more willing.

So how do we encourage a shift in customer attitudes for the rest of consumers? Here are a few ideas that may prove useful.

  • More education – In our view, there is going to have to be a substantial amount of education on how the sharing of information works in open banking to ease customers’ concerns regarding their personal data.  Incumbent banks may not be willing to pay for this education so we query whether it will need to be an initiative taken up by the relevant regulators.
  • More engagement – Fintechs will need to think more innovatively about how they engage with customers. It will not be enough to offer a good product at a competitive price on a nice looking app. Perhaps real innovation will come, not in the form of new products themselves, but in the way that customers are engaged and encouraged to prefer one product over another.  Alipay and WeChat are good examples of how this may work in practice.  These apps have good payment functionality, but this functionality developed organically as an addition to the social media platform. In a way, these apps are not just about offering a new financial product, but a new way of interacting with people.  This is the type of innovation that, in our view, will have better prospects of overcoming consumers’ natural reluctance to change and embrace new financial products.

Conclusions

Investing in Open Banking, while important, is not guaranteed to deliver more competition.  To achieve more competition, there will also need to be additional investment in the social infrastructure that will make switching banking providers possible (and likely).  There will also need to be a creative approach to encouraging customers to switch and to overcome any natural bias against change.  The experience in payments would suggest that one way to overcome that bias will be the use of platforms that create a new customer experience that goes well beyond what banks offer today.

 
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