Due to the success of open banking, it’s likely that we will see the development of open finance in the near future.
Open Banking: A Success Story
Open banking involves granting a third party access to your bank account. With your consent, this third party can access your payment account data and ask your banking provider to make transactions on your behalf.
The October 2021 Open Banking Impact Report found that 55% of Open Banking consumers agreed these services had helped them reduce their fees and costs and that 83% were willing to expand their use of these kinds of services.
On the whole, open banking seems to have been largely successful, and this has now opened the door to expansion into open finance.
Open Banking to Open Finance
Both open banking and open finance operate on the idea that individuals should be in control over who can access and use their financial data.
Open finance is simply an extension of open banking; it would enable wider sharing of this consumer data to more financial products and services, rather than it being confined to banking. So, rather than this data sharing solely involving things like payments, under open finance, it would also be applied to things like investments, insurances and mortgages.
The FCA’s Definition of Open Finance
Encouraged by the success of open banking, the FCA, government, and financial services industry have been considering the potential benefits of open finance… but what exactly is it?
[Open finance] is based on the principle that financial services customers own and control both the data they supply and which is created on their behalf. Re-use of this data by other providers would take place in a safe and ethical environment with informed consumer consent. This would mean that a financial services customer who consents to a third party accessing their financial data, could be offered tailored products and services as a result. Access would be provided by that customer’s current financial services provider under a clear framework of consent
How Might this Work in Practice?
Open finance would work on the foundation already established by online banking. It would work in a similar way, through data sharing to third parties, but it would simply cover a wider breadth of circumstances by collaborating across various financial services. According to UK Finance, this could potentially, “reduce fraud, improve financial wellbeing, widen access to credit, deliver greater choice in payments and help enable reusable digital identities.”
So, let’s have a look at a few examples of how this may look in practice for its consumers…
With open banking, consumers can see all of their account balances on one singular dashboard. With open finance, more financial products could be incorporated, so that the consumer could see their ISA, pension, mortgage, investments, and so on, all in one place.
Open finance also allows for even more personalisation. One example of this is lenders being able to offer mortgages based on the customers’ exact needs. Their service to the consumer would be personally tailored to them as an individual through data analysis of their accounts and finances.
Whilst open banking allows its users to authorise third parties making payments on their behalf, open finance could go even further, allowing consumers to link automatic transfers between different financial products, such as establishing recurring payments to pay off their mortgage.
by Red Star Wealth
According to Finder’s digital banking statistics, around 93% of Britons used online banking in 2022. The rise of digitalisation has certainly made it easier for us to manage our finances, but has it made it too easy?
Reviews and Regulatory Checks
One great impact of digitalisation is the ease of which we can now check the trustworthiness of financial advisers and firms which offer financial products or services.
It’s easy for us to check reviews and ratings online to see other people’s experiences with different businesses and individuals. Even more importantly, we can easily check whether advisers or firms are FCA or PRA regulated to ensure that we are properly protected when receiving financial products or services.
Online Banking
Online and mobile banking can enable us to manage our money easily at the click of a button. It allows us to see the exact numerical figure of what we have in our bank account and allows us to set up savings accounts with little hassle, encouraging saving and financial planning.
However, not all of the effects of digitalisation have been quite as positive…
Accessibility
Digitalisation has made it far easier for us to check our finances and make changes to them, such as making an online banking transfer in less than a minute.
In fact, according to Finder, 49% of those who opened or intended to open a digital bank account cited convenience as a driving factor, with 16% driven by a lack of branches in their area. But is ‘going digital’ a response to banks closing, or is it also a driving factor as it reduces the demand for their services?
The Rise of Cryptocurrency
Digitalisation has led to the boom of cryptocurrency in recent years. Depending on your viewpoint of cryptocurrency, this can either be seen as a more positive or more negative impact.
Whilst many now swear by cryptocurrency, it does offer us the opportunity to take on more risk when investing. This can of course reap high rewards but it can also lead to huge losses due to its volatile nature.
