Open Banking. Closed Minds.

A year ago we were told ‘Open Banking is about to change the way we bank forever’.

A year on….and we’re questioning: ‘what’s the holdup? Where is Open Banking?’

Just 1 in 4 people have heard of it, and only 1 in 5 of those people actually know what it means*.

So, it’s no surprise with such limited understanding that we’re not all shouting from the rooftops about the latest digital disruptor in banking. But are we wrong to ignore it? The likelihood is… YES!

By ignoring it, we could be missing out on better mortgages, cheaper household bills, better control of our own direct debits and extra spending advice.

The government-backed initiative launched just over a year ago and enables us, as customers, to log in to just one app, and have access to all our loans, credit cards, current accounts, and spending habits—even if those span across multiple banks.

PWC are predicting it as one of the biggest disruptors to traditional banking with 33 million of us expected to be signed up to Open Banking by 2022.

It relies on your bank sharing your current account data with regulated third-parties, and for it to work properly the more banks that sign up, the better. So, understandably, this has been met with reluctance from people who don’t want to share their spending habits with companies they’ve never heard of.

But surely giving up our spending habits is no worse than the Sainsbury’s and Tesco Banks of this world using our store loyalty card data to work out if buying avocado each week makes us a safer person to lend to? At least in this case the extra information could open doors to greater financial inclusion and more affordable, competitive loan services.

By giving up our data, challenger banks, fintech firms, and tech companies are forced to come up with more competitive deals for products like mortgages, overdrafts and insurance. All tailor-made around our newly available financial data.

So could this be the end of us trawling the internet for the best deals …. Instead we sit back while the companies battle for our custom?

The big names are on board – Barclays, HSBC and Santander are just 3 who have adapted their apps to include financial data from your other banks. And the fintech-savvy digital-only banks, like Monzo and Starling, are embracing it even more – allowing customers to choose from a range of products that can be integrated in to their existing accounts (e.g. Pension Bee to view pension balances). Debt management services are next; fintech companies have already started approaching credit score agencies to use the data to benefit the consumer by increasing levels of financial inclusion with debt management.

So is it just us, the consumer, who is lagging behind?

Is it time for us to realise that this isn’t just a gimmick, it’s the future. It’s dynamic, it’s disruptive, and it could really benefit the consumer.

The big question is, are we ready for this transformation?

*Source – Splendid Unlimited survey

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for co-managing global equities portfolios. He joined us in 2014 from SWIP, where he was investment director in global equities. In addition Craig also had analysis responsibilities for the tech, energy and utility sectors. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors, a member of the global environmental equity team. Craig has a 1st Class honours degree in Building Surveying, an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 17 years’ industry experience*.

*As at 30 November 2018.

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No bank? No problem!

Bank Clerk: How can I help you, young man?

Stan Marsh: I got a hundred-dollar check from my grandma and my dad said I need to put it in the bank so it can grow over the years.

Bank Clerk: Well that’s fantastic. A really smart decision, young man. We can put that check in a money market mutual fund, then we’ll re-invest the earnings into foreign currency accounts with compounding interest aaaand it’s gone.

[Blank stares and silence as it goes from the Bank Clerk, to Stan, to the Bank Clerk, to Stan]

Stan Marsh: Uh… what?

Bank Clerk: It’s gone, it’s all gone.

South Park geeks will remember the episode ‘Margaritaville’ where the US economy goes into freefall due to bankers behaving badly. All trust in the financial system erodes and chaos ensues. Ah yes, that’s right; this actually happened!

In the episode, Stan Marsh goes to bank a cheque and has his savings almost immediately wiped out by the bank. The bank clerk then dismissively asks him to move along. In the real world, many people, like Stan, don’t trust the US banking system.

The Federal Deposit Insurance Corporation (FDIC) has conducted a yearly survey since 2009 to assess the inclusiveness of the US banking system. It’s astonishing to us that 6.5% of US households (that’s over 20 million people) have no bank account whatsoever. They are dubbed the “unbanked”.

Reasons for Not Having a Bank Account, % of Times Citied 

Source: 2017 FDIC National Survey of Unbanked and Underbanked Households

Imagine life without a bank account and all manner of simple tasks become complicated.

It’s the norm to get paid and pay others through a bank account. We can purchase things at shops and online with a single piece of plastic. If you do want the physical stuff, just take it out of a hole in the wall. We can set up direct debits to pay bills and forget how much we are paying for the sports channels. Using a bank account protects our money from fire, theft and accidently throwing out the cash-stuffed mattress. It can also help us access credit for larger purchases, like a house. Heck, they even pay us interest for all of this goodness!

So who can the unbanked trust? One place to turn could be Green Dot, which has been providing an alternative solution since 2001.

