Why open banking is finally gaining speed

After a plod­ding start, open bank­ing is final­ly gain­ing speed in the UK. Users grew from 1 mil­lion in Jan­u­ary 2020 to 3 mil­lion this year. It’s still way behind tar­get and lags coun­tries such as South Korea, which has 20 mil­lion open bank­ing users. But it is encour­ag­ing giv­en open banking’s poten­tial to rev­o­lu­tionise finan­cial ser­vices.

The revised pay­ment ser­vices direc­tive (PSD2) that ini­tial­ly drove open bank­ing is three years old. Its goal was to lev­el the play­ing field for cus­tomers by giv­ing third par­ties dig­i­tal access to bank infra­struc­ture.

Despite the lum­ber­ing start, UK banks and fin­techs are excit­ed about what open bank­ing can do in future.

Some say it has achieved much already, espe­cial­ly in help­ing thou­sands of strug­gling com­pa­nies and indi­vid­u­als find cred­it dur­ing the coro­n­avirus pan­dem­ic. It did this by allow­ing cred­it providers to make more informed and time­ly deci­sions using real-time cur­rent account data.

But open bank­ing can go much fur­ther, for exam­ple in enabling instant mort­gages and open access to sav­ings, pen­sions and oth­er finan­cial prod­ucts.

Further innovation

Dan Weaver, open bank­ing expert at Equifax UK, says the indus­try should cap­i­talise on this momen­tum and dri­ve fur­ther inno­va­tion. In par­tic­u­lar, for mort­gage appli­ca­tions, he thinks real-time access to bank account infor­ma­tion and pay­ments data could sup­port ID ver­i­fi­ca­tion, and pro­vide more time­ly and accu­rate views of com­plex afford­abil­i­ty cas­es com­pared to cur­rent meth­ods. It could also make process­es safer, fair­er, quick­er and less sus­cep­ti­ble to fraud, says Weaver.

“Giv­en the right plat­form, open bank­ing can improve finan­cial ser­vices great­ly and make feats such as instant mort­gages a real­i­ty,” he says. “But it is vital that more cred­it providers, includ­ing banks, util­i­ties, insur­ance, auto-finance and telecom­mu­ni­ca­tion com­pa­nies, accel­er­ate its adop­tion.”

Rich innovation

There are 102 offer­ings already avail­able in the UK open bank­ing ecosys­tem. But we are only start­ing to see where this tech­nol­o­gy can take us.

Dan Glober­son, head of open bank­ing at NatWest, says con­sumers have already ben­e­fit­ed from open bank­ing via reduced costs and con­sumer pro­tec­tion built into pay­ment cards. Card schemes are also evolv­ing to inte­grate loy­al­ty points and faster pay­ments to mer­chants.

“But we have only scratched the sur­face,” he says. “In the medi­um term, we will be able to obtain more prod­ucts and ser­vices out­side bank chan­nels, per­haps dur­ing ecom­merce, sales or account­ing jour­neys. Account­ing plat­form inte­gra­tion with banks, par­tic­u­lar­ly for star­tups, is improv­ing. 

“We haven’t dis­rupt­ed pay­ments yet, though it was in PSD2’s crosshairs. But I can see that hap­pen­ing and embed­ding some­thing big­ger than just pay­ments, for exam­ple elec­tron­ic con­tracts.”

Glober­son agrees instant mort­gages are pos­si­ble as open bank­ing can quick­ly enable banks to obtain income ver­i­fi­ca­tion, afford­abil­i­ty and cred­it data. Only the land reg­istry con­fir­ma­tion would slow it down, but per­haps that too could be more inte­grat­ed.

In the longer term, shared cus­tomer data will also speed up and reduce the cost of onboard­ing oth­er prod­ucts such as pen­sions, he says. 

Dr Oliv­er Prill, chief exec­u­tive of busi­ness bank­ing plat­form Tide, agrees the biggest cur­rent impacts for open bank­ing are in link­ing cred­it, pay­ments and account­ing solu­tions with bank accounts and, in the future, that will include sav­ings and invest­ments.

Open bank­ing has already allowed sav­ings plat­forms like Plum to grow to more than a mil­lion users. Plum esti­mates that auto­mat­ic, real-time opti­mi­sa­tion of util­i­ty bills, sav­ings and invest­ments could save the aver­age user £186,000 over 40 years. 

Continuing challenges

One rea­son for open banking’s slow ini­tial uptake was the focus, for many banks, on com­pli­ance with PSD2 instead of com­mer­cial oppor­tu­ni­ty. Prill blames the reg­u­la­tors for oblig­ing banks to open their data for free.

“No one would expect a cred­it rat­ing agency to pro­vide their data for free,” he says. “Why would you want banks to? The big banks, there­fore, do the min­i­mum pos­si­ble to com­ply.

“Open bank­ing needs to become mar­ket led and allow banks to offer pre­mi­um ser­vices for a charge. When their data becomes a prof­it line, resources will flow to improve ser­vices. We only need the reg­u­la­tor to stop oli­gop­o­lies and abu­sive pric­ing.”

Post-Brex­it, the UK gov­ern­ment can gain an advan­tage by intro­duc­ing such a mar­ket-led sys­tem, adds Prill.

Anoth­er big bar­ri­er to take-up has been pub­lic trust in the secu­ri­ty of data. In oth­er indus­tries, cus­tomers will share data if they can see the ben­e­fits. So adop­tion rates could accel­er­ate fur­ther if providers can com­mu­ni­cate ben­e­fits bet­ter.

Stephen Noakes, chief dig­i­tal and trans­for­ma­tion offi­cer retail, at Lloyds Bank­ing Group, says: “Longer term, open bank­ing will cre­ate a more diverse, inno­v­a­tive mar­ket with more com­plex, high­er-val­ue prod­ucts. 

“The chal­lenges to this include poten­tial risks to cus­tomers, par­tic­u­lar­ly where third par­ties are enabled to trans­act on their behalf. But more com­plex open bank­ing propo­si­tions can suc­ceed if banks and third par­ties work togeth­er to high­light ben­e­fits.

“We agree open bank­ing will best flour­ish if firms have the right incen­tives to par­tic­i­pate. The infra­struc­ture sup­port­ing open bank­ing should also be fair and encour­age firms to work col­lab­o­ra­tive­ly.”

Ricky Knox, chief exec­u­tive of Tan­dem Bank, says anoth­er excit­ing devel­op­ment is that open bank­ing will help providers seg­re­gate risk types by under­stand­ing cred­it, fraud and anti-mon­ey laun­der­ing infor­ma­tion. This will lead to much more stream­lined ser­vices.

“It could also help pro­vide auto­mat­ed, insight­ful real-time advice on all your finances,” says Knox. “Open bank­ing has some detrac­tors, so one ques­tion is how much appetite the UK gov­ern­ment has for this. But, ulti­mate­ly, inno­v­a­tive star­tups will dri­ve fur­ther devel­op­ments.”

If they get it right, the can­ter­ing pace of the last year could grow to a gal­lop.