This review of the progress of the UK’s Open Banking initiative is the fifth in the series, marking the fifth anniversary of the launch of the Second Payments Services Directive (PSD2) on 13 January
2018.
The past five years has seen the CMA9 - Allied Irish Bank, Bank of Ireland, Barclays, Danske Bank, HSBC, Lloyds, Nationwide, RBS and Santander - transform data structures and security architectures to meet the requirements mandated by the Competition & Markets
Authority.
Five years is a long time in the technology industry. And open banking has evolved beyond what the regulators have put in place. According to the Open Banking Implementation Entity (OBIE), there are now over 6.5 million active users of open banking-enabled
products in the UK, providing consumers and small businesses with innovative products to support money management.
Momentum must not be lost, and the OBIE has today announced that the CMA open banking roadmap has now been completed. The OBIE will now look to the Joint Regulatory Oversight Committee (JROC) for their decision on the future. A true transformation of the
financial services industry, the UK’s open banking experiment has permitted UK fintech firms to overcome challenges at a faster rate than their European counterparts.
There are now 246 regulated third-party providers in the UK, compared to 338 in the entire European Economic Area. Further, there are 6.5 million regular users of open banking technology, 1 billion API calls a month and a staggering 7.5 million open banking
payments, as of December 2022.
Next steps for open banking
At the end of last year, the JROC – made up of the CMA, HM Treasury, the Financial Conduct Authority and the Payment Systems Regulator -
revealed that they were working on developing the vision for the future of open banking and on the design of the future entity.
This includes adopting a model that is scalable for future data sharing propositions and establishing a sustainable footing for the ongoing development of the open banking ecosystem. A strategic working group, chaired by Bryan Zhang, is set to report back
to the committee on some of the issues this month.
In the lead up to Sibos 2022, Finextra
spoke to Dan Globerson, head of Bank of APIs at NatWest, to explore how open banking will evolve in 2023. Globerson highlighted that banks saw
2020 as a year in which to consolidate their open banking strategies amid unprecedented challenges.
Emerging out of the Covid-19 pandemic in
2021, the conversation on open banking in the UK rapidly evolved into areas such as open finance and smart data, and ultimately, “open everything,” as Globerson described.
In
2022, UK banks have grown from the learnings and successes of open banking and are now considering how to apply these to a broader ecosystem, while continuing to ensure we all have control over our own data.
Globerson furthered that “we are in the middle of having some deep industry and regulatory wide debates around what is going to drive the next steps. That’s the big thing in 2022. Will market forces drive open finance and beyond into open everything? Do
we need some regulation or a combination of both? Do market forces create a strong enough incentive to develop services such as open finance? Maybe that’s the real question that needs to be answered,” Globerson said.
Insights from the CMA9 and third-party providers
Finextra reached out to the CMA9 and regulated third party providers to capture the sentiment of the industry. Matt Cox, director of digital payments and cards at Nationwide Building Society,
highlighted that “open banking has brought choice and competition to the market, which has benefitted not only our members but consumers more broadly. There is much to take and learn from the last five years of this initiative and there’s much greater potential
ahead if we set up right for the future."
Looking ahead, and in agreement that the sector must now leverage open finance, Cox added that "delivering services that drive real consumer value and help solve financial problems [...] will require broader, whole of market participation facilitated by
a clear regulatory framework that is well governed and commercially sustainable.” Harry Weber-Brown, CEO, TISA Digital, has a similar view and agreed that as the open finance ecosystem evolves, the framework must be "safe, accessible and simple to adopt
by the public."
He referenced the fact that the UK Government has indicated that "smart data is core to its vision of the future of UK financial services, and we share that confidence in this technology – but security must come first," calling out that fear of mis-selling
and/or unauthorised access to data is a major challenge to progress. On this move from open banking to open finance and open data, Glen Keller, Chief Product Officer, CRIF Realtime Ltd, explained that while "open finance takes the principles of open
banking and expands them to include other types of financial data, such as insurance, pensions, mortgages and investments.
