Open Banking Progress
Finance

Open banking: slow, but steady progress

Integrating open banking into our models was one of our priorities after the initiative launched in early 2018, and Lending Works is proud to be an early adopter within UK fintech. We have also been keen followers of the progress of open banking, and the programme recently toasted the completion of its second year by announcing that 1 million customers have made use of the technology.

There are signs that growth is beginning to lean towards the exponential too, with the Open Banking Implementation Entity (OBIE) – an organisation tasked with delivering open banking on these shores – revealing that overall customer uptake doubled in the second half of 2019. There are now more than 200 open banking service providers too, half of which came to the party last year. Additionally, the OBIE reports that open banking API ‘calls’ - which are effectively a data request from a third-party provider to a bank – are clocking in at 200 million per month.

Yet there are mixed views among experts as to whether these numbers represent a successful rollout of the reforms or not. Furthermore, scepticism endures over the concept of open banking itself – both from a consumer and business perspective.

What is open banking?

In 2015, an EU law was passed which obliged banks to set up the requisite technology to share customer data securely with other approved financial services providers. The Competition and Markets Authority (CMA) mandated the OBIE to oversee implementation of open banking, which is conducted through a series of secure APIs upon request by the customer. Fundamental to this is UK banks providing Payment Initiation Services (PIS) and Account Information Services in a standardised way through these APIs.

At its core, the idea behind open banking is collating the customer’s financial information into a single portal, enabling them to switch providers in a simple, or even automated manner - and based on real-time information. Rather than be limited to just current accounts or savings, these capabilities would also extend to loans, credit cards, insurance, energy and other financial products.

Open banking’s development comes against a backdrop of heightened awareness of data security, and there is thus a certain stigma that hangs over it. However, it should be noted that data can only be shared upon request by the customer, and, after 90 days, this request will expire, meaning that providers are obliged to re-acquire express opt-in. Banks are also liable to reimburse you for any losses that occur as a result of them sharing your data with a (regulated) open banking service provider. 

Has it been a success?

A few of the nine major banks in the UK (known as the CMA9) have dragged their heels. Various extensions have been handed out following their failure to meet agreed deadlines – chiefly having the systems in place to facilitate open banking. Among these is the fact that customers often still have to log in to their online banking so that other providers can access the relevant data – a process known as ‘screen scraping’. This antiquated method was meant to be retired by September, but banks were given a further six months to improve their functionality.

Some industry analysts are also unimpressed by the level of uptake, having initially been promised a ‘revolution for financial services’. Back in 2018, the Centre for Economics and Business Research suggested open banking would deliver a £1bn annual boost to the UK economy, with 17,000 new jobs created. Held against such lofty predictions, it’s fair to say progress has been slower than anticipated.

Nevertheless, from an international perspective, the UK is a global leader. Open banking, or an equivalent framework, has now been launched in 36 countries, and we sit at the top of the league table. Growth in PIS providers also expanded rapidly last year, and fintechs continue to crop up with dynamic and innovative technologies. Credit Kudos for example, are aiming to make credit scoring fairer by harnessing the power of open banking to improve affordability decision making. 

There are even signs that banks are changing their tune too, signalling an embrace for open banking by partnering with notable startups. Among the most high-profile collaborations was Nationwide joining forces with CreditLadder, with an initiative to support first-time buyers. Yet there are a number of other examples of incumbent banks partnering with fintechs in order to capitalise on the commercial opportunities open banking brings.

Open finance

The big gains, however, are likely to come through 'open finance', which essentially involves extending open banking beyond basic banking products to insurance, energy, and even things like mortgages and pensions.

According to the head of the OBIE, Imran Gulamhuseinwala, the long-term output of this would enable consumers to 'have all their information in one place, allowing them to make really good decisions and leading to higher engagement and less stress.' 

It could all be underpinned by a single legal framework too. The FCA has commissioned a 'Call for Input' from stakeholders, seeking proposals on the benefits, risks and opportunities relating to open finance, and the outcome of the review is likely to be published in the summer.

However, Gulamhuseinwala told The Times that larger companies may try stonewall the progress of open finance, and create 'silos' for their products and sectors. 'Incumbents have very clear territories around their products. It works in their favour to keep those as defined spaces,' he warned.

What does the future hold?

There is clearly still much water to go under the bridge before we reach the point of a single dashboard, encompassing all products and services within the realm of personal finance. Especially one which the majority of Brits feel comfortable providing widespread access to. This point is well illustrated by Gulamhuseinwala's observation that just 0.1 per cent of all open banking activity thus far has been payments-related.

Some of the bigger players are unlikely to play ball every step of the way too. Such disruption is anathema for many established behemoths, who instead profit from blind customer loyalty and inertia.

That said, open banking need not be a zero-sum game for banks and fintechs, but rather a gilt-edged chance to collectively leverage each other's strengths. The commercial reach of the incumbents, coupled with the dynamism and rapid technological development of the challengers sets a platform for an exciting future which will deliver tremendous value and convenience to the individual that matters most: the customer.

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