Open banking’s role in addressing the cost of living crisis

By Dan Morgan, Europe Policy Lead, Plaid

The crisis at hand

As we emerge from another peak of the covid pandemic, consumers and small businesses alike are facing a cost of living crisis. In December 2021 inflation reached its highest recorded level in three decades and essential bills are also on the up. Energy UK, a trade body, warned that tariffs could increase by as much as 50% by spring 2022. And, to top it all off, interest rates are tracking up in line with inflation, meaning those with outstanding debts – like a mortgage – can expect to see their monthly repayments increasing.

With consumers now under increased pressure to maintain their bottom line and ensure financial stability through what is a turbulent period, technologies like Open Banking are playing a key role in helping to boost customer confidence by paving the way to a more bespoke financial ecosystem.

Open Banking is here to help

Rising costs are combining in a perfect storm for many, making it harder to afford the same everyday expenses as before the crisis began. However, unlike the last major financial crisis in 2008, we already have a framework of tools that can help individuals and businesses to navigate this crisis. Open Banking, first introduced in 2018, was created with the aim of helping to create a data sharing environment that not only democratised personal financial data, but also helped usher in a new generation of providers.

Open banking and the subsequent fintech revolution spurred the creation of apps and services that improve the process of switching to cheaper utility tariffs, accessing interest free borrowing, automating savings, and even combining spending accounts in a single, easy to understand format. Our research found that, last year, nearly half (46%) of fintech users save more than $50 a month on interest and fees.

Similarly, HMRC now relies on APIs to process consumer tax returns, as well as SME payroll and lenders can make more informed decisions about customer creditworthiness when they take into account their transaction information, alongside traditional credit ratings.

Benefits to businesses – Low cost digital payments

Despite all the progress made in Open Banking to help people manage money better and institutions improve financial services, there are new open banking tools that should be used to help navigate rising consumer costs. Namely, Open Banking offers a critical rail for facilitating payments securely, more quickly, and at lower costs.

If more businesses offer and push customers toward account-to-account open banking payments over cards and other popular forms, it will help cut operating costs. On an individual payment, they may only save pennies, but in volume – it could make a huge difference, particularly when it comes to high-price items or recurring payments like subscriptions and utilities.

Open banking payments pose significant benefits for consumers, businesses, and the overall economy. Open banking payments are attractive to retailers/consumers because of lower costs and faster settlement, which represents significant savings for businesses. Not only can these savings be passed directly onto their customers they could be reinvested into the business.

What we need next: Empowering people to make positive choices about their finances.

There is still much speculation around just what will happen next in relation to rising inflation and global supply chain challenges. Expectations of further base rate rises are irrefutable and things may get worse for the average person, before they get better. Key to rebuffing this is financial engagement and empowering people to make positive choices about their finances.

Open banking has the power to combat these challenges and directly improve the financial ecosystem. Customers stand to benefit from improved personalisation and access to tailored financial products. Businesses, on the other hand, can help drive down costs while improving their operations with new payment rails. Now it’s time for fintech to shine and show how it can really create positive change.