2022 has seen a surge in dialogue surrounding the purported value or objective of Open Banking, and whether this has been realised in the UK. While the debate has stoked critical thinking around what we should hope to achieve through Open Banking, there
persist large questions around the potential benefits that remain on the table – particularly for incumbent banks.
The financial institutions that approach Open Banking capabilities with an open mind, rather than undergoing the process as a matter of compliance or tick-box exercise, are better positioned to leverage new opportunities.
As a result of PSD2, all banks and payment product providers are required to provide access to third-party providers (TPPs) in a safe, secure and easy-to-use way. Chris Allen, director, banking and financial services at Cognizant states that “over the last
couple of years, we’ve seen an explosion of vendors that are able to provide the APIs required for Open Banking, and they’ve really refined and honed their ability to work with banks to rapidly deliver Open Banking solutions. Some of these providers are now
providing banks with the ability to go to market with a white label, accelerated Open Banking solutions within three to six months.”
While the CMA9 have met the same requirements and have funded the development of UK technical standards and infrastructure for the benefit of the wider industry, explains Hetal Popat, director
of Open Banking, HSBC, “the services enabled by PSD2 are only the start.”
“Open Banking in its broadest sense should extend beyond this regulatory starting point and offer a range of extensions that will unlock wider benefits,” Popat argues. For example, Open Banking payments can be enhanced to make them better suited to merchant
needs both in physical and e-commerce use cases. Similarly, Open Banking data sets can be extended to non-banking data such as accounting information that will simplify the financial lives of SME customers.
How then should incumbent banks, particularly the CMA9, best go about improving their Open Banking strategy at this stage in the timeline? Cognizant, HSBC, Revolut, and Tink weigh in on the conversation, peeling back the layers to better understand the potential
that remains at the heart of Open Banking.
Reaching the CMA9’s full potential
Open Banking in the UK has seen strong cumulative growth with 4.5 million regular users, and one million new active users added every
six months. At the end of 2021, a cumulative 26.6 million Open Banking Payments had been made, which is an increase of over 500% across a 12-month period.
Joshua Fernandes, senior product owner for Open Banking and acquiring at Revolut, explains that banks have effectively executed the Open Banking trends of account-to-account payments and basic account information services (AIS). The CMA9 have also worked
with regulators to adopt Open Banking standards and regulations, as well as strong API standards and UX principles - for example app-to-app UX flows for seamless interactions. They have also placed increased focus on working groups for upcoming projects.
While legacy banks have steadily moved toward Open Banking, with a growing number of larger incumbents implementing improved UX flows and faster API responses, Fernandes continues that certain banks “are yet to approach the world class quality exemplified
by neobanks, which have a natural advantage due to their more nimble API infrastructure and ability to quickly adjust their tech stacks as the landscape continues to evolve.”
Sahana Hussain, HSBC’s global head of Open Banking technology, agrees that there remains a huge opportunity for the CMA9 banks to leverage the regulatory Open Banking platform, invest in the API economy and build ‘API-as-a-channel’ that will enable banks
to deliver value, improve customer experience and provide flexibility to customers to make informed financial decisions.
UK incumbents are acutely aware of the long-term significance of Open Finance, with regard to both the business opportunities it presents, and the amplified risks of failing to remain competitive should they implement Open Banking inadequately.
Yet, across the majority of CMA9 banks, Open Banking strategy appears to have been adopted with an approach akin to a tick-box exercise, taking action merely to provide services or access to satisfy regulatory requirements.
Allen explains that there is a sense that CMA9 banks are “cautiously engaging with Open Banking”, “they have the most to lose to new entrants and are not yet prepared to bet big on exploring different services and revenue models”
Allen adds: “Yes, while the CMA9 are doing well with basic aggregation, they have all stopped short of using it to provide services that really add value to customers lives or providing their services through new marketplaces. We are having lots of conversations
about how they can move faster – whether it be utilising a broad range of ecosystem partners or adding more data and engineering firepower”
While CMA9 banks have successfully been able to publish APIs for the industry, Tasha Chouhan, UK & IE banking lead, Tink, states: “many banks have understandably struggled to incorporate Open Banking into their core banking services. But now we are at a
point where banks have ticked the box from a compliance standpoint, and the focus is shifting to how they can use Open Banking to enrich how customers can be served digitally.”