"This will allow for the creation of new products and services that were previously impossible, such as personalised financial advice based on a customer's entire financial history, not just the information held by their bank, or fuller, more accurate risk
assessment and faster, fairer and more inclusive decisions. One of the main drivers behind the shift towards open finance is the need to truly fulfil what open banking promised – which is friction free movement around the financial system. This has always
been stifled slightly by the need in some cases to break-out of a fully automated process and request manual information.
"Open finance will plug these gaps and allow us to provide intelligent services that save time, add value, and ultimately, provide better outcomes for both businesses offering products and for consumers too," Keller continued. However, this evolution does
not come without its issues. Keller raised the fact that while he is in support of the UK’s original approach, where a centralised authority ensured standardisation and a unified set of technical and regulatory steps for all players in the market, as we move
into the future, interoperability across the ecosystem must not be lost.
Keller called out some cost considerations for the progress of open finance in 2023: "To keep competition alive in the UK, we need to make sure it is cost effective and not overly complex for innovative small companies to connect to the ever-growing numbers
of providers and work in a standardised way with the data they receive. Another significant challenge in the industry is who pays for this new set of ever-moving technical goalposts? With open banking we’ve all been spoiled by the free-to-access APIs provided
at vast expense by the big banks.
"A new model must be found that ensures uptake by the data holders, including the smaller providers, whilst also allowing the creation of services – that are often free to end users - to be built upon them. If this model cannot be found, then adoption will
be low, either leading to low market coverage, or low market adoption. Both of these outcomes have the potential to cause frustration among consumers – if they can’t understand why their provider is not covered by an application, or if there are still gaps
in a providers’ full view leading to slow or inaccurate decisions, or manual documents requested."
Shilpa Bangera, chief revenue officer and global head of platform fintech ecosystem, Finastra,
took a step back and defined true open finance as "disrupting and reshaping the foundation of financial services." In line with this, she went on to explore how the events of the last few years has seen "seen the unbundling of banking, with institutions
offering products procured outside of their organisation, a move to contextual and conscious banking services which meet the customer at the point of need, and a greater desire from many companies to do well by doing good."
The industry has been ripe for disruption for some time, and this will continue. Bangera continued: "All of these form part of the shift to open and require collaboration through open platforms. As the world gets more interconnected, it will power the digital
economy towards open finance and drive collaboration between financial institutions, operating and technology models, government, and regulatory entities to allow for economies of scale and an optimised user experience. open finance will help eliminate friction
in the ecosystem so that financial services can be delivered in the best way – as well as being fairer, more sustainable, and inclusive for all."
Finastra's annual State of the Nation report found that:
- In 2019, over 70% of respondents agreed that open banking represented the future of banking.
- In 2022, some 99% of respondents considered it a ‘must have’ or ‘important’ to their business, with 50% agreeing it’s already helping to improve the customer experience and 48% saying it’s helping them attract new customers.
- While in 2020 some 41% of banks couldn’t report on the benefits of open banking as they were still in the early stages of adoption, by 2022 only 1% said they were unable to measure any impact.
- In 2019 roughly 35% of institutions believed more sharing of data would benefit them.
- By 2022 some 98% agreed that technology plays a key role in fintech collaboration, with 46% agreeing it helps to improve openness and sharing of data between financial institutions.
Kush Shah, product lead – open banking, Bottomline, highlighted that “financial institutions deal with a world of challenging expectations. The operative phrase from a consumer perspective is not ‘whenever you’re ready.’ The operative phrase
is ‘what have you done for me lately?’ According to Shah, "open banking represents the best opportunity for banks to extend meaningful innovations to their customers, both commercial and retail" for two reasons.
- Fraud defence: "Five years ago, you could have made a good argument that the only consistent defence businesses or consumers had against payment fraud was their own attention to detail. We forget that payments fraud was rarely detected
until it was too late, and too late meant that a business was catching it after the losses hit the books, or account statement. Open banking has changed that. In fact, I’d argue that Confirmation of Payee (CoP), enabled by open banking, is the single most
effective technology solution to detect payments fraud in flight and, in turn, protect its potential victims. Recent proprietary Bottomline research of global banking leaders shows that CoP is the only non-payment feature that hits the top five among respondents
when asked what they most look forward to extending to customers. The new Payment System Regulator mandates will give CoP a much higher profile. Criminals who live off push payments fraud won’t be cowed by it. But because it is a technology rather than a process
or policy, CoP has true game-changing potential."
