Open Banking is amazing - but could be so much more

Open Banking is a flop, it’s too costly, “clunky”, and businesses struggle to make money from it. That was the view of Anne Boden, CEO of Starling Bank, speaking to MPs on the Treasury Committee in October 2021.

But, there's increasing evidence that her view is untrue or, at least, incomplete. While it’s true that there are hurdles to overcome in the widespread adoption of Open Banking, after these challenges are solved the rewards could be game changing. The green shoots are becoming visible, and the initiative has been gathering momentum recently.

Open Banking’s Demise – Again

Open Banking celebrated its 4th birthday this January, born when the Payments Services Directive 2 (PSD2) came into force in 2018. Since inception, Open Banking has been plagued with tales of its demise. Its aim was to connect banks, third-parties and technical providers, and importantly enable the simple and secure exchange of customer data. By doing this, Open Banking aims to help new businesses break the long-term data monopoly of banks and financial services providers, who have enjoyed holding on to information for their own uses.

Progress is being made, slowly but surely. According to the Open Banking Implementation Entity (OBIE), the body responsible for creating the relevant Open Banking software standards and industry guidelines, there were over 4.5 million regular users of the initiative at the end of 2021 – 3.9 million consumers and 600,000 small businesses. This number grew by 60% on the 2.8 million users in December 2020, an increase of 1 million new regular users every six months. 

Yet, despite this momentum, the rollout has repeatedly faced criticism. UK high street banks have complained to the CMA about the amount they’ve had to pay to help set it up, while challenger banks have criticised UK regulations they believe prevent them from competing with their older counterparts. 

Open Banking is far from dead in the water though. There are a number of innovators within the space, many backed by venture capital, that have full faith in the initiative, and that are creating innovative products that are likely to thrive as they grow, showing Open Banking’s potential. 

Secure payments and new credit referencing

Many believe that to enter the mainstream, Open Banking needs to be more widely adopted by online merchants, replacing cards as the primary payment option. Indeed the recent dispute between Visa and Amazon regarding the use of Visa credit cards on the ecommerce giant’s UK site highlighted the need for a quicker, cheaper means of paying for purchases. 

By enabling safe and easy account-to-account payments, Open Banking can provide just that. And by working closely with banks and other financial services providers, this aspect of Open Banking has seen several fintech businesses flourish. 

Vyne, for instance, reduces the expense and friction of online payments for merchants, enabling customers to make instant account-to-account payments in as little as three clicks. This is secure for the customer and cost-effective for the merchant.

Elsewhere, Vipps, a Norwegian fintech backed by several of the country’s banks, allows users to instantly send and receive money using only a phone number, while Swish, a mobile payment system launched by six large Swedish banks, is currently used by more than eight million Swedes – almost 80 percent of the population – to make secure real-time payments. 

Looking to other use cases, Credit Kudos, with its use of innovative data analytics, enables businesses to use Open Banking data to form accurate, fast and powerful credit assessments for all, especially those underserved or ignored by traditional credit reference agencies.

With the vast majority of payments made by debit card, Open Banking is ripe to replace what we’re used to in payments. And with access to rich spending data, Open Banking can widen access to credit and other financial products many can’t access today.

The future of Open Banking lies in innovations like these. Incumbent financial institutions are catching up, but their size and legacy systems mean they don’t have the agility to lead this innovation. All that’s needed for Open Banking to succeed here is for promising UK fintechs to have greater freedom to innovate. Freedom which starts at the FCA and continues through to the heart of Government and the Kalifa Review.

Looking to the future 

Of course, there are still regulatory hurdles that must be overcome before the full potential of Open Banking can be unlocked. Challenger banks, for example, are currently required to provide historical data to demonstrate they can effectively manage their risk, which Boden suggests would require companies like Starling to take on expensive additional external capital.. There are geographical issues too. PSD2 regulatory policies can be interpreted differently in different countries, with various subtle nuances hindering a smooth Europe-wide rollout. 

But underlying these issues is a demand from consumers – and enough innovative companies seeking to meet that appetite – that means Open Banking isn’t necessarily the flop that Boden suggests it is. Whether it will succeed depends on the use case. And, once regulatory challenges have been addressed, and the initiative is more widely adopted, the best may still be yet to come.