Why has open banking been so slow to take off?

The initiative was meant to enable an ecosystem of competitive fintech services, but its stately progress over the past five years has left many in the sector disappointed. What needs to change?
Open banking

Open banking arrived in the UK in 2018 as an initiative aimed at boosting competition in financial services. The country’s eight largest retail banks and the Nationwide Building Society were required to set up application programming interfaces (APIs) enabling customers to share their current account data with third-party fintech firms. The idea was that this would allow them to access a range of innovative services – particularly in payments – without having to open new accounts.

But five years on, open banking remains relatively niche in terms of uptake. The Financial Conduct Authority (FCA) reports that there are just over “7 million active users”, which is a long way short of the total the industry had hoped for.

In a bid to improve the situation last year, the government convened the Joint Regulatory Oversight Committee (JROC), co-chaired by the FCA and the Payment Systems Regulator (PSR). The committee, which published its recommendations for the next phase of open banking this April, hopes that there will be “industry action and strong regulatory direction”.

What needs to change in open banking?

“There are two main factors preventing the widespread adoption of open banking,” says Tony Craddock, director-general of the Payments Association. “First, there’s no strong incentive for consumers to use account-to-account payments instead of card payments. Second, there are concerns about the degree of consumer protection in open banking payments.”

He believes that the issue of incentivising account-to-account payments will take care of itself once the transactions are as easy to complete as card payments are, because retailers will naturally prefer the cheaper option. “They are desperate to do it,” Craddock says. “Replacing card payments with payments from accounts could reduce their transaction costs by 0.5%.”

But what about the business model for the banks, which cannot charge for making account data available? They took longer than mandated to get the APIs in place, and they’re still not doing enough to boost open banking, according to some critics.

David Birch, an author, adviser and commentator and adviser on digital financial services, says: “The commercial model for banks should be that you get tough on basic APIs and minimum service-level agreements and give them flexibility on premium APIs, for which they can charge.” He argues that “obvious” premium services include ‘this is a real person’ and ‘this person is over 18’ APIs, both of which would boost online security.

Can the banks do more to help?

However, it may be a while before we get there. After all, even if the APIs were in place, the banks’ underlying systems aren’t yet geared up for the point-of-sale experience. “The missing piece for open banking is that, at the point of sale, messages from banks concerning whether or not payments have been accepted and processed aren’t really flowing,” reports Dr Ruth Wandhöfer, who chairs the PSR panel.

Craddock adds that there’s at least one other aspect of the messaging system that needs fixing to make open banking as attractive as card payments.

People outside the industry don’t understand what open banking is

“There is no reason to not have a chargeback and account-resolution facility for at least some account-to-account payments, particularly higher-value ones,” he argues. “The next-gen messaging architecture enables that to be supported, but someone still needs to build the system. This pill has yet to be swallowed by all participants, but it needs to be for open banking to thrive.”

But who should foot the bill for enabling full-blown open banking? Craddock thinks that third-party payment providers may need to start paying to access open banking and that there should be a merchant fee, albeit less than that charged by card schemes.

How might a pricing structure for that look from the banks’ point of view? “The options for pricing open banking transactions include a tiered membership scheme, a pay-as-you-go model or a combination of the two,” says Craddock. He adds that card schemes will also need to get more realistic with their pricing as open banking takes off.

Ways to boost the uptake of open banking

Of course, industry incentives are not the only sticking point. As things stand, open banking requires consumers to do quite a lot of clicking and permissioning, which doesn’t inspire much confidence among users or give them a good checkout experience. So, is there perhaps a killer product that could help to solve this problem?

The JROC is putting its faith in variable recurring payments. These are “really exciting”, according to Andrew Boyajian, a former JPMorgan director who is now head of variable recurring payments at Tink, an open banking platform provider.

“They address the pain points in payments by moving strong customer authentication on to a payment mandate level instead of the payment itself,” he explains. “If a payment meets all the requirements, it can simply be processed automatically in the background. That makes it feel more like a direct debit, and it has much less friction than open banking payments.”

At a more fundamental level, the term ‘open banking’ has not necessarily helped when it comes to encouraging take-up. “It sounds scary,” Wandhöfer says. Craddock agrees that a better name could have been picked, adding that most people outside the industry “don’t understand what open banking is. You could have something like ‘pay by bank’ or ‘direct payments’ instead – anything that stops people thinking about branch opening times.”

Despite all the hiccups so far, there is general agreement that the next stage of open banking should be an exciting development, and that it’s not an end point.

“Open banking is an API-based data highway. In a few years, we’ll just call it the digital economy,” Wandhöfer predicts. “In the meantime, it needs to be expanded, with better cybersecurity, a digital ID infrastructure and secure API libraries. This will enable the same sort of consent-based data sharing that we already see in fields such as mortgage lending and healthcare.”