Why midata will change personal banking forever
How midata will shake up the broken banking world, empowering consumer choice and forcing the growth of customer-focused accounts and providers
Mention bankers and banking to the put-upon consumer and eyes will roll, lips curl and shoulders slump with feelings of anger, helplessness and despair… From rate-rigging to subprime lending and multiple mis-selling scandals, the list of historic outrages is long and inglorious, and as they plunged the world into economic catastrophe the salaries and bonuses of many of those responsible seemed to simply keep growing.
But a key tool to help take back control of our financial lives is now here in the form of midata comparison. This government-backed scheme is dedicated to improving consumer decisions and choice. Gocompare.com is the first to offer it for current accounts, with the aim of increasing competition in the much-criticised high street banking market.
Rather than relying on assumptions when shopping around for a new bank, midata will make the comparison better by using details of your actual account use over the previous 12 months to project the future benefits you could expect if you switched to a new account. This can be translated into easily understandable pounds-and-pence figures, making your choices more straightforward and, in the longer term, meaning that account providers will have to offer options suited to customers if they want to attract their business.
The road to today's current account market
The origins of banking are thought to lie around 4,000 years ago in the first agrarian societies of Mesopotamia, where farmers would take out grain loans from merchant collectives. If this seems rather remote from the plastic-panelled cashier ports at your local Barclays or Lloyds, you might want to shoot forward the odd 3,500 years to Renaissance Italy where mercantile banking developed rapidly to service the needs of the rich trading cities such as Genoa, Florence and Venice.
The commercial benefits proved obvious and desirable and sophisticated banks began to spread north, appearing throughout the Holy Roman Empire. Amongst the places showing the greatest appetite for banking services was the great shipping and trading hub of Amsterdam, and it’s this city that’s often credited with being the birthplace of the modern current account. With capital in abundance in Amsterdam in the 16th century, bankers were able to charge a fee for taking in and securely storing their customers’ deposits.
Did you know...?
The oldest bank still in existence is Italy’s Monte dei Paschi di Siena, which was founded in 1472 and has operated continuously ever since
Similar institutions soon spread to Britain where financial services reacted to the opportunities presented by a growing trading empire and then the industrial revolution, a set of circumstances that encouraged things people rarely associate with the banking world - creativity and innovation. Something that may be more familiar to people is that this new way of handling capital was based on ‘promissory debt’ rather than an actual asset or commodity. Banknotes started to become a common replacement for gold in the 17th century and cheques appeared in pre-printed form in the 18th century. The first clearing house is thought to have been the Five Bells tavern in Lombard Street, London, where bank clerks would meet to settle cheque balances in cash. If cheques are becoming an increasing rarity in the modern world, something that is still all-too-familiar to many of us – the overdraft – is thought to have been invented in 1778 when Royal Bank of Scotland allowed the merchant William Hog to take £1,000 more out of his account than he had in it.
Banking was still the preserve of the rich and the mercantile class, but this changed in the course of the 20th century with the rise of consumer-driven – and consumer debt-driven – economies. Possession of a current account has now become more the norm than the exception, and not having such an account can keep people trapped in a debt cycle, leaving them unable to get a job, process payments, build a credit history, or obtain the best deals on essentials like energy.
The implications of not having a bank account are so serious that a 2014 European Union directive stated that all EU member states must ensure that people have access to a basic payment account by 2016, allowing them to receive money and to pay bills. According to EU figures, in 2014 there were around 58 million EU consumers over the age of 15 without access to a payment account.
A March 2015 Financial Inclusion Commission report said that two million adults in the UK didn't have access to a bank account, but in December 2014 the government announced a deal for an agreed basic bank account template that would meet and exceed the EU requirements.
