Open Banking. Setting a path for pensions to follow. Whitepaper

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1 Open Banking Setting a path for pensions to follow Whitepaper

2 Contents 3 Executive summary 4 Does Open Banking tread a path for pensions to follow? - Pensions are not bank accounts 7 The rise of Open Banking - Setting standards - How technology helps - The rollout - Government backing 11 Lessons to be learned from Open Banking 12 What next for the pensions industry? 13 In conclusion 2

3 Executive summary Open Banking was an industry initiative. It was built to deal with the problem of a lack of consumers' engagement with their banks. The Pensions Dashboard has a similar objective for pensions. What can the pensions industry learn from Open Banking to ensure the Pensions Dashboard is a success? Should a different path be taken to reflect the variances between banking and pensions? 3

4 Does Open Banking tread a path for pensions to follow? The first online bank in the UK was launched in 1997 (by Nationwide, strictly speaking, a building society at the time) 1. Today, people are more likely to engage online with their bank accounts than they are to use a physical bank branch. Despite these technological advances and the introduction of a standard bank account switch guarantee, by 2016 switching bank accounts to another provider remained extremely rare (just 2% switched in 2016) 2. This meant many members of the public were not necessarily in the most suitable account or with the best provider for their individual circumstances. The Competition and Markets Authority (CMA) opened an investigation, which found that there were significant barriers for the public to compare bank accounts properly. Information on service charges was hard to find and consumers struggled to understand whether there were accounts elsewhere that were more suitable for them 3. To this end, the CMA stipulated that banks had to agree to a standard set of information. This would allow the public to access that information on their account and to compare current accounts across providers. In addition, the Treasury had established an Open Banking Working Group 4 to create a set of APIs that would stimulate FinTech innovation in banking, by allowing new 'challenger banks' and other third parties access to an individual's current account details. All the initiatives above were drivers behind the formation of the Open Banking Organisation 5. This is an organisation established by the banks and backed by the Government to define an open set of API standards. These are available for use by any company that has the required set of regulatory permissions. 1. BBC News 2 Money Saving Expert 3 UK Government 4 Scribd 5 Open Banking Organisation 4

5 These standards have led to a variety of FinTech companies registering with the Open Banking Organisation and providing services and applications that make use of the standard. The services operated are not limited to comparing bank accounts or overdrafts; companies are free to combine banking data with any other financial data the individual wishes to share with the app, to come up with innovative new finance solutions. For example, the Open Banking Organisation suggests services that offer spending advice and improved loan terms based on banking details shared via Open Banking 6. Pensions are not bank accounts When the Pensions Dashboard was first proposed, this led to some commentators proposing that this could result in 'open pensions'. Are there any lessons the pensions industry could learn from Open Banking? It is often assumed that the banking sector and bank accounts are extremely similar to the pensions market and pension products, but there are some significant differences, as illustrated in the following diagram: Market participants At what frequency do most people engage? Ease of switching providers Who owns the money? How easy is it to withdraw cash? Who owns data on the assets? Banking Bank Accounts Small number of similar providers, focused on single simple current account product Daily to monthly Free to choose banks cannot refuse Individual Easy with few limits The individual Pensions More than 6,000 disparate providers/schemes, offering wide variety of trust- and contract- based products Many very rarely or yearly, a few monthly Restrictions apply trustees can refuse Trustee on behalf of the individual Complicated, with laws controlling access The pension scheme 6. Open Banking Group 5

6 Bank current accounts are designed to meet daily cash management needs. As a result, people will frequently engage. If consumers are dissatisfied with their bank, they are free to change. The money in a bank account is the individual's money and they are free to dispose of it as they wish. A consequence of this is that the individual has control of their data and can direct who has access to it. Pensions are a long-term savings vehicle, often provided by or through an individual's employer. Due to their long-term nature, people do not engage with their pensions regularly. In addition, even if they are dissatisfied, there are restrictions on their ability to change providers, particularly in a workplace context. In addition, in many pensions it is not the person but the trustees who are in control of the members' data and determine who has access to that information. On the surface, therefore, pensions and bank accounts are not so much 'apples and oranges' as 'apples and bicycles'. However, there are lessons the pensions industry can learn from Open Banking and how it was established, as well as warnings for the future. 6