Green Dot began life as a tech company before buying a bank and we believe this gives them an edge over the industry’s incumbents. Possessing the ability to build and distribute their own financial services products directly to the consumer has proven successful; they found their niche in pre-paid debit cards and largely helped develop the market into what it is today.

The idea is simple – it works much like a credit or debit card, except 1) you pre-load the card and 2) you do so at your local grocers. This has proven massively popular with the unbanked for the following key reasons:

  • Pre-paid cards are not linked to a bank account and there are no credit checks as no credit is on offer;
  • They can be used to receive wages and government payments such as social security and unemployment benefits for people without traditional bank accounts;
  • Transactions are made on a pay-as-you-go basis;
  • No overdraft allowance and no overdraft fees. Only use what you load onto the card;
  • Access the card at convenient places and convenient times, rather than queueing forever at your local branch

They aren’t perfect and certain fees still apply. But they can provide a great solution for the many millions who are currently excluded from the traditional banking system in the US. This hasn’t gone unnoticed; Green Dot won the Economics Inclusion Award 2017 at American Bankers Association.

If only Stan Marsh had known!

The South Park scene – there’s nothing rude don’t worry!

About the author

Euan Ker is a sustainable investment analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 5 years’ industry experience (as at 30 November 2018).

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Boring, boring banks

Boring is good…sometimes. Especially when it comes to the banking sector. Typically, banks that get into trouble – and thereby become a burden to society – often have one thing in common: they take excessive risk. 

And their risk behaviours often reflect their corporate culture; since the global financial crisis many banks are still scrabbling about trying to convince everyone everything has changed. Of course it has….

There are always exceptions though. Neither First Republic Bank (US) or Svenska Handelsbanken AB (Swe) – both of which are in the top ten holdings of the Kames Global Sustainable Equity Fund – suffered significantly during the events of 2008. Key to the success of both has been their unrelenting focus on creating and maintaining the right culture. Despite the Atlantic divide, they actually have much in common. It’s always about ‘the long-term’, ‘what’s best for the customer’ and ‘empowering staff to take responsibility’. The outcome? Lower costs (including lower staff turnover and fewer bad creditors), more satisfied customers than other banks and higher profitability.

Which in turn provides a competitive advantage. Financial stability enables lending regardless of the economic or business environment. Relationships are strengthened further when customers know they can count on you even when others have pulled back. As the CEO and chairman of First Republic succinctly puts it: “culture trumps everything else” and in-turn, “size and growth are a result of quality”.

You won’t be surprised then that these customer-focused models have performed exceedingly well. First Republic was founded in 1985 and has delivered 32 years of consistent profitability. Average losses at the top 50 US banks were 18x those of First Republic over the last 5 years, and 90% of loans, since 1985, have been originated by bankers still with the bank! And by the way, the founder is still at the helm!

Handelsbanken has been similarly successful. No other bank in the world has a higher credit rating (for a bank) from Fitch, Moody’s and Standard & Poor’s. And the bank’s total shareholder return since the start of the financial crisis has smashed its European opposition. There are no bonuses or volume targets for staff and performance is simply measured in terms of the long-term relationships managers build with their customer. Instead, employees and executives receive shares in the parent foundation which are redeemable at the age of 60! Could you incentivise a more long-term perspective?!

Boring perhaps. But good.

Making money in a cashless society

Investing sustainably means more than financing windmills, solar panels and electric vehicles. The growth in electronic payments and its broader impact on society provides a good example of a sustainability theme that many investors may not be familiar with.

The increase in digital transactions is driven by technology, consumer expectations regarding convenience and policy action. Electronic payments offers a number of advantages to businesses, including lower cash handling costs, streamlined operational costs and the opportunity to better understand customers via data analytics.

Governments also like electronic transactions. They provide greater transparency, which in turn leads to greater formalisation of the economy and higher tax revenues. In general the less cash-based a society the less corrupt it is – a fundamentally sustainable outcome.

Greater transparency was at the centre of India’s recent demonetisation efforts, when the government removed approximately 85% of the currency in circulation to reduce unaccounted and counterfeit money in circulation.

As well as reducing corruption, electronic transactions also enable financial inclusion. In India, there are now approximately a billion people who can transact via their smartphone, or if they don’t own a phone they can transact through biometric devices located in small stores across the country.

Similarly, in Sub-Saharan Africa, mobile money account ownership is driving a huge expansion of financial inclusion. As the World Bank Group states:

 

“When people can participate in the financial system, they are better able to start and expand businesses, invest in their children’s education and absorb financial shocks.”

 

Companies operating in this space include Vantiv, a US integrated payment processor that operates between merchants, customers and their respective banks. We also like Tencent, which operates China’s second largest online payment network. And although a relatively small part of its overall revenues, Google offers a peer-to-peer payments service through its Google Wallet product.