Open Banking three years on: An industry evaluation
Following the third anniversary of Open Banking in the UK, Maddy Christopher speaks to industry experts on whether the entity has fulfilled its promises to the financial sector.
In three years of implementation, UK Open Banking has attracted nearly 3m users and now lists 294 regulated third-party providers within its ecosystem.
According to the UK’s Open Banking Implementation Entity (OBIE), open banking payments increased from 320,000 to more than 3m4m between 2018 and 2020. API calls have increased from 66.8m to nearly 5.1bn between 2018 and 2021.
“Open Banking was a bit of an unknown quantity [when] it launched in 2018,” said FreeAgent chief commercial officer Kevin McCallum. “So there was understandably some excitement and optimism that this would change the world for the better for consumers and businesses.
“At the three year mark now, the fintech world has not been turned entirely on its head, but there are absolutely the early signs of the impact this part unbundling of the banking system will have.”
The mechanism to access data (AISP) arrived before the ability to initiate payments (PISP) and has stayed ahead when considering the number of businesses on the Financial Conduct Authority’s (FCA) register. “I do firmly believe that we’re still very early in the journey and the solutions and services that will begin to arrive over the next few years will be very impactful,” added McCallum.
However, many observers still have reservations about Open Banking. “Technically, I’m sure it has a relatively clean report card,” Open Finance & Payments Working Group chair Louise Beaumont told AccountingWEB. “But that’s the issue.”
Narrowly technocratic projects can be technically successful. Boxes will always be ticked, but the impact and potential for end-users (individuals and businesses) still looks woefully unfulfilled in the UK.
Has Open Banking lived up to expectations?
“If your expectation was that this was a risk to your incumbent bank, and one that you could kick into the long grass with overly-prescriptive technical standards and anti-competitive security measures, then yes, you’ll be pretty chirpy,” answered Beaumont.
“If your expectation was that this would deliver dosh to the UK’s bottom line, then you’re going to be pretty disappointed. The Centre for Economics and Business Research reckons that Open Banking’s potential to add $1.4bn to the UK’s GDP has been thwarted to date – and, so far, it looks like they’re right to be gloomy.”
As is often the case, delivery is harder to achieve and takes longer than expected but, after the initial delays from the largest banks (known as the CMA9), the delivery of the planned application programming interfaces (APIs) have largely met expectations.
For McCallum, more fintech developers could have gained their own FCA regulation by now, but in many instances platform providers are gaining credentials on behalf of fintechs that they support.
There are still a number of Open Banking milestones still to be met by the end of 2021, but the core capabilities to access data and make payments are in place. Building on the Open Banking principles, Open Finance is making an impact by making a broader range of financial information and services available such as pensions, mortgages, investments and insurance.
Real life impacts
According to Bank of England chief economist Andy Haldane, the full potential of Open Banking remains largely unrealised with awareness and use remaining low. Around two-thirds of banking customers have never heard of Open Banking and for half of customers, their current bank does not even offer an Open Banking service.
“This unrealised potential is perhaps greatest among SMEs,” said Haldane.
For chartered accountant and fintech specialist Nick Levine, this is the key pitfall of Open Banking. “A lot of the innovations are happening behind the scenes from the way we interact with different financial services,” said Levine.
Accountants and businesses rely on open banking feeds every day, but are often unaware of how these feeds are superior and more secure than what came before from the likes of Yodlee.
The regular re-authentication requirements for Account Information Service Provider (AISP) are also holding back the efficiency and uptake of Open Banking. Accountants frequently come to AccountingWEB to express their frustration with the disruption caused by having to reconfirm AISP connections every 90 days.
How does Open Banking affect AML?
Open Banking allows users to interoperate with over 60 brands using its protocols. But for the payments side to make progress, the question of how much know your client (KYC) activity is required for anti-money laundering (AML) purposes.
“At the moment it appears to prevent payments being used in many circumstances on a practical basis,” Cirrostratus Exedra CEO John Hemming told AccountingWEB.
As far as AISP is concerned, Open Banking is progressing, said Hemming, but Payment Services Directive 2 (PSD2) questions about AML will continue to be an issue for payments.
Open Banking is quite technically complex because of the need to ensure security. The Open Banking Implementation Entity (OBIE) has handled this technical challenge quite well, commented Hemming. However, he added, “As far as payments are concerned, it is how the PSD2 requirements for AML are satisfied (in the sense that if you need to prove your identity just to make a payment given that the banks know who you are) which will make the most difference in the long term.”
Where are the sunlit uplands of Open Banking?
The biggest development we are likely to see in the near future is the rollout of payment services, which has the potential to revolutionise the way accountants and their clients pay bills, according to Levine.
But other ecosystem experts like Beaumont have even broader horizons: “We need to look far beyond the limited potential of Open Banking to the epic potential of Open Data. Only when we can bring data from a broad spectrum of sources together in combinations that create innovative new solutions will we fulfil our potential for hyper-personalised services – services that are predictive, pre-emptive and, most importantly, pleasurable. It doesn’t have to hurt!”
For more on Open Banking, watch Why the future of open banking matters to accountants on-demand where Nick Levine and other industry experts explore how far open banking has affected the workflow of accountants and what the future holds.