Two years after regulators obliged the UK’s high street banks to make account and payments data available to third parties, open banking finally hit its stride in the UK in 2020, data from the Open Banking Implementation Entity (OBIE) reveals. But the full disruptive potential of the open banking model has yet to be realised, experts believe.
From a regulatory perspective, the UK has been a pioneer in open banking, a model of interoperability between banking services that is designed to unlock digital innovation in the sector.
In 2018, it was among the first to uphold a requirement of the EU’s Payment Services Directive (PSD2) that obliged banks to make account and payments data available to third-party providers (TPP) through secure application programming interfaces (APIs). TPPs include mobile banking app developers and digital payments providers.
After a slow start, the use of these APIs surged this year. The number of successful calls to open banking APIs has risen to more than 650 million in November 2020, a 206% year-on-year increase, according to data from the open banking Implementation Entity (OBIE).
This comes after a rocky few years for open banking. Many banks missed numerous deadlines for the system’s roll out, from the initial release of financial information to providing a sandbox for testing new products, which meant that API availability was shaky and TPP innovation limited until recently.
And, despite a regulatory mandate, until this year British financial institutions had less appetite for open banking adoption than their counterparts in Hong Kong, UAE and Singapore, according to research by fintech Finextra.
But banks have finally “got themselves together” as the API usage data shows, with a wealth of new useful products now on the market, says Sarah Kocianski, head of research at fintech consultancy 11:FS.
In part, this reflects the technical maturity of the APIs themselves. “One thing that’s happened is that the bigger organisations have stabilised their APIs and they’re actually more reliable now,” she says. “That has contributed to more third parties starting to use them.”
The pandemic has also accelerated open banking’s momentum. It has led more customers to adopt digital banking services, which, in turn, encouraged larger organisations to source quick solutions through fintech acquisitions, says Kocianski.
“There is now a constant state of anxiety about what’s going to go wrong next and that tends to make people want to make sure that their nest egg is safe and that they’re saving a bit,” she adds. “You’ve got people who are lucky enough to still have jobs who have more money and a bit more time to look into their finances.”
This was tempered by the fact that the pandemic also created obstacles to implementation. Despite this, 2020 was the year that open banking took off in the UK, says David Beardmore, head of the OBIE ecosystem.
“Open banking used to be the best-kept secret in financial services. But now it boasts over two million active monthly users, and with this number growing strongly, the secret’s out the bag,” he says. “Increased successful API calls and TPP engagement demonstrate that open banking-enabled products are rebalancing the market in favour of consumers and small businesses.”
One key driver of open banking this year has been uptake in the payment initiation services (PIS), which allow customers to pay companies directly from a bank account. This has revolutionised what was previously a very onerous process by removing the requirement for a third-party debit or credit card to make digital payments.
Payment APIs have the potential to unlock more innovation in the UK’s banking ecosystem, says Kocianski. “For customers, they have the ability to make purchasing and money movement experiences much slicker,” she says. “For merchants, they have the potential to boost account-to-account payments, which will create cost savings.”
Open banking’s untapped potential
However, there are still untapped opportunities for innovation, Kocianski believes. “Open banking hasn’t yet been as disruptive as it still has the potential to be.”
She points to Australia, where regulators are applying the open data sharing model to a broader range of financial services, including insurance and investment – a model known as ‘open finance’. “From the beginning, [they] saw what the UK was doing with open banking and thought we can make this bigger and look to incorporate more elements of financial services.”
“Banks get a hard time, but actually, if you look at different types of financial services providers, the banks are actually quite a long way ahead of a lot of other types of provider,” Kocianski explains. “I’m talking about pensions and insurers, who definitely still have cardboard boxes full of paper files in the basement.”
Beardmore agrees that ‘open finance’ is the natural progression of the UK’s open banking regime, although it is currently outside the OBIE’s scope as set out by the Competition and Markets Authority.
“It is clear that the technology has the potential for use far more widely, and the government has stressed that it views open finance as the right and natural next step. That comes as no surprise to us,” he says. “Examples of how open finance would work include the possibility of ‘personal financial management dashboards’ which will enable people to understand and then ‘optimise’ their overall financial position.”
The success or failure of open banking has ramification beyond the financial services sector. The model of requiring incumbent suppliers to share their customers’ data with digital innovators has been proposed in other sectors.
In the UK, non-profit Icebreaker One is co-ordinating efforts to create an ‘open energy’ ecosystem, modelled on open banking. “We believe that harnessing [energy] data through a robust, decentralised and federated data infrastructure is key to modernising the energy system in the UK and attaining our targets for a carbon-net-zero future,” the group says.