- Financial management: "It’s easy to overlook the fact that consumers and businesses have banks to help them manage their money. Open banking has introduced some of the most essential management tools in a tough economy: single payments,
variable recurring payments and account information services. Finance leaders recognise the need to communicate with payers concerning payments, perhaps increasingly so as the cost-of-living crisis grows and the number of failed and cancelled direct debits
increase. Open banking payments give consumers more power over their finances. Full stop. Sit them alongside a direct debit process, and if the direct debit fails for any reason, open banking allows payment of the full amount, or in part, when the money becomes
available in their account. That provides massive flexibility and is something companies should start thinking about today.”
As Hiroki Takeuchi, CEO and co-founder, GoCardless, said “the UK has made a solid start with its implementation of open banking, but we need to build momentum and capitalise on the investment made to date. This requires building a framework that is
sustainable for the future with a mix of regulatory obligations and the right commercial incentives. And, ultimately, if we are to accelerate user adoption, there must be a relentless focus on improving trust levels in open banking through great customer experiences
and robust consumer protection. Government, the regulatory authorities, and industry must work in partnership to push this important agenda forward.”
Looking ahead to this year, Andrew Griffin, corporate development director, Modulr,
predicted that we will "see the pure open banking service providers consolidating. Many raised funds at high valuations in 2021 but remain lossmaking and will be looking to maximise cash runways. We have already seen some acquired by larger businesses.
It would be ironic if these companies end up being acquired by the incumbents in sectors where the intent was to open-up competition. Longer term we should push ahead for broader promise of open finance initiatives, rather than waiting for open banking to
be 'done'.
He added that "the liability issues surrounding variable recurring payments (VRP) and the incompatibility of country-to-country IBAN open banking will be addressed, as will other issues. But it will take time and if we are not to be asking the same progress
questions for decades to come, we should push ahead with open finance. The benefits to consumers, security, fraud reduction, economic growth and productivity are too big to ignore. It is encouraging the government and regulators remain committed to fostering
innovation in this area."
Ciaran O’Malley, vice president of financial services and e-commerce, Trustly, stated that the "UK user experience is the envy of Europe and many industry leaders are in the process of launching a solution for their business." He continued to say
that while there is room for improvements in 2023, "easing some of the payment limits imposed for specific banks and use cases is an easy win for example. Why does one bank allow a peer-to-peer PIS payment for £25,000 but a payment to a regulatory compliant
business is limited to £5,000? Much of the reported 'fraud' is actually technical issues in the payment stack which can be immediately solved.
"Open finance more broadly represents a significant opportunity to deliver better customer outcomes in a range of financial products by enabling competition through data sharing. Banks should not have to share their mortgage risk models, but customers
should be able to share their mortgage data digitally with brokers to see if they can get a better deal. Being able to control your finances and insurance through a third party provider could revolutionise the sector," calling out the fraud and financial management
use cases also.
Looking ahead to other opportunities, Brian Hanrahan, CEO, Nuapay (an EML Payments business), said that Nuapay 2022 research found that open banking is the payments technology that presents the most opportunities (36%). This is ahead of digital wallets
(35%) and BNPL (26%), with 25% of businesses predicting it to become the most popular customer payment method. Further, for consumers, respondents stated that the most significant benefits of open banking are greater control (41%), followed by improved customer
experience/convenience (37%) and the reduction in fraud risk (34%).
"Open banking is increasingly evolving into open finance which is designed to enable access to a customer’s entire financial footprint. With this next step and further regulatory frameworks, we are heading towards a financial services ecosystem fit
for today’s needs. The open finance model will level the playing field in the wider financial services ecosystem and for customers, provide greater transparency across providers and far more personalised solutions.”
Huw Davies, CCO and co-founder, Ozone API, also mentioned the impact on the consumer and said that open finance has the opportunity to tackle problems such as financial inclusion and economic growth. "Yet it has to be built on good technical foundations.