While access to a current account has come to be seen as a basic right of a citizen, customers have also come to expect this as a ‘free’ service, a situation that has helped encourage banks to seek profit from their account holders in other ways. This, allied to the fact that many customers see their relationship with their bank as one that can last a lifetime, has made the current account market something of a stagnant environment. Regularly run PR research grabs frequent headlines along the lines of ‘our relationships with our banks last longer than those with our partners’. Unfortunately, as with insurance and so many other financial products, blind loyalty rarely pays in a commercial relationship…
It took the seismic shock of the 2007-8 financial crisis to wake the world up from its banking slumber. The traditional image of the solid, reliable bank manager as a pillar of the community who everybody could trust – or at least gently mock in the manner of Captain Mainwaring – was obliterated, and bankers became the pariahs of the modern world. Many of the scandals responsible for this turnaround in perception happened at a corporate and trading level and bore little relevance to the work of the bankers you’d deal with in a high street branch. Think Libor interbank lending rate fraud, foreign exchange rate manipulation, insider trading, tax avoidance scams and money laundering. However, other scandals can be laid squarely at the door of the banker-in-the-street, even if their targets and culture were driven by the corporate machines above them.
Did you know...?
In 2011, 34% of personal current account revenue for UK banks and building societies came from overdrafts, revenue from unarranged overdraft charges amounting to £1.7bn
The subprime lending practices that played such a big part in causing the economic misery that has swept the world were fuelled by face-to-face mortgage sales, and similar profit-motivated rather than customer-driven tactics can be seen in a variety of other areas. These are likely to be familiar to anyone who has walked into a bank or logged into an online account in recent years; you may have just wanted to check your balance or cash a cheque, but chances are you’ll have been hit by a sales pitch encouraging you to ‘upgrade’ your account, take out insurance, or sign up to some other scheme that will leech regular payments from you by direct debit.
Perhaps the most high profile of the outrages related to such practices is the long-running and ongoing Payment Protection Insurance (PPI) scandal. Financial institutions have been found to have mis-sold payment protection policies since at least the 1980s, and since the story of the scandal broke in 2011 many billions of pounds have been paid out to customers in compensation. Policies were pushed onto people who may have had sufficient cover from another source, to those who didn't need such protection at all, and to people who would have been ineligible to claim. What's more, many didn't even know they were taking out PPI - it was foisted upon them as a sort of 'bundle' with a credit agreement. The peak of the fall-out from this seems to have come in 2012 when there were 12,000 PPI complaints a week coming in to the Financial Ombudsman, but the issue is expected to remain live for many years to come. In January 2014 it was estimated that banks alone had paid out £22bn in compensation, and around 4,000 complaints a week were still being made.
If it seems like we’ve passed the peak of the PPI complaints, we may have barely scratched the surface of the mis-selling of packaged bank accounts. These are current accounts that typically charge you a monthly fee for extra services that may include things such as insurance, card protection and vehicle breakdown cover. Packaged accounts have come in for criticism from both the financial regulator and consumer groups because people often have the services from another source and they've sometimes been sold to those who were ineligible for some or all of the benefits offered.
Another area that seems ripe for a banking scandal is the charges levied on current account overdrafts. In 2011, 34% of personal current account revenue for UK banks and building societies came from overdrafts, with revenue from unarranged overdraft charges amounting to £1.7bn. The Financial Conduct Authority (FCA) is investigating how providers set and monitor overdraft limits and their governance and strategies for doing so, with the wide variety of overdraft fees causing much confusion amongst consumers. As part of its review, in April 2014 the FCA published research into what was then an £8bn market, concluding that products didn’t offer good value and that the costs confused customers. The regulator was concerned that:
- Overdrafts were not a prime factor when switching current accounts
- Banks therefore have little incentive to give good value overdrafts
- Consumers don’t take account of overdraft costs
- Overdraft use quickly becomes habit
- Increased overdraft limits can be perceived by customers as their bank 'trusting them'
"Just about everybody who banks can have access to some sort of overdraft facility - whether they've signed up for it or not," said Christopher Woolard of the FCA. "The sheer size of this market is huge and with overdrafts bolted on to over 30 million UK current accounts, we want to make sure it's working well for consumers." In response, Eric Leenders of the British Bankers' Association (BBA) told the BBC: "Millions of people find overdrafts are an easy way to borrow money, more flexible and convenient than taking out a loan. Anyone who uses this type of borrowing receives details of how much they're charged in their account's statements."
