Is UK open banking mature enough to survive without the OBIE?

In March 2021 the CMA launched its consultation on the future governance of open banking, a process in which the Open Banking Implementation Entity (OBIE) sits firmly at the centre. On May 17, the CMA published an update featuring consultation responses from key stakeholders, and a final decision as to the future strategic direction is expected to be announced imminently.

UK Finance, the industry body which has carried out significant research into the future of open banking at the request of the CMA over the past 12 months, recently released its recommendations which outline a proposed transition of the OBIE into a new service company to suit a new future headed toward Open Finance.  

While evolution of the OBIE’s role is inevitable, several factors are proving contentious across the industry, as certain players query the true state of open banking’s progress, such as how the future open banking body should be funded, and who precisely its ideal supervisory body should be. 

Alan Ainsworth, head of policy, OBIE, believes that open banking is at an inflection point which, if not approached with the utmost caution, presents the risk of undoing four years’ hard work in the establishment and growth of the sector.  

The OBIE was set up to deliver the CMA Order in 2017, which sought first and foremost to increase competition and choice in financial services. It required nine of the largest current account providers (the CMA9) in Great Britain and Northern Ireland to create and pay for an implementation entity – known now as the OBIE.

The OBIE has since built the necessary infrastructure and implemented most of the Order’s objectives. With over three million individuals and small businesses and more than 200 third party providers using open banking services and the rest of the globe attempting to replicate the UK’s model, the OBIE has succeeded thus far with arguably impressive results. 

However, Ainsworth believes there is more to be done, and that there are real gaps in the current proposals being considered. He points to the consultation submission of the OBIE Trustee Imran Gulamhuseinwala, who has outlined a proposed model for the future governance of open banking that satisfies the four priorities specified by the CMA to be addressed in the consultation: 

1. the framework is independently led and accountable;
2. adequately resource to perform the functions required; 
3. dedicated to serving the interests of consumers and SMEs; and 
4. sustainable and adaptable to future needs of the ecosystem.  

Ainsworth believes that to guarantee a solid open banking and ultimately, open finance future for the UK, a number of key fundamentals must addressed.

Where is the finish line? 

First, Ainsworth believes there must be recognition around the true status of the UK’s open banking roadmap. While the OBIE was established as a temporary vehicle to implement the CMA Order, and transition away from its current structure is unavoidable (and essential), the time to step into the new phase has not arrived just yet.  

“There is still work to do on the roadmap, there are bits and pieces outstanding, so it is incorrect to assume that implementation is largely finished,” he points out. “For instance, the FCA has just closed its consultation on changing the 90-day reauthentication requirements which may require changes to our standards. Also, the CMA has not yet decided whether to mandate the implementation of variable recurring payments for sweeping.”

Additionally, Ainsworth explains that with an average of around one third of open banking journeys not being completed, there is still uncertainty around effective implementation. While conformance with the OBIE’s standards around availability and performance has strengthened over the past two years, these incomplete journeys are evidence that more work to rectify is required. 

“My worry is that if we continue to have lots of journeys which don’t complete, particularly in payments, open banking payments won’t take off,” he explains. “This is especially the case for retail use cases. We need to ensure that we are able to continue to monitor this so that we can figure out what the problems are and solve them.” 

The CMA noted that there are risks associated with too rapid a transition, and, if the process began before all items of the roadmap had been delivered, some or all of them could either be delayed or left unfinished.  

TechUK also responded to the CMA consultation on the subject of transition, stating that; “while a long transition has disadvantages, it is nonetheless preferable to a rushed transition or any uncertainty as to the future of open banking which could put at risk an entire ecosystem and stifle innovation and competition, sending the wrong message to the UK’s vibrant fintech community.” 

Managing the motivations of CMA9 

The rousing success of open banking in the UK could very well be attributed to its birth as a regulatory obligation, rather than a free-market or opt-in standard that larger institutions could choose to participate in.  

“There is an optical issue here around the big banks being the target of a competition remedy having responsibility for ensuring long-term success of that remedy,” warns Ainsworth.

Imran Gulamhuseinwala, OBIE Trustee, set out a counter proposal to that of UK Finance which would see a separation of the current OBIE into two constituent elements – one being supervision and the other being a functional Chairman of the entity itself. This would ensure that an individual continues to have a role to keep the CMA9 in line. 