Online Loans
With digitalisation has come the emergence of online loans. It is relatively easy for us to apply for online loans with us now able to borrow money from the comfort of our own homes.
However, the ease of which we can now obtain loans might actually make managing money harder in the long run. This is because it encourages many people not to manage their finances at all, but to instead expect that they can rely on borrowing.
It’s arguably too easy to be accepted for payday loans online due to affordability checks which are often inadequate. This makes dealing with your finances harder in the long run as you will still have to deal with the original debt but with the addition of excessive interest rates.
Buy Now Pay Later
Buy Now Pay Later firms have made it too easy for us to overspend, as it encourages many people to think they can afford more than they actually can and spend without repercussions. However, there are of course significant repercussions of this.
Apple Pay, Contactless and Debit Cards
Apple Pay, contactless card payments and debit cards mean it’s now very easy for us to spend money. If paying solely with cash, you would have to ensure that you always had enough cash on your person, which is a double-edged sword.
It would mean you wouldn’t necessarily have enough money if you were in an emergency that required payment, e.g, running out of petrol. It would also mean you would always have to carry cash, sometimes in large quantities. Therefore, if you were to lose your purse or wallet, this money would be gone.
Having a debit card or a form of online payment means that we avoid both of these issues. With the latter, you could cancel or temporarily freeze your debit card if you were to lose it.
However, these forms of payments have perhaps made spending too easy. It is easy for us to spend money without really thinking about it leaving our account. For more information about how cash may be better for helping us budget, click here.
Overall, digitalisation has made dealing with our day-to-day finances much easier, but this isn’t always a positive thing…
by Red Star Wealth
Before undertaking any investment or other financial decision, it’s important to be aware of all of the potential advantages and drawbacks. So, let’s have a look at the advantages and disadvantages of investing in AIM shares.
What are AIM Shares?
AIM stands for Alternative Market Investment. It is a submarket of the London Stock Exchange which deals with small and medium size growth companies which are seeking to raise capital through an Initial Public Offering.
The listed companies tend to be smaller and more speculative as regulations are rather relaxed compared to larger exchanges. This type of investment tends to be higher risk with the potential of higher rewards.
Advantage: Potential of High Rewards
One advantage of AIM shares is the potential of reaping high rewards from your investment. The companies listed on AIM are still relatively young and in their growth stage, meaning there is the potential to earn more money off them than the mature companies on the FTSE index.
A prime example of this is ASOS: listed on AIM in October 2001 at the price of 20p a share, these ASOS shares later reached £71 a share by October 2014. You can click here to see their current price per share.
Advantage: Tax Benefits
Tax benefits are one of the main draws of AIM share investment. Some of these tax benefits include:
No stamp duty land tax (SDLT) due on shares traded within AIM
Some AIM companies are inheritance tax (IHT) free if shares are held for longer than two years
Some AIM shareholders may qualify for income tax and capital gains tax (CGT) reliefs when held through an Enterprise Investment Scheme (EIS) or through CGT Entrepreneurs Relief.
You can click here for a more detailed guide to AIM tax benefits.
Disadvantage: High Risk
AIM share investment is best suited to those who are willing to take on a high degree of investment risk. This is because many listed companies on the AIM index are still in their growth stage and aren’t fully established, meaning you don’t know whether they will be as successful as expected.
As stated by Andrew Howe on Interactive Investor, “AIM is the world’s worst-performing major stock market index of 2022.” He continues, “The number of AIM companies worth more than £1 billion has nearly halved over the past year. All the companies that are still valued above that level have lower share prices, some up to three-quarters lower.” This said, he does also note that there is the potential for a rebound this year.
Disadvantage: Illiquid
Listed companies usually have fewer outstanding shares available to be traded, meaning it can be difficult to buy and sell them at the price you want to.
It tends to be harder to sell AIM shares than those of larger companies, meaning you’re essentially more tied into your investment.