The variety and scale of these banking problems may seem overwhelming, something that’s likely to have contributed to the inertia in the current account market with consumers sticking with the devil they know. However, if any positive can be drawn from the economic crisis and the modern age of austerity, it may be a rising awareness of personal finance with people encouraged to tighten the purse strings and look for the leaks that drain away their hard-earned cash. When it comes to current accounts the consumer has needed help to stop that flow…
The seven-day switch
Despite the innumerable problems in the banking industry, as noted customers have proved remarkably reluctant to change their current account provider - the number of people switching in a year tends to be around the one million mark and those switching tend to be motivated by negative factors.
To try to counter this, a vital first step was to look at the mechanics involved in changing bank accounts, and in September 2013 the Payments Council and major banks and building societies introduced the Current Account Switch Service which was backed by a Current Account Switch Guarantee. Before this scheme came in, it could take up to 30 working days for an account move to take place and banks and building societies all had different processes in place. The reforms cut the time it takes to change account to seven days, improved service and ensured a consistent approach across the industry, offering:
· The ability to nominate a date to switch that suits you
· A promise that money coming in (for example salary payments) and money going out (such as direct debits and standing orders) would automatically be moved to the new account
· A guarantee that any payments sent to or attempted to be taken from the old account would be automatically redirected to the new account, meaning there's no danger of going overdrawn because a payment is taken from the old account and there's no money there to cover it. The guarantee period was initially 13 months, but from March 2015 it should be 36 months
· The promise of a refund of any fees or charges on your old and new current account if something does go wrong
· The removal of the need to talk to your current bank or building society if you want to switch accounts by guaranteeing that your new provider will take care of the changes for you
While the guaranteed switch service has led to some big improvements in the market, for many it hasn't gone far enough and the 2014 Autumn Statement announced a number of measures aimed at refining and improving the service. The government is examining whether the switch period can be cut to five days, and if this would deliver significant benefits to consumers. It's also thought to be looking into the possibility of account number portability, meaning that customers could hold onto the same bank account number when they change provider. Others have called for far more radical changes.
"The switching service is an innovation which, despite the government’s good intentions, has unfortunately not done enough to encourage competition," said the Yorkshire Building Society’s Mike Regnier. "We instead want to see real reform that achieves full account portability." Proposed ways of achieving such change have included technological improvements to take some of the manual processes away from consumers, some of which will be helped by midata.
Meet the switchers
While the seven-day switch was a vital first step in reforming the current account market, research indicates that the impact in terms of getting people to actually change provider has so far been limited. Gocompare.com research in July 2014 suggested that only 6% of customers had switched in the nine months following the government's change in rules and just 19% had heard of the new rules.
Emily Bater discusses bank switching with Cardiff shoppers
However, the same research suggested that those who did decide to move their business found the experience a positive one, with 41% of them saying they were attracted by better deals from other banks, 26% that they were driven to change by poor service from their old provider and 77% saying they found the switch process easy. Here are the case studies of some people who took the switching plunge:
'I wasn't annoyed with them but wasn't very happy'
"There were too many visits to the bank and too much having to beg them for this, that and the other," said North Londoner Bernard Nazarian, a 60-year-old who ended a 25-year relationship with HSBC to join Santander. "I wasn’t annoyed with them but I wasn’t really very happy either. The Santander branch is literally two or three minutes from where I live and I kept seeing the red ‘123’ advertising. I didn’t think much about it until I became aware that it pays 3% interest but it’s a current account. That prompted me to forget any loyalties I had towards HSBC."
'They paid interest and gave me money'
"I’d been with my original bank since I was 16 or 17 but Cydesdale was offering an account which paid interest on a current account and it was offering money to switch, so I thought it was time to chance it and see how it went," said Gavin McQuistan, a railway signalman from Montrose. “I had nothing against my previous bank, they’d never done anything wrong, but if someone’s going to pay me some interest on what I have in there then I’ll switch.”
