It has been nearly three years since the Second Payment Services Directive (PSD2) came into force. A much-heralded move, has this piece of European legislation enabled the UK’s traditional financial services sector to digitally transform or is it yet to fully embrace the potential of Open Banking?
The UK’s Competition and Markets Authority (CMA) had hoped PSD2, which arrived in January 2018, would level the playing field between incumbent legacy banks and smaller fintech challengers.
Enabling newcomers to get a foothold for growth in the market was an issue highlighted in 2016 by the CMA which went on to set up the Open Banking Implementation Entity (OBIE) to “create software standards and industry guidelines that drive competition and innovation”.
However, experts are divided on whether this has been achieved. Many highlight slow movement by some of the incumbents, despite the new arrangements for secure sharing of current account information with third-party providers, offering transformative tools for personal customers and smaller businesses.
Using new apps and websites, customers can see a single clear view of their finances to deliver more effective budgeting, gain easy access to the best deals, services and credit options from the whole market and spot fraud faster.
Official figures out in September do appear to be promising. Users of Open Banking-enabled products exceeded two million, a doubling in just over six months. Imran Gulamhuseinwala, trustee of OBIE, which is funded by the UK’s nine largest banks and building societies, says Open Banking is “rebalancing the market in favour of consumers and small businesses”.
Banks have not embraced Open Banking fast enough
But others are less sure. Luc Gueriane, chief commercial officer at payment solutions company Moorwand, believes Open Banking is failing. ”Beyond the reluctance from banks, low-consumer awareness and the limited number of services are also key to its failing,” he says.
“The products that are there are often overshadowed by the reliability and security which is associated with incumbent players.
“It must become both easier and cheaper for new players to build Open Banking APIs [application programming interfaces] and propel their services into the mainstream. Making infrastructure readily available will be key.”
Adam Bialy, chief product officer at OpenPayd, adds: “The APIs are being built and the infrastructure is in place, but few banks are meeting PSD2 requirements.
“Open Banking has been less of a catalyst and more of a ‘gentle nudge’, with consumer-facing applications being limited to chiefly account aggregation services.”
And while Mike Hampson, chief executive of Bishopsgate Financial, feels the slowness was due to the difficulty of “adapting API legacy architecture to be flexible and responsive, rather than a deliberate attempt to stifle the competition”, he says: “But now, banks can use the competitive data held by other providers, to expand and rebundle their services, while improving their bottom line.”
One suggestion for such innovation is to take more advantage of account-based payments within the retail sector, as this would cut the cost of commerce, but Bialy explains this is being hindered by “clunky user authentication flows that are different for each bank”.
This is still the right leap forward, according to Jonathan Hughes, chief executive of payment and banking experts Pollinate Horizons. ”For merchants, there are significant economic advantages to accepting payment through an Open Banking transaction, rather than on the card rails,” he says. “The large enterprises that adopted Open Banking early on have forecast huge savings when compared to using cards, which in turn could result in savings for small and medium-sized enterprises.”
Open Banking is not all doom and gloom
However, on the other side of the virtual coin, Open Banking is solving existing problems and defining new ways of doing things, from targeting recommendations for restaurants, attractions and activities based on previous financial behaviour, to Open Banking Excellence, an awareness-raising group, joining forces with Moneyhub Enterprise and Streeva to power charity donations by scanning a QR code with a phone. It then pays directly from the user’s bank account to the charity’s account with automated Gift Aid.
Freddy Kelly, co-founder and chief executive of Open Banking credit reference agency Credit Kudos, is another seeing the benefits, this time for loans. He says: “A growing number of lenders, including banks, are embracing Open Banking as it helps them better understand a customer’s behaviour in a rapidly changing world. By a borrower securely sharing their bank transaction data through Open Banking, the lender is able to detect a customer’s recent loss of, or significant change in, income as well as identify new borrowing behaviour.”
Ada Westerinen, Europe, Middle East and Africa director of solutions consulting for partners at MuleSoft, is also upbeat. “Open Banking is a huge opportunity for banks to unlock new sources of revenue if they can build highly personalised customer experiences in collaboration with other banks and service providers,” she says.
“Banks have taken steps towards becoming curators of financial services, establishing marketplaces in which customers and providers can come to select the best products at the right price.
“By embracing this mindset, traditional banks can behave more like Silicon Valley startups, creating new revenue channels by sharing their core banking capabilities and customer base with authorised innovation partners.”
One such innovator is Victor Trokoudes, co-founder and chief executive of free money management app Plum. He estimates Plum can make the average person £186,000 better off over their lifetime. “The kind of financial resilience this brings has been more important than ever in 2020 as the world responds to the COVID-19 pandemic,” he says.
“We’re looking forward to seeing more people than ever before use their banking data to empower themselves and break down financial barriers. When this happens, we’ll see the true impact: no more companies that overcharge people, better financial literacy and engagement, and true wealth for all.”
Are these four Open Banking apps a sign of the future?
Open Banking is being used in many different ways to aggregate bank account information, provide access to credit, manage debts, apply for loans or mortgages and make saving easier. The app store run by the Open Banking Implementation Entity (OBIE) currently has 89 different Open Banking mobile applications and online products across consumer, business and technical services.
But as a sign of what could be possible, you only have to look at the winners of this year’s Open Up 2020 Challenge from innovation foundation Nesta. The contest attracted 107 applicants, which resulted in 15 finalists. Each of the four winners will now get a £150,000 grant, on top of £50,000 awarded at the finalist stage, to grow their solution to help more people manage their money.
- Mojo Mortgages MortgageScore combines credit and Open Banking data to determine if a customer is mortgage ready while the MortgageCoach feature provides personalised advice on how they could improve their score.
- Moneybox is an app that helps customers save and invest by setting money aside through round-ups, one-off or regular deposits with the option to put the money into stocks and shares ISAs, lifetime ISAs, savings accounts and pensions.
- Plum is a free money management app that automatically sets aside small amounts every few days and can invest the money. It also finds better deals on bills and offers spending insights.
- Wagestream enables employees to stream a proportion of their income as it is earned, save directly from their salary, track their wages and bank balance, and set smart payment reminders in real time.
Lubaina Manji, senior programme manager of Open Up 2020 Challenge, Nesta Challenges, says: “Open Banking has revolutionised the way people manage their money and put them in control of their financial data.
Despite its huge potential, it had a slightly slow start with many people initially unsure about sharing their financial data or the benefits it would offer them.
“The £1.5-million challenge, run in partnership with OBIE, was designed to boost people’s awareness, trust and adoption of Open Banking-enabled finance apps.”
New research from Open Up 2020 of 2,000 adults across the UK has found 82 per cent of people who already used Open Banking-enabled apps said they helped them improve how they manage their money with four in ten happy to share their data with apps like this to get personalised guidance or to save money.