Recognising differences in CMA9 performance
The “hidden story” of Open Banking in the UK, explains Allen, is tied to the broad range of approaches that incumbents’ have used to implement its account sharing and payment capability. For instance, certain banks allow users to share their banking details
in just a couple of clicks, while others may take drastically longer. “Some can do it in 10 seconds, others take 40 seconds. There is a real difference in speed and customer experience between banks. If Open Banking uptake continues at its current rate and
customers start using Open Banking services multiple times a week, the performance of your bank in enabling basic tasks becomes a real concern. We spend a lot of time with incumbent banks helping them get this right”
While CMA9 institutions have made progress toward construction of an aggregated view of their customer’s financials, Allen continues that only two of the CMA9 banks are delivering bespoke lending based on Open Banking analysis, and so clearly significant
room for improvement.
Elaborating on the differences between implementation, Hussain states that Open Banking implementation requires sharing of data in a secure environment and all CMA9 builds must be aligned to the OBIE (Open Banking Implementation Entity) standards developed
in conjunction with the CMA9 and industry participants in UK. However, “each CMA9 bank has unique integration requirements to existing banking systems and infrastructure in order to deliver the end-to-end Open Banking use cases, resulting in different non-functional
outcomes including in performance and availability.”
While labelling Open Banking a “shining opportunity” for banks to better serve customers, Fernandes concurs that there is absolutely more that the industry can do to help consumers benefit from the enormous value this represents. “At its core, Open Banking
regulation is designed to bring businesses and consumers better ways to manage their money. We would like to see the entire financial services sector drive this message about Open Banking - not just for banking, but for various other aspects of finance.
“This will help create awareness about how Open Banking empowers customers and open up more use cases across other industries. From a regulatory perspective, creating trust marks for Open Banking will help build trust in this powerful new technology. Across
the board, developing a smoother customer journey (UX) will make Open Banking more user-friendly, which will also help drive adoption.”
Popat is particularly excited about HSBC’s moves into the realm of personal data passporting. A step beyond Open Banking and into Open Finance, “it will enable customers to share the personal data they have entrusted to HSBC in a safe and efficient way.”
The benefits from this stretch beyond banking products and include simplified switching of other services (for example, mobile phone or utility contracts), improved protection against identity theft and other frauds, and also benefits to other industry partners
through age and identity verification (with customer consent).
Ramifications of missing the Open Banking boat
Beyond missing out on the key benefits, CMA9 banks which fail to successfully implement and leverage Open Banking opportunities risk slipping to the back of the herd in a market with highly competitive digital players.
Referring to a 2021 report by Tink, Chouhan explains that 41% of European financial executives believe that the digital shift caused by Covid-19 is permanent, with two-thirds of respondents arguing that it has increased their focus on Open Banking.
On top of the pandemic, Chouhan cites the uncertainty currently teamed with rising inflation and the cost-of-living crisis. “This macro environment impacts the need for banks to better understand their customers, and to embed technology that helps them engage
with customers to be able to serve them more effectively.”
As an example, Chouhan notes that Tink’s money manager, a type of personal financial management (PFM) tool, offers a financial data layer which banks can deploy to better understand their customers, to spot when they may need financial assistance through
mortgage holidays or restructuring credit for example, and for giving customers simple tools that help them understand their spending, and set budgets or savings goals. “Some UK banks are already using money management technology very effectively, to engage
their customers in better financial wellness. One example we work with is NatWest. Within NatWest’s Spending tab, they launched a Newsfeed and Insights which was made accessible to 9.4 million digital customers. Six months after implementation, 24 million
financial insights were generated with over 25% of customers taking action on this.”
Revolut anticipates that the concept of Open Banking as a route to greater transparency, access and convenience will ripple across a broad swathe of industries and sectors. Putting the risk of missing out on this succinctly, Fernandes notes that “as this
proliferates, any element of friction around the banking aspects of a particular user journey could risk diminishing user loyalty to their banking provider.”
He comments that as innovative developments such as the adoption of variable recurring payments VRPs - continues at pace, “it will be important for banks to continue in this vein in order to maintain momentum and enable Open Banking to scale quickly - and
also expanding Open Banking to insurance, investments, utilities, and pensions areas of the financial services sector.”
Hussain explains that it will allow configuration of recurring payment instruction to make a series of future payments, which will not only enable sweeping and subscription-based payments but also deliver enhanced features for refunds and bulk payments.
“Overall, it is a new foundational capability to build enhanced payment propositions underpinned by Open Banking.”
The overarching logic behind perfecting Open Banking performance from the perspective of CMA9 banks, is that the activity of enabling payments through a mobile phone may be the single most frequent way customers interact with their bank in the future. Therefore,
Allen argues, “this is going to become a real differentiator for banks which do it badly – a real Achilles heel.”