'I wanted a current account paying high interest'
"I usually keep around £2,000 in my current account at any one time so I was keen to get a good interest rate," said Jennie Hill, a 33-year-old clinical psychologist from London who's preparing for a June wedding with her partner Marten. "We’re not saving so much in the short term at the moment because of the wedding so a high interest rate current account seemed like a good alternative. We both went to the bank and took out a current account each with TSB and a joint bank account, too. We had a meeting at the bank on a Saturday and by the following Friday everything was sorted, including standing orders. Switching isn’t as big a hassle as it seems. Be proactive and look around at the best accounts for your needs – it’s always important to look."
'A local branch is open to me every Saturday'
"I had a couple of bad customer service experiences with my local bank and thought that’s it,” said Jonathan Annable, a 24-year-old marketing assistant from East Molesey who switched to Metro Bank. “A local Metro Bank branch is open to me every Saturday and that’s when I do my banking now because I can’t do it during the week. Being quite young I’m not scared of internet banking… but when it comes to sorting things out I’d definitely much rather have someone to speak to."
Beware of gimmicks
Despite some of these encouraging tales, Sanders has warned potential switchers not to be swayed by the short-term bonuses and benefits associated with some accounts. “Since the introduction of the new rules, we’ve seen banks and building societies offering a range of incentives to entice new customers through the door, things such as a £125 switching bonus and cashback cards,” he said. “Many people find these offers of ‘free money’ attractive and are switching accounts, but customers shouldn’t just look at the headline offer to switch. They should take time to look at what the account offers to make sure that it meets their needs. For example, if you always go into the red before the end of the month, an account with good overdraft terms would probably be better for you than one that offers a good rate of interest on any surplus cash built up in the account.”
When considering such things and calculating the costs and benefits, it’s time to turn to midata…
How midata can help
With the mechanics in place to make bank switching quick and hassle-free, the focus has now turned to helping customers find the right deal, and to selling them the benefits of ensuring they do exactly that. The solution to both of these issues can be found using midata, and when its widespread use is taken on it'll have a wider impact on the entire current account industry. When midata-enhanced comparison becomes the industry standard there’ll be little point in account providers tailoring their products for profit rather than customer benefit – the customer will be able to easily see the costs they’d incur by choosing an unsuitable product, making such accounts obsolete.
Such developments also help encourage new challenger banks to join and shake up the market. In 2010, Metro Bank became the first financial institution to gain a full banking licence for over a century, and many more are following in its footsteps. The challenger banks may well offer improved customer service, or may target another particular niche area that could be closely suited to your needs, potentially improving the market in a similar way to the impact we've seen from small gas and electricity firms in the energy market. This approach to banking reform is backed by the government.
"More competition means banks working harder to provide the best possible products and services for their customers, and customers getting more choice about where and how they bank," said Andrea Leadsom, economic secretary to the Treasury and Conservative MP for South Northamptonshire. "More competition means a more dynamic and innovative market, which helps customers benefit from cutting-edge financial technology and makes it easier for challenger banks and alternative providers to enter the market and prosper. We’ve addressed the balance of power between customer and bank. We’ve made it possible for people to switch banks in a week so customers can hold their bank to account and vote with their feet. The government’s midata initiative will enable customers to plug in their bank data and, for the first time, receive a detailed comparison of which bank is best for them."
Sanders added: "At the moment there’s unfair competition in the current account market which is dominated by brands and by products and services that customers don’t really understand. The government had two options; they could heavily regulate it, or go for a sort of free market mechanism. Heavy regulation would mean there’d be one body sitting over all the banking service providers, regulating exactly what they do and what they offer to customers. The free market approach is about inducing competition in that market and the way that midata does that is that it releases the customer’s data into the market, allowing customers to compare and select current accounts that are right for them and to vote with their feet. This should then get the banks developing products that are fit for purpose and fit for customers."
