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.
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.”
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.
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.