Overall, it is up to you to decide whether AIM share investment is right for you. However, before jumping in head-first, make sure you are fully aware of what you are investing in and how it all works.
by Red Star Wealth
Islamic finance continues to be a growing success story both in the UK and globally.
An Introduction to Islamic Finance
Institutional Islamic finance started to emerge in the 20th century and the Islamic financial sector continues to grow at high rates every year.
Islamic finance is a broad term, covering a range of products, services and firms, but it is essentially a way of managing money in a way which complies with the moral principles of Islam and Shariah law.
Anyone can use Islamic finance products and services, regardless of whether they themselves are Muslim.
This report found that Islamic finance experienced growth of 17% in 2021, reaching $4 trillion USD worth of assets.
This graph, taken from their report, shows the trend of growth for Islamic financial assets from 2015 to 2021, as well as projections of reaching $5.9 trillion USD by 2026.
The report also found that there are now 47 different countries with at least one type of Islamic finance regulation.
As we can see from its findings, Islamic finance is experiencing steady growth with no signs of stopping or slowing down.
Key Principles of Islamic Finance
Money should not have value in itself. Rather, it is a measure in which we can exchange goods and services which do have a value. As such, we should not make money off money itself, e.g, from interest
Prohibition of interest, whether nominal or excessive, fixed or floating, simple or compound. Wealth should only be created through legitimate trade and investment in assets
Islamic finance should not cause harm. Once again, we can apply the prohibition of interest here; interest on loans is disallowed because it is seen as an agreement which unfairly favours the lender, thus exploiting the borrower. As well as interest being prohibited, any kind of dealings with, or investment in, things that are deemed haraam, is also not allowed. This includes things like gambling, pornography, pork, tobacco and alcohol
Shariah compliant financial transactions are based on the essential maxim of sharing risks and rewards. Where possible, any risk or profit should be shared, whether between two people, an individual and a business, or two businesses
Shariah Boards
A Shariah Board certifies that Islamic financial products and services are Shariah complaint. Compliance with Shariah law forms the basis of Islamic finance, so many Islamic banks or companies that deal with Islamic finance will have their own Shariah board. These boards are usually comprised of Shariah scholars who are qualified to issue fatwas (religious rulings) on financial transactions.
However, the UK does not have a central authority to ensure Shariah compliance of financial products or services and there is no legal requirement for our Islamic financial institutions to have a Shariah supervisory board.
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) regulate Islamic financial institutions on a basis of “no obstacles, but no special favours.”
This means that in the UK, Islamic financial institutions are treated the same as other conventional firms so need the same kind of authorisations and permissions to carry out financial and business activities.
If an Islamic financial institution does have its own Shariah board, it should provide additional information to the FCA about this.
by Red Star Wealth
One million people in the UK are part of a share save scheme, but what exactly are they?
An Introduction to Share Saves
You may see share save schemes referred to as Save As You Earn (SAYE) or employee share ownership schemes.
Introduced in the UK in 1980, share save schemes help you save towards buying shares in the company you work for.
For a company to participate and offer this scheme to its employees, it must be (or be owned by) a public company listed on a stock exchange.
How do they Work?
You save directly from your wage and then at the end of the savings period you are given the option to buy shares in your company or take your savings in cash.
The company will give you an option price, which is the price you will be able to buy shares for at the end of the scheme.
You can save up to a maximum of £500 a month under the scheme. The amount you opt to save is then fixed every month. So, if for example, you opt to save £50 a month for the duration of the scheme, you can’t then increase this to a contribution of £200.
The company may set an eligibility period wherein to join the scheme, you must have worked for the company for a minimum length of time.
What do you get?