To look at some specific areas where midata could address known problems in the current account industry, consider the issue of overdrafts.
As noted, overdrafts are subject to an FCA investigation and many people find the range of fees charged quite bewildering. Some accounts may have an overdraft buffer, allowing you to go a little overdrawn without charging you, and you also need to be aware of both arranged and unarranged overdraft fees, of the level of interest you’re charged on agreed and unauthorised deficits, and of whether fees are capped. What’s more, some overdrafts charge daily fees – an arrangement that potentially benefits some customers, but that will prove cripplingly expensive for others. BBC financial journalist Paul Lewis said on his Money Box programme that APRs on some such overdrafts charging daily fees could be "entering payday loan territory".
By using midata, a comparison of the banking options open to customers will take such fees and factors into account and make calculations based on their actual current account use in the previous 12 months. Customers can then see how much each particular option will save or cost them if they make the switch and continue to use their account in a similar way.
On a more positive note than overdrafts, customers may also want to consider the interest rates paid on some current accounts when they’re in credit.
Since the Bank of England cut its base rate to 0.5% six years ago, the interest paid on most savings accounts has plummeted to levels that could be considered laughable if we weren’t too busy crying over them. FCA research discovered that around £160bn of the funds held in easy access savings accounts in 2013 earned an interest rate equal to, or lower than, the base rate of 0.5%.
The decline of the savings market has been accompanied by increasing competition in the current account market, with many banks and building societies offering highly attractive, market-leading in-credit interest rates on their current accounts. Such deals often come accompanied with convoluted terms and conditions, though. For example, interest is likely to be capped when a balance hits a certain level – perhaps £2,000 – meaning that if you were to keep, say, a balance of £5,000 in the account you’d still only be earning interest on £2,000.
Many interest-paying current accounts will charge a monthly fee, and other typical terms and conditions include ensuring that you have regular payments going in and direct debits coming out. Again, midata will be able to factor such terms and conditions into its calculations, delivering an accurate comparison based on your individual circumstances.
Of course, midata can never be a panacea for all your financial issues and personal money-management education, skills and responsibility will always be vital. For example, if you’re savvy enough to be using a high-interest current account, you may be making full use of the maximum interest-paying allowance while keeping any additional cash elsewhere in a savings account. As midata will be basing its calculations on your current account usage over the previous 12 months, it won’t be factoring in any additional cash you may be able to plough into a high-interest current account from a savings account that could be offering poor interest returns.
Customers who are going through significant lifestyle changes – perhaps getting married, having a baby, gaining or losing a job – should also take particular care, as the previous 12 months of bank account use may not reflect what will happen in the next 12 months. As just one example, let’s consider students. Their overdraft may considerably increase year-on-year as they study, meaning that what they need from their account will change. When they eventually graduate, their circumstances may quickly change again, hopefully because they have a greatly increased income from a graduate job. In all such instances, an analysis of the previous 12 months of account use may not be the best way to secure the right deal for the future.
To ensure you know what midata can and can’t offer, find out a little more about the mechanics involved...
How midata works: The technical bit
The Treasury and the Department for Business, Innovation and Skills have secured an agreement from the major current account providers that they will make customers’ data available in a safe, simple, standardised format that can be easily fed into comparison sites to give the customer more clear and accurate options when they shop around. Gocompare.com is the first comparison site to offer this service. If you search for current accounts through us, you’ll see our standard comparison table but also a button at the top of the page inviting you to try our enhanced, midata-powered service. Click this and we’ll walk you through the simple steps you need to take…
If you have access to online banking with a participating bank, you should see an option to download your midata file when you’re logged in. The file will be in a .csv format – if it isn't, it won’t work with our system. You then upload this file into our comparison software, a process which is in accordance with the data protection rules from the Information Commissioner’s Office. The information is encrypted and is only used to calculate your personalised comparison table – your data isn't stored, nor is it used for any other purpose. "We've got a lot of safety and security measures in place to make sure your data is secure," said Sanders. "We don’t store any of your data either – as soon as it’s run through our system we delete it from our database and it’s gone from there forever."