Echoing Fernandes’ comments around diminished loyalty, Allen believes customers may migrate away from incumbents which are left with a “fairly unprofitable, boring utility” and toward neobanks or other players who are able to provide value-added services
that play an important part in customers’ lives.
Amplifying the threat is the strong attention being given to operational resilience. If banks fail to provide customers with access to their services at what is considered a competitive speed for Open Banking, its resilience in an increasingly digital world
may come into question.
Spearheading opportunity to avoid the risk
In the long term, Allen argues that Open Banking should help banks reframe their position in people's lives, and tap into revenue streams that exist beyond merely the movement of money.
“Incumbents can form a deeper, more personal role in their relationship with their customers, by servicing more of their needs and therefore taking more of a share of their wallet.”
The almost “tyranny of choice” faced by incumbents as to where to place their bets on Open Banking success shouldn’t hamper incumbents’ efforts, Allen furthers.
“A good strategy is to look for areas that provide a blend of fast time-to-market, which addresses things that the bank doesn’t currently offer – this allows them to leapfrog the competition. Additionally, it means you're unlikely to cannibalise your existing
business. This is a ‘net new’ revenue stream that allows you to prove out the approach, so it's you're not having to compete with yourself.”
When it comes to use cases in which Allen sees potential, it’s overdraft protection and synthetic offset mortgages which he believes are the most interesting. “More than 30% of people in this country, list paying off their mortgage early as one of their
top 3 financial goals but are scared to do so because it's a complex process and can leave them kind of open to fees and charges that they don't know about. An open banking solution can enable people to pay down their mortgage earlier, safely taking money
from the current account and operating as a better mechanism to save. As interest rates rise, this type of solution becomes even more compelling.”
Moving from selling products to meeting needs
In order for banks to leverage the new payments trends and opportunities that Open Banking presents, incumbents must re-assess their approach to testing and launching new products.
For organisations which aren’t constrained by legacy technology stacks or structures, Allen observes that Open Banking has been the catalyst for this fundamental shift around how products had been created and delivered, along with the type of revenue model
associated with it. “Those which have evolved have been able to profit from this change.”
According to Allen, best practice for improving end-to-end experience is to start from first principles around what the customer the customer’s true need is, and then assess, across the entire journey, how that need is fulfilled. “This takes into account
things that may not happen on the bank’s estate or infrastructure. Banks must therefore look beyond their four walls and the things that they own to really understand that end to end experience and to test against it.”
This is a significant challenge for many legacy banks given the manner in which they are set up structurally, whereby their entire business is centred around products.
“In this regard, we've seen some really good practice in people shifting the focus from products toward thinking of customer segments and then providing them things for all their financial needs.”
HSBC, one of the leading CMA9 banks with regard to Open Banking implementation, has a range of services in place to ensure its customers get “the seamless experience they seek” from Open Banking services, explains Popat.
“Firstly, we have recently completed a substantial investment in our
developer resources. This reflects feedback from developer partners, and makes available enhanced technical documentation, as well as a sandbox, that closely replicate our production environment, so that software can be fully tested before being made available
to our customers.
“Secondly, we have a dedicated team to work with the third-party providers (TPPs) who access our Open Banking services. This team ensures we have a mutual understanding of technical requirements and plans, and enables production testing of interfaces, so
that before propositions are scaled up both HSBC and our partner TPPs can be confident the customer outcomes will be achieved.
“Thirdly, we have extensive real-time service monitoring in place to ensure the production service is highly resilient.”
Chouhan explains that Tink also has three approaches to its testing methodology. First, akin to HSBC’s dedicated TPP team, it equally prioritises the role of local ambassadors to provide support on each of its bank connections, which enables Tink to test
Open Banking flows to ensure the highest success rates enabling a high-level of conversion and high-quality customer experience. Secondly, Tink runs proof of concepts with the financial institutions and fintechs it works with to guarantee the minimum viable
product before scaling volumes or expanding across markets.
“Our third approach is working closely with customers to make sure we're doing things in the right way, that we have engagement, that we have a real finger on the pulse of what financial institutions want to achieve.”
Concluding on a more philosophical note, Allen says that there is tangible tension being experienced by traditional banks between meeting regulatory and revenue demands, and re-calibrating for the digital future. Fintech firms and neobanks simply aren’t
encumbered by the burden of having to juggle a short-term defensive stance to safeguard existing revenue, versus adapting to address a long-term existential threat.