7 The rise of Open Banking One particular learning point for pensions is the key elements that made Open Banking happen. This could have a significant impact on the Pensions Dashboard. The main elements in the rise of Open Banking are how standards were agreed, how technology helps, how the initiative was rolled-out and the role of the Government in making it happen. Setting standards For any technology project to work, one of the first steps is to agree a set of data standards. This needs to cover what data should be included, what it means and how it should be transmitted. At a lower level, it means agreeing the length of fields and the format of these fields; for example, are dates 'dd/mm/yy' or 'dd/mm/yyyy', and should money fields include a comma? Should the data be provided via an API or through a file? And, if it is to be a file, is it XML or CSV? Should the request be satisfied in seconds, by the close of play or within five working days? To agree a set of standards that the banks could support, the Treasury established a working group that consisted of banks, civil servants and FinTech providers. This standard would need to meet the requirements of the FinTech providers and be consistent with Government objectives. The Pensions Dashboard initiative run by the ABI in 2017 consisted of a number of pension providers, FinTech companies and civil servants. That group developed a set of standards that was proven to be capable of working on most modern pension platforms. While there is still some work required to complete the standards such that they can embraced by the whole pensions industry, the consortium of providers, FinTech companies and industry/government representation is the best way to take the standards forwards. 7

8 How technology helps When the CMA established the Open Banking Working Group, it identified the crucial role of technology in driving engagement. To enable technology in this key area, the CMA decided to use established and widely-used frameworks for user authentication (OAUTH2). The Working Group also engaged the Open Data Institute (ODI) to ensure that the data inspired and fuelled the innovation that forms part of the ODI manifesto 7. Adoption of this framework has allowed mobile apps to be designed that make it easy for the public to share their data. For example, Starling Bank uses its own app security and bio-metric authentication 8 to give the customer a fast, simple, yet secure way to implement Open Banking functionality. The CMA, to drive innovation, also launched an initiative (the Open Up Challenge 9 ) that awards prizes to FinTech companies that come up with innovative solutions that utilise the data made available through Open Banking. 7. The ODI 8 Starling Bank 9 Nesta The first lesson for the pensions industry is that it should not just build a single dashboard, but encourage multiple dashboards. Enabling technology companies to innovate the industry will evolve front-end presentations, across multiple channels, that will really drive much higher-quality consumer engagement. There will need to be guidelines that all participants must follow on how data is presented, to ensure the public has a realistic view of retirement and the data is not misused, but that has been successfully managed in Open Banking. One of the differences between the banking industry and pensions is that pensions are very long-term contracts; hence there are far more legacy platforms holding the data. Even with a very 'open' and flexible Pensions Dashboard architecture, many of the older systems will be unable to connect in a direct fashion. In the pensions context, the industry proposes to address this issue through use of Integration Service Providers (ISPs) that provide a technology hub to link old, inaccessible data into the central Pensions Dashboard service. Without this key component, the Pensions Dashboard will never achieve full population. 8

9 The rollout The driver for Open Banking was to encourage the public to identify whether they were in the best account for their circumstances and to make it easier to switch current accounts. To do this, the Government stipulated that the largest nine banking groups in the UK had to roll out Open Banking. Failure to do so would resort in punitive measures. By forcing the largest banks to implement, the majority of the UK 10 would then be able to access Open Banking. In addition, other banks that do not adopt Open Banking could see their market share under threat as the public begin to accept Open Banking as the norm. Are there lessons here for pensions? People will not engage with the dashboards if they cannot see all their pensions displayed 11. It is imperative to maximise coverage for pensions. Research on overseas dashboards, as well as from UK schemes, shows that the only way to achieve universal coverage is for legislation that compels all UK pension schemes and providers to open up their data. Given that legislation takes time to be put in place and further time to be implemented across the market, the pensions industry will need to consider whether a first release of a Dashboard is viable with a more limited population. With the right industry support, it should be feasible to achieve 'near complete' status, with key areas to include on day one being all DC auto-enrolment schemes and the major public sector DB schemes. In addition to having a legislative imperative, as time progresses, any pension provider not supporting the Dashboard with their data, will most likely see their market share drop and assets decline, as the public, consumer groups and employee representatives press for assets to be moved to schemes and platforms that are more open. 10 Webarchive 11 British Insurers 9

