Open banking — what is it?

Open banking is a relatively new initiative often talked about, rarely understood. However, legislation has been in practice for over three years in the UK and Europe and in progress long before then.

What is open banking?

In a nutshell, open banking legislation puts financial data ownership in the hands of the customer. It allows regulated third-party service providers access to their data or permission to perform operations on their behalf. Rather than data being heavily guarded and solely of service to large financial institutions (FIs), open banking revolutionizes how individuals and businesses benefit from their own financial data.

A brief history of open banking

Open banking varies by region. Driven by regulation, open banking legislation is further advanced in Europe — and specifically the UK — than in other regions, for now.

Prompted by the global financial crisis of 2007-08, the European Union passed legislation called the Payment Services Directive (PSD). The legislation sought to demonopolize the banking industry, give consumers more choice, and impose transparency between banks and customers.

In 2018, PSD2 was implemented. PSD2 reinforced its predecessor (PSD) and extended the legislation to make payments more secure and attract new providers and technology companies to the market.

However, other regions are catching up. In Australia, a staged rollout out of the Consumer Data Right (CDR) commenced in July 2019. The CDR is intended to provide a framework under which consumers can consent to a transfer of data from a holder (such as an FI) to an accredited data recipient. Once implemented in the banking sector, the CDR will be introduced to other sectors — such as the energy industry and beyond — to establish an ‘open data economy’.

At the same time, open banking is being driven by market forces in other regions, including North America and Asia Pacific. Many US banks are choosing to collaborate with globally diverse fintechs. Regulators have remained relatively hands-off in Asia Pacific, too, allowing the industry to carve the way forward. Regions such as Hong Kong and Singapore are also now prioritizing open banking.

The shift in data ownership induced by open banking means customers can now safely and securely share their financial information with non-primary banks and regulated third parties. This opens the market to new products and services and has encouraged new entrants to the space, to develop innovative applications for businesses and FIs.

Open banking — financial institutions

If you feel customers hold the cards from a data perspective, many might agree. Open banking raised concerns that the primary banking relationship may weaken by open access to data, causing a loss of ownership of the central customer interface.

Consider payment providers. They help businesses manage their money without accessing their banking account — accepting payments and sending payouts — by leveraging application programming interfaces (APIs).

However, increased competition isn’t a negative. And digitally savvy FIs, or those with a strong emphasis on digital transformation, realize the potential to gain and not just give data.

By harnessing data and forging relationships with tech providers, FIs find themselves with a unique opportunity. Namely to understand and meet their customers’ needs and build deeper, holistic relationships — to remain relevant.

Through collaboration, FIs and third-party providers can drive innovation, aggregating multiple data sources to iterate new digital services and expand existing ones. Ultimately, these developments keep customers sticky and engaged.

Rethinking the banking playing field

In 2016, the UK’s Competition and Markets Authority (CMA) released a report ‘Retail banking market investigation’. The report found that established banks face few hardships maintaining significant market share, while newer and smaller banks find it difficult to grow and access the banking terrain.

To remedy this, the CMA proposed several solutions and set up a regulatory body to facilitate and promote open banking — the Open Banking Implementation Entity (OBIE). OBIE is governed by the CMA and funded by the UK’s nine largest banks: Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS Group, and Santander.

Since its inception, OBIE has worked closely with the government and regulators to create a world-leading ecosystem. Here are a few quick numbers that call out OBIE’s achievements to date:

  • The number of API calls has increased from 66.8 million in 2018 to almost 5.8 billion in 2020
  • Circa 320,000 open banking payments were made in 2018, rising to over four million in 2020
  • Today, over 2.5 million people use open banking to move, manage and make the most of their money.

9Spokes is a proud member of the OBIE ecosystem since 2018, alongside 300 other fintechs and innovative providers. All members are vetted by the Financial Conduct Authority (FCA) to ensure the highest security standards.

OBIE has not been alone on its journey but working closely with the EU to align with PSD2 so the same security standards would facilitate wider adoption across the continent.

The COVID-19 effect

The impact of COVID-19 is pervasive. Regarding open banking, it has accelerated a dramatic shift in attitude – especially for small businesses.

Out of this crisis, the following was observed:

  • Increased adoption: 50% of SMBs surveyed in the UK report increasingly using services offered by open banking providers as they look to future-proof operations.
  • Improved resilience: Of those who leverage open banking services, the majority confirmed it had a positive impact on their businesses overall, specifically increasing their resilience.
  • Accelerated switching: While small businesses have historically been slow to change their current bank account/s, there’s a predominant and growing willingness to seek out better deals, with approximately 20% of respondents now switching across a range of products.
  • Small business borrowing: Almost 50% of SMBs in debt have taken on over half of that debt in the last six months. About 66% of all SMBs have taken advantage of government support schemes, and another 18% have received alternative lending.

Building momentum

In 2016, an open banking program found that only 4% of UK small businesses had switched business current account (BCA) providers in the last year. Open banking was conceived to address that.

Today that number is 10% (17% for those firms who already use other open banking products). There’s still work to be done. OBIE research indicates that things are moving in the right direction – with new developments surfacing as businesses weather the impact of lockdowns.

The OBIE also launched the ‘Power of the Network’ campaign in April 2020. It promotes and showcases how the open banking ecosystem responds to the COVID-19 crisis with products and services that could assist those affected.

An open banking app store launched to help individuals and companies find the right open banking-enabled financial products. Targeting small businesses and innovative service providers, the store currently offers 96 apps and services to the market.

Considering everything, open banking is still at an origination phase. But the potential is massive. Users want more control, personalization, and choice. Open banking has the power to unlock new models and create fresh opportunities – using data to drive economic innovation and create significant benefits for the end user.