Open Banking: what does it mean for insurers?
Open Banking is now three years old and has passed the 2.5 million user mark in the UK. What are Open Banking's implications for the insurance industry?
Let's first briefly recap. Open Banking was one of the CMA reforms to shake up the industry and inject new competition, following its retail banking market review. A similar initiative saw the light in Europe with the second payment directive (PSD2).
Open Banking means that consumers should be the ones in control of their financial data, not their bank. It means they should have the option to share their transactional data history with other providers if they estimate they'll benefit from it. The exchange of value is meaningful here as some consumers may feel uncomfortable to share their data and will need to balance this with the benefit they get in return. Consumers could use this to view all their accounts in one place or to share richer data, for instance, to get a better rate for a loan.
Open Banking is a game-changer in that it gives third-parties, bank or not, access to consumers' banking data. In the UK, the CMA mandates that the nine largest banks share their customers' data with Third-Party Providers (TPP), provided the customer gives consent. Companies share data through API's. All Open Banking scheme participants are regulated and must obtain approval from the FCA (or European equivalent).
What does this mean for insurers? Although they do not currently have to participate in Open Banking, it presents them with real opportunities – I would highlight three here:
1 - Premium Financing – Open Banking enables more precise credit decisions that correspond to each customer's financial situation, leading to fairer outcomes. By accessing more granular transactional data, with customer consent, the underwriter can refine decision models. For instance, information about rent payments and incoming salary is typically not available in bureau reports. Leveraging Open Banking for lending becomes particularly interesting for customers with no credit bureau history / 'thin files' or young drivers.
2 - Policy Pricing – similarly, having the full financial picture through richer data can help improve pricing models for motor, home or general insurance policies.
3 - Payments – Open Banking's Payment Initiation functionality is an opportunity for insurers to reduce the cost of accepting payments vs cards. Customers selecting this payment method on the insurer's checkout page would consent to the insurer requesting the payment directly from the customer's bank account. It would result in no need to fill in the card details or shipping address for the customer, creating a positive user experience. For the insurer, this means the transaction doesn't go through the "cards rails" so there is no interchange involved.
Reducing payment-related costs through this alternative method would undoubtedly be welcomed at a time when fair value exchange will put pressure on margins. With Open Banking now a reality, the regulator is looking at broadening its scope to other financial services, including general insurers and insurance intermediaries.
In Dec 2019, the FCA initiated a call for input on its Open Finance initiative. Its final report and recommendations will be published later this quarter. Depending on the proposed measures and whether large players will be mandated to participate or not, Open Finance could create broader opportunities for insurers and foster more competition with margin erosion.
It will be critical for insurers to get best practices from retail banking to overcome some of the early challenges to accelerate take-up and benefits. The companies that innovate and accelerate the positives that Open Banking brings while addressing game-changing space challenges will move ahead of the broader market.