Is my data secure?
Over 1,500 calculations relating to your spending habits will then be made by examining a huge number of transaction types. These are basically the things that banks charge you for - all foreign usage fees, for example, plus any overdraft charges, cheque return fees and standing order charges. Gocompare.com will then trawl the current account market and show a table with the options available to you. The one assumption that is made is that you’d use the accounts we’ve compared in the same way as you’ve used your old account according to the data you’ve provided. Based on that, the comparison table forecasts the actual cash benefit (or cost) you’d incur by switching to a particular product.
Digital design company Runpath is responsible for building Gocompare.com's midata current account comparison engine and Ian Major is the firm's director. "To simplify what we’re doing here, we’ve got the six big banking groups which represent 10 retail banks under their group banners," said Major. "They are going to be creating files showing 12 months of a customer's banking history, but each banking group will be doing that slightly differently. So the task at hand is for us to be able to ingest each of these different files but… most importantly go through the very granular complexity of analysing each and every transaction that the consumer has carried out.
“We then work out for the 150 or so bank accounts that are currently available in the UK what every single account charges, its fees, rates of interest, cashback offers, incentives and rewards. Then we have to unfold all of that information in milliseconds to be able to show the results that are bespoke for the consumer… that’s not without its challenges.
“What all parties around the midata working group table were seeking to do was to decide what could and couldn’t be included… We reached a compromise where, for an accurate comparison, we'd need to know things about charges, about fees, about rates of interest, but we’d also need to know things about point of sale transactions - so where people are spending their money and in which shops - to be able to make sure that we can make good on reward schemes that are out there. We needed to make sure that we had enough information to provide a tailored comparison, but that anything that was superfluous would be redacted. That talks to the security concerns and fears and allows the Treasury to encourage banks to provide the data and for third parties to use it.”
Ian Major of Runpath, the builders of our midata comparison engine
As midata evolves, the switching process is likely to be streamlined with the help of Application Programming Interfaces (APIs), a set of routines, protocols, and tools for building software applications. Essentially, APIs should help different companies share data and speak to each other more easily. In the 2015 Budget the government confirmed its commitment to deliver an open API standard in UK banking and - working with the banking and financial technology (FinTech) industries - set out a detailed framework for its design by the end the year. This was to enable FinTech firms to make use of bank data on behalf of customers in a variety of ways and to ensure the UK remains at the forefront of developments in financial technology and innovation.
What’s next for midata?
Although the term midata will be new to many, it’s been around for some time and its potential impact is likely to extend far beyond the current account market… The government initiative was launched in 2011 as a scheme feeding into the overriding programme of providing better information and protection for consumers. It aims to encourage consumers to be more aware of their spending habits and how best to spend and place their money by getting businesses, consumer groups and regulators to make available the data they hold on consumers in standardised, safe, electronic and portable formats which can be easily fed into comparison sites and other apps and tools. As well as current accounts the project could impact on almost any aspect of personal finance including credit cards, credit reports, energy and mobile phones.
"I’d like to see midata moving into every area where a company collects personal usage data from a customer – anything that tells a company how a customer uses a certain product," said Sanders. "The customer should be able to access that data in a standard way that allows them to then go away and compare other products within the market."
Major added: “We see the roles of the comparison sites and other websites changing quite dramatically in the coming years. It’s all well and good us doing a midata comparison for a current account to see which one you should move to, but if in that same process we were able to understand how you use your credit card, how you pay off your mortgage, how you deposit money if you’re saving, what loans you might have, what insurances and so on… that joined-up view gives us a much richer picture.”
Although midata is a voluntary scheme, the 2013 Enterprise and Regulatory Reform Act has given the government extra potential legislative powers over particular industry sectors, making it a powerful tool to help deliver the dream of a world of personal finance driven by the interests of the customer.