Posted: 2nd October 2018

To put it in a not-so-elegant way, Open Banking is a lot like plumbing.

Your average consumer will probably not want to know much about what goes through the system, or how it is all put together, but they certainly want to know it works and provides them with the services they need. As long as the pipes remain unclogged and no leaks appear, then the average person will be more than happy with the existence of this unseen infrastructure.

However, if leaks do appear and if pipes become blocked, customers will certainly start to complain. But in the Open Banking environment, in which third-party institutions will have access to customer information for the purposes of providing financial services (that is, if they are explicitly granted permission), complaints and disputes become a more complex issue to manage.

The competitive spirit behind Open Banking

Perhaps one of the biggest shake-ups in retail banking in recent memory has occurred with very little fanfare and little customer reaction. Open Banking, borne out of the Competition and Markets Authority’s (CMA) desire to improve competition within the market, refers to the ‘opening up’ of customers payment account data held by banks and building societies.

The structure of Open Banking has allowed ‘third-party’ regulated financial services providers (think of those free advice websites, online payment services and so on) to access previously withheld information in order to provide customers with more choice and better, more personalised services.

While the previous UK framework restricted this sharing of information, under Open Banking, banks and building societies will be unable to tell their customers not to share their details with third party providers. Though ‘grey-area’ tactics such as ‘screen-scraping’ were previously employed by third parties, a customer’s information was always considered a guarded secret.

The Open Banking architecture was designed with the aim of giving more power to the consumer and removing barriers to competition for financial services firms. After all, over half of millennials are comfortable managing their money online and even sharing their information with other online services promising innovative and frictionless experiences.

Open Banking will likely be a huge boon not just to the customer, but to those third-party providers who will benefit from legal access to data and the ability to authorise payments on behalf of another institution’s customer (though, naturally, explicit consent will still be required). However, with innovation and more efficient customers services come issues related to responsibility and ownership.

“Who will take my call?”

Who would a customer complain to, and how would they raise a potential dispute, if something were to break down in a three-party transaction?

Take, for example, a mortgage comparison website. Under Open Banking, a customer from a high-street retail bank could share their current payment account information with this website in order to compare various mortgages. They supply this access to data willingly, with explicit consent, and in turn receive a selection of mortgage offers from a number of banks and building societies. If the bank customer takes out a mortgage from one of the offered financial institutions and then, a few months or years down the track, discovers that the plan is not suitable (or, even worse, unaffordable), to which institution would the customer complain? With whom would responsibility lie? The comparison website would, perhaps, argue that the information used to provide the offer was supplied willingly from the customer’s payment account institution.

The situation is likely to be more complex compared to more ‘traditional’ transactions. Though other payment products, such as credit cards, already have well-developed dispute processes in place and are bound by rules and regulations that cover well-known causes of disputes and complaints, the industry is still new to Open Banking and not yet familiar with the complexity of transactions under it.

Fast, but not perfect

At the same time the industry is adapting to these changes, they are also grappling with misdirected payments and payment scams occurring over ‘Faster Payments’, a system that allows for near immediate payments. This architecture has allowed UK online businesses and financial institutions to thrive and speed up operations in our internet-centric world, though it has also brought its own issues.

Faster Payments makes payments much harder to recall. If a customer aims to pay into a certain account — for example, for the purpose of paying rent — and inputs even a single wrong number, then the payment will be processed and potentially sent into an unfamiliar account. Though this can be resolved if both parties – the customer and unwitting recipient and their respective banks – agree to the return of money, there is no guarantee that sent funds will ever be seen again.

Open Banking may serve to add to the complexity of handling payments disputes that consumers may raise around Faster Payments. In such cases, banks and the Financial Ombudsman Service (FOS) can work together to resolve disputes, free of charge for the consumer.

It is worth noting, however, that assistance for companies who accidentally send payments to wrong addresses is expensive and only available via commercial alternative dispute resolution providers. Businesses, who will usually be moving larger amounts of funds than the average consumer, remain relatively ‘on their own’, even if Open Banking has given them greater access to information than ever before, and Faster Payments a quicker way of sending funds.

Settling disputes before they arise

Communication channels have been embedded within Open Banking, but the framework’s relative youth means that there are still gains to be made. Automation in processing still needs to be achieved, and rules and regulations still require time to catch up, at least to the level of older, more established payment methods.

Until then, there are a number of things that banks, building societies, regulators, financial institutions and customers can and should be doing to ensure that customers get the most out of Open Banking.

Firstly, the issue of liability within Open Banking needs raising. Responsibility for the remedying of situations as described earlier will have to be placed on one or more of the parties in a clear and reasonable manner. Though it is true that the customer will always bear some of the responsibility for their own finances, the ability to quickly, easily share financial information puts the onus on financial institutions to act responsibly, and with additional regard to potential customer vulnerability. Potential regulation should not just be about placing responsibility, though, it will be needed to ensure that those parties responsible pay their fair share of any possible penalties.

The improved security measures within the revised Payment Service Directive (PSD2) – including the upcoming Strong Customer Authentication requirements – should serve to reassure customers that their information is protected and only being used for its intended purpose.

Customers are, and should remain, at the centre of Open Banking; the entire structure of the system having been designed to allow them greater access to financial decision making and payments services. Financial service providers will need to be rethinking the typical customer journey to account for the twists and turns of Open Banking. They will need to be asking themselves whether enough is being done to inform the customer of how they can share their information, how it is being utilised and how their decisions could be impacted by Open Banking. As of yet, however, it is still uncommon for financial institutions to fully explain the implications of this new payments architecture. The plumbing remains unseen. Education and transparency will be key, going forward.

Settling disputes in Open Banking will require a new approach. Firms will need to be questioning whether they are truly acting transparently, meeting regulatory obligations and customer requirements and treating consumers fairly.

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