10 Government backing Open Banking was a Treasury-driven initiative, but was established by the banking sector with interest from the Government. This allowed the initiative to be innovative and not constrained, while also allowing the Government to ensure its policy designs were being met. Legislation was eventually created as an outcome of the project, with the Government using the threat of punitive action for failure to comply. This should allow the Pensions Dashboard to work in the same way as the Open Banking project. It will give the industry freedom to innovate and build dashboards with which the public will engage, while allowing the Government to ensure its policy needs are met. It is also probable that the Government will legislate (though possibly at a later date), and potentially apply punitive measures to schemes/ providers that fail to comply. In a written statement on 4 September 2018, Guy Opperman confirmed that the DWP would expect the industry to build a Pensions Dashboard while they ' will continue to engage with industry on this model and Government will protect pension savers and personal information by legislating where necessary.' Parliament 10

11 Lessons to be learned from Open Banking The most obvious success in Open Banking is the number of innovations already being offered. By designing an open API with a governance structure to which a company must agree before being allowed access to the project, the Government and industry have enabled the market to design apps and services that the consumer needs. Newer start-up banks such as Starling Bank, Yolt and Monzo are showing fantastic innovation, shaking up the whole banking sector. The same principles should be applied to the design of the Pensions Dashboard ecosystem. Open APIs, accessible to appropriately regulated bodies under an industry governance structure, will enable innovation through multiple Dashboard presentations, driving success in engagement objectives. This structure will enable forward-thinking suppliers to develop leading-edge engagement tools, based around Pensions Dashboard data. The providers who produce the most engaging services will thrive at the expense of their competition. The importance of governance is another factor that translates well into the pensions industry for the Pensions Dashboard. In Open Banking, to build an application, a company must have the correct FCA permissions for the services it wants to offer. In addition, it must also agree to the Open Banking dispute resolution process to settle disputes. The parallels here for Pensions Dashboards are that there needs to be a strong governance framework in place, with only permitted entities able to participate in the Pensions Dashboard ecosystem, committed to data security and operating to agreed standards, with penalties for those abusing the data or failing to meet prescribed security standards. Another driver for Open Banking was to match consumers with accounts that are most suitable for their situation. While it is too early to determine how successful Open Banking has been at achieving this, there are parallels for the future direction for the Pensions Dashboard. While the pensions industry should not try to run before it can walk, future iterations of the Pensions Dashboard could include information to help consumers identify the best pension for their situation and to allow them to consolidate their money purchase pots in an automated fashion. 11

12 What next for the pensions industry? In a similar way to the banking sector, there is an opportunity for the pensions industry to grasp the reins and make progress in a way that is practical for the industry but also has the consumer needs as the primary driver. The Government is continuing to suggest that it would like to see positive activity in this area, although it is disappointing that nothing more formal has been forthcoming during Waiting to be told what to do by Government is not the right approach; there is a real consumer need for the industry to proceed sooner, and a benefit in the industry in driving the solutions, building on successful collaboration shown in the earlier ABI prototype project. 12

13 In conclusion While pensions and bank accounts are different finance vehicles, there are lessons to be learned from Open Banking for the pensions industry and the Pensions Dashboard. It is crucial to ensure data is open and available for a range of dashboards, to allow innovation and engage with the public to make sure that the Pensions Dashboard is a success. Pension providers and pension schemes must embrace the Pensions Dashboard, both through supplying data to other providers, but also to make use of the Dashboard information within their own engagement initiatives. The Pensions Dashboard will happen and any pension market participant that is late to the party could find its customers and members are looking elsewhere and finding a more appropriate pension with a more forwardlooking provider. Ultimately, the Pensions Dashboard's purpose is for the good of the consumer, but the pensions industry can do much to rebuild consumer trust by supporting an open dashboard concept. Benefits exist for the pensions industry too, as better-engaged consumers will save more, increasing the overall size of the market. Then the providers that will thrive will be those that embrace the Pensions Dashboard and the wider engagement opportunities that it offers. As Albert Einstein said, 'The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.' Open Banking is changing the way we think about banks; the Pensions Dashboard can change the way we think about pensions. For more information, contact us at enquiries@aquilaheywood.co.uk or visit our website: 13