Open banking requires an investment in infrastructure. For certain use cases and applications, it's now the de facto and default way of doing things. For example, a business once had several options about how to connect bank accounts to its cloud accounting
platform. The default way of doing this is now through open banking APIs. We're now seeing a wide range of new customer-facing propositions which leverage this access to help them do things better, whether that's budgeting, reducing debt, or improving savings.
This sort of behavioural change is building really well. There is a lot of innovation and increasing adoption.”
Chris Michael, CEO and co-founder, Ozone API, added that “banks and fintechs are going to be the key to unlocking other sectors and moving beyond the sharing of financial data. Retail, for instance, is an extension of that, but many other sectors
can benefit. For centuries, banks have been institutions which help individuals or businesses manage, protect and look after their assets. That's valuable for any sort of asset, including data. Banks have a really important role to play in this new open data
ecosystem, but they shouldn't try and do it themselves. They should partner with fintechs and use best-in-breed agile technology. I think the future is about banks knowing how to approach technology."
Freddi Gyara, co-founder and CTO, Ozone API,, also explored the potential that can be found in APIs: “Although open banking started off as an exercise driven by legislation and regulation, that was not where it was going to end up. The future lies
in APIs that can be monetised by the banks - premium APIs. We knew that innovative new propositions that could ride on top of this open banking wave would offer real financial benefits to both banks and TPPs, as well as the end customers of course. This was
the direction of travel in the marketplace, and it has continued over the last few years. We are still in the very early days of open banking and have not even begun to see the really big innovations taking place. So, if we are comparing our progress to the
dawn of the internet, we're still at the point where Netscape launched its first browser. When open banking becomes transparent to the user, we will know it has been properly adopted.”
Similarly, Martin Bould, co-founder, Little Birdie, said that “open banking has been transformational in allowing innovative fintechs to scale and support more people – which has been vital during the cost of living. Utilising open banking is essential
in order to build a more accurate overview of consumer finances, making support solutions much more effective." James Hickman, CCO, Ecospend, also believes that “the adoption of open banking is undoubtedly growing at pace and will continue to dramatically
change the way we use banks and manage our finances in the digital age. Already, account-to-account payment solutions are being utilised across a range of verticals - creating a smoother journey for customers and removing unnecessary transaction charges for
businesses.
"At Ecospend, for example, we are expecting to process billions of pounds in payments for HMRC and other clients in January – particularly following the self-assessment tax deadline at the end of the month – which will set another market benchmark. Over
the course of 2023, we not only expect continued adoption of similar technology by other government departments and large organisations, but we also an increase in consumer understanding and adoption across every business vertical. However, account-to-account
payments are only one facet of open banking.
"Open finance offers huge potential from solutions which use account information services (AIS), including budgeting and personal finance applications, as well as credit checks and onboarding procedures. While there are a myriad of exciting applications,
the use of this kind of technology is still at an early stage. We are likely to see more significant growth across the whole industry, however due to the complexity of deployment and need for consumer education, we predict that 2023 may not offer the inflection
point for wider open finance expected by many.
"Instead, 2023 will be a year of consolidation. Steady growth in the implementation of account-to-account payment solutions, along with continued innovation, will lay a strong foundation for the wider adoption of open banking services in 2024 and beyond."
Another area is development across the SME sector. Gabby MacSweeney, head of policy and communications, Codat, explored how
"building on the progress made and generating momentum towards open finance is long overdue. The lack of progress we’ve seen since a bright start is concerning, particularly in the SME sphere. Open banking is not enough for SMEs because most
of their important financial data sits outside of their bank account, for example, in accounting and eCommerce systems. Improved data sharing has huge potential to support them and stimulate growth in this sector - open banking has barely scratched the surface
of what’s possible. Fair and convenient access to credit is one example of this.
"One of the biggest barriers to SME growth is difficulty accessing funding. A problem that exists because SME lending is not set up for borrowers or lenders. It’s often tricky for lenders to access up-to-date, accurate data on businesses to make informed
decisions, and the application process for SMEs can be too complex and time-consuming. Better data flow between the financial tools used by businesses and lenders is key to improving this dynamic."