To mark the launch of the UK’s Open Banking initiative on 13 January 2018, Finextra typically reviews the progress of the experiment on this day each year. Over the past four years, the CMA9 - Lloyds, Barclays, Nationwide, RBS, Santander, Danske Bank, HSBC,
Allied Irish Bank and Bank of Ireland - have transformed data structures and security architectures to meet the requirements mandated by the Competition & Markets Authority.
The aim, of course, being to champion transparency, serve new customer demographics and enable other regions to implement similar, yet disruptive programmes. However, Open Banking has since evolved far beyond the changes that these nine banks have made.
In celebration of Open Banking’s birthday, we look at what’s worked, what didn’t and what’s next.
From mechanisms to innovation
The Open Banking Implementation Entity (OBIE) continues to implement mechanisms to encourage further competition, but the Covid-19 pandemic’s urgency for digital transformation resulted in Open Banking payments reaching maturity, with organisations providing
consumers and businesses with more choice and control.
As a reminder, Open Banking allows customers to use new products and services from licensed third-party providers (TPPs) because banks were mandated to build APIs in accordance with PSD2 and provide free access to them. This led to increased competition:
developers were now able to build new fintech services to compete with larger financial institutions and retail banks were forced to innovate to provide more appealing offerings.
Where Open Finance takes it up a notch is with open access to all financial data, across credit, insurance, pensions and mortgages, further levelling the playing field across financial services, but also industries such as healthcare where data can be leveraged.
The Financial Conduct Authority (FCA) defined it as extending “Open Banking-like data sharing to a wider range of financial products, such as savings, investments, pensions and insurance,” in its
Call for Input on Open Finance in March 2021.
Open Finance in action
Since the
feedback statement on Open Finance was issued, 2021 also saw the CMA ruling in favour of the OBIE’s recommendation to mandate
Variable Recurring Payments (VRPs) as the mechanism for implementing Sweeping in July. Although, this was
pushed back by six months after CEO Charlotte Crosswell warned that most, if not all, of the CMA9 would not be able to allow customers to connect authorised payments providers to their bank account by the deadline of 31 January 2022.
The CMA’s revised timetable requires banks to provide a detailed delivery plan to start TPP testing and validation before completing testing in a live environment by July 2022, when the standard should be made generally available. Broadening their horizons,
the CMA also highlighted that “there are much wider potential benefits in applying Open Banking beyond retail banking, including driving competition in payments and the broader financial sector.”
The report, published in November 2021, added that “moving forward it will also be important for there to be a clear regulatory vision supported by cooperation from wider industry and stakeholders. We are therefore also working with other regulators to publish
a statement of our joint regulatory expectations alongside our consultation response.”
Small scale progress
In order to reduce customer attrition, the
FCA also modified their Open Banking rules to no longer require fintech firms to re-authenticate customers every 90 days for continued access to bank account data. At the time, the FCA stated that “these measures are proportionate, taking into account the
level of risk. They balance the need to protect consumers from TPP access without explicit consent, and unwittingly sharing data, with reducing friction customers.”
Market leaders agree that 2021 was significant for open banking adoption, but 2022 will be a “transitional year,” as
stated by OBIE consumer representative Francis McGee. “The implementation phase will end, and we need new structures that make sure Open Banking continues to be done well for consumers, and run well for the ecosystem. Let’s start 2022 by signing up to five
principles to make that happen:
- Open Banking must meet the needs of end users.
- Governance must always be independent and centred on end users.
- Government and regulators must ensure end users’ money, data and rights are protected. They must intervene if plans for open banking do not meet end user needs.
- Open Banking’s destination must lie within a network of Open Finance and other services. Only then can its full potential be realised.
- An amplified end user voice must be at the heart of all decision-making about open banking.”
Echoing McGee’s sentiment that we are far past the age of Open Banking implementation, Mark Chidley, independent SME representative, OBIE, said: “As the implementation phase of Open Banking concludes it is essential that the CMA and its fellow regulators
(the Financial Conduct Authority, the Payment Systems Regulator and the Information Commissioner’s Office in particular), orchestrated by government, ensure that:
- Open Banking implementation is done well.
- Important end user protections and initiatives developed through the Open Banking programme are secured for the future.
- Transparent steps are taken to ensure that Open Banking is successful not just as a competition remedy, but also as a paving measure towards Open Finance and smart data.
“We have been encouraged by the CMA’s 5 November Open Banking update to believe there is every chance that these important outcomes are delivered in the broad interests of the people and small businesses that Open Banking was always intended to benefit,”
Chidley added.
A coordinated response
Beyond Open Banking, Open Finance will enable third parties that want to improve their services and respond to their customers’ needs. However, consumers will not want to go to different providers to use different products and will need their services to
be bundled or coordinated, paving the way for what is referred to as embedded finance.
Further, to meet the rising demand for embedded finance, banks will need to start offering these bundled offerings, otherwise known as Banking-as-a-Service (BaaS). According to
McKinsey, “banks are concerned that distributing their products through partners threatens their client relationships, but if end users begin adopting embedded finance in significant numbers, banks may have little choice but to launch BaaS business lines.”
The article continued: “The good news is that enabling partners to distribute banking products can be a low-margin, high-volume business for banks. Banks often struggle with their cost structures, which are frequently based on legacy technology and enabled
through manual processes and operations. To offer BaaS, banks must undergo digital transformations, but many already have.”
While traditional banks may be reluctant when launching BaaS business lines, Starling Bank
launched BaaS in the UK in 2018 and already has 25 payment and banking services customers, including Raisin, CurrencyCloud, Moneybox and Vitesse. More recently, Boden also
confirmed the planned launch of a Software as a Service (SaaS) proposition during 2022.
Take a trip down memory lane. Find our previous Open Banking birthday round ups here:
Open Banking year three
Open Banking year two
Open Banking year one