Ainsworth sees the role of supervision as vital, explaining; “I think there is a slight disconnect as the big banks seem to think that there is no longer any requirement for supervision, and that this role could be done by the FCA going forward as they are the PSD2 regulator."

However he furthers, "Our view is that the job is not yet done.  More than three million is a good number of users, but 20 million is a better number and we need to know what needs to be done to get to 20 million.”

This view was this week echoed in an Open Letter sent to the CMA, in which FData, alongside a number of UK fintechs outlined their concern “about the process of reviewing UK Finance’s (UKF) proposal and the future direction of the stewardship of open banking in the UK market.”

The group expressed three core concerns:

1. Decision making in the hands of the large banks, the ability for those banks to exit the Future Entity, and lack of independent oversight for the entity creates undue risk to the future of open banking;
2. The consultation is limited to only the UKL proposal, and has not given due consideration to approaches proposed by other stakeholders; and
3. There has been little transparency in the disclosure of alternative proposals submitted, and in the decision to consult on only proposal.

Speaking to the FT, James Lynn, co-founder of Currensea said that giving banks more influence over the rules was like “putting foxes in charge of a henhouse” or allowing them to “mark their own homework […] A group which is heavily funded by banks isn’t going to be proposing a future state which drives far more additional competition for those banks.”

Who is going to foot the bill? 

Currently, the CMA9 are obligated to fund the OBIE in line with the CMA Order. UK Finance puts this figure at £45 million each year, which is footed by the nine banks in addition to their own implementation costs to deliver the roadmap requirements.   

In its proposal UK Finance outlines a ‘membership model’ as a means to build a form of income which would ideally build a sustainable method of funding for the entity into the future – shifting the burden of the entire cost away from the CMA9. Account Servicing Payment Service Providers (ASPSPs) enrolled in open banking would be obliged to become members in order to proportionally cover annual funding requirements.  

Ainsworth believes that in the absence of a sustainable funding model, there is a risk that the services offered to the entire open banking ecosystem – including the essential support for the nascent fintech market – would dry up and starve the young open banking market. 

“My view is that instead of the membership model put forward by UK Finance, where there is no obligation to be a member, an FCA levy-style funding model would be more effective to get up and running commercially.” 

Ainsworth adds that while no one disagrees with the premise that it would be ideal to get the OBIE running on (self) sustainable funding: “my worry is that unless we find a funding model for right now that isn’t reliant on the goodwill of nine banks, we will end up with things falling off the cliff. Whether that’s now or in three years’ time I don’t know, but there is a real risk.” 

Addressing this point, the UK Finance report states that “it should be noted that if the current CMA9 organisations withdrew their membership of the Future entity before this funding model has fully evolved it may cause a disruption to services and hence the governance section recommends an initial membership term of three years for the current CMA9 bank to the Future Entity.” 

The report further outlines that in the course of industry discussions there were divergent proposals put forward on how to manage this risk of membership withdrawal, including the proposal for an industry Levy. “On consideration we believe that the entity should and does have value to the market and as such a position should be reached whereby the entity itself is self-sustaining without forced membership.  

“In our view, if a levy were imposed on day one it is unlikely this would be removed, whereas having the reassurance of the CMA9 funding for an initial three years whilst the funding principles take effect give the opportunity for the entity to be self-sustaining. If a levy were subsequently considered this would require legislative powers.” 

Why we should squeeze the best out of open banking

Funding is essential to the health of open banking and its ability to continue acting as a catalyst of innovation and competition.  

This challenge was underscored by Gulamhuseinwala in his response to the CMA consultation, stating that he is “extremely concerned that the current proposals raise a significant risk that much of the progress made to date will be lost and rather than acting as a springboard to Open Finance and Smart Data the innovative nature of open banking will be replaced by a purely ‘keep the lights on’ approach.” 

He wrote that within the current proposals “there is no mechanism for governance to transition from open banking to ‘open banking plus’ let alone Open Finance or Smart Data, and rather pointedly stated that “it is clear that UK Finance’s aim is to reduce the cost and implementation burden of open banking on CMA9. They have no interest in extensibility, and their proposals on governance and funding support that view.”  

“The simplest way to ensure this,” Gulamhuseinwala concluded, “would be for the OBIE to be extended in its current form until such time as the roadmap to Open Finance/Smart Data was clear.”