As we noted earlier, you can take your savings as cash or as shares in the company. However, there are a number of options and combinations as to how you can do this:
Take it as cash. Here, the scheme has been used as a savings account of sorts. With this option, you will get back every penny you put away into the scheme. However, the money will not accrue any interest whilst sitting in the scheme, unlike how it would in an ordinary ISA
Buy and sell the shares. For example, you may choose to do this if the share price has risen above the option price given to you at the start of the scheme, so buying and selling the shares allows you to immediately make a profit
Buying and selling some but not all of the shares
Buying some shares and taking the rest as cash
You have 6 months to make this decision, so you don’t need to choose as soon as the scheme comes to an end.
You will pay no income tax or national insurance on the difference between what you paid for the shares and their value, but you may have to pay capital gains tax if you sell the shares.
What Information should my Employer give me?
Your employer will usually extend an invitation for you to join the scheme a couple of months before it begins. They should disclose the following information to you:
The scheme’s length, which will be either 3 years or 5 years
The deadline for signing up to the scheme
How much you can save each month. Under share save schemes, you can save between £5 and £500 a month. However, your employer may have their own rules, where they have increased the minimum payment you must make, lowered the maximum payment you can make, or a combination of the two
The price you can buy shares for at the end of the scheme. This price is set at the start
Is this Right for Me?
Whether share saves are right for you is a personal decision. If you would only want to take the savings as cash at the end of the scheme period, a savings account is probably a better option for you, as you can benefit from savings growth via interest.
Additionally, if you are struggling with debts or need to focus on building an emergency savings fund, it’s probably worth prioritising this over share saves.
However, if you do have a bit of spare income each month and want a low-risk form of investment, share saves may be a good option for you.
by Red Star Wealth
The Bank of England (BoE) is looking into the creation of a digital pound that could be used for in-person or online purchases, acting as an alternative for (but not a replacement of) cash.
The Digital Pound
The central bank digital currency (CBDC) or ‘digital pound’, would use some of the same technologies as cryptocurrency. However, it would be different in nature as it would have a central regulator (BoE) and its value would be denominated in pound sterling, rather than being entirely demand and supply driven.
From the above graph, taken from page 9 of said paper, we can see the decline of cash use in recent years, combined with an increase in card purchases.
Therefore, introducing digital money could be a way to take into account these consumer trends.
Perhaps here we can link the impact of Covid-19. During the height of the pandemic, we saw many businesses unwilling to accept cash payments due to it being less sanitary. Perhaps this has now stimulated a change in consumer purchasing wherein we are now less likely to resort to cash because we saw the ease of which we could live without it.
BoE has stated, “while we ensure continued access to cash, we also have to recognise that it cannot be used in digital transactions.” The proposed digital pound is not intended to replace cash, but rather to act as an alternative when cash cannot be used, or when consumers do not wish to use it.
Critcism
Moody’s Investors Service have argued that CBDCs would disrupt traditional banks. This in turn could lead to closure of branches and job losses as a result, due to the shift in the power structure of financial institutions.
Lord Forsyth of Drumlean, Chair of this Committee, stated, “We took evidence from a variety of witnesses and none of them were able to give us a compelling reason for why the UK needed a central bank digital currency. The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem.”
The ICAEW also stated that, “the shift in banking practices away from consumers holding money in cash form or as commercial bank deposits carries potentially seismic risks from a financial stability and monetary policy perspective.” However, BoE aims to address the risk to financial stability by setting deposit limits of £10-£20k in order to reduce money flows from commercial banks.
As you can see, the digital pound is certainly not an uncontested idea, as many have concerns about its potential repercussions. Perhaps one of the largest concerns from the public is about potential breaches of privacy…
Privacy
In response to these privacy concerns, BoE states that the digital pound would be “subject to rigorous standards of privacy and data protection.” They have proposed a platform model wherein Payment Interface Providers would identify and verify users but then anonymise this personal data before sharing information with the Bank. Therefore, neither BoE nor the Government would have access to users’ personal data, except for in exceptional circumstances whereby law enforcement agencies would be legally entitled to. This proposed system would therefore work similarly to current digital payments and bank accounts.
The digital pound is currently a consideration rather than an actuality. BoE is continuing to look into whether progression will take place in order to build and launch the digital pound.
