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Learning from the UK open banking experience

The UK’s retail banks have been broadly ready for open banking since the start of the year. Let's look at what we have learnt so far.


The UK is probably the most advanced country in Europe when it comes to open banking. With its nine biggest retail banks embracing open banking in advance of the European Union’s second Payment Services Directive (PSD2), some 90 percent of the population already has access to open banking services, in theory.

Under open banking, authorised third parties can securely access relevant bank-held customer data and make payments on the customer’s behalf. The aim is to open up financial services to new providers, bringing down costs and making the sector more innovative and competitive.

For example, first-time and frequent customers at many merchants have to type in their card details to make a payment. Open banking allows those users to give consent to the merchant to take funds directly from their bank whenever they want to make a payment, without having to share banking credentials. This cuts friction and reduces costs and the risk of fraud. 

While the UK adopted a deadline of January 2018, the rest of Europe is waiting until next year to adopt opening banking en masse. So, have we learnt anything of use from the UK’s head start?

Innovative services

 

New banking solutions have certainly emerged that look like open banking, such as account aggregation, alongside other merchant and service-provider offers.


Account aggregation services access customer bank accounts across different financial institutions and display the balances in one place via an app. Fintechs such as Yolt are developing open banking systems while HSBC has launched its Connected Money service, both illustrating how open banking-style services are gradually becoming mainstream.

 

However, not all these launches are pure open banking and their existence is fuelling the development of similar services that rely on screen scraping. This involves accessing each bank account with the customer’s credentials and then consolidating the information. It is old-school, pre-PSD2 data handling and carries the risks of sharing credentials that open banking is designed to eliminate.

 

Meanwhile, other sectors are developing open banking solutions, although their offers would still benefit from further development in terms of functionality.

In the rental sector, property marketplaces are offering services that help tenants and landlords kick off a new tenancy faster. Traditionally, setting up direct debits and completing credit checks can take as long as 10 days. These new open banking solutions will access bank data to take the first payment direct from the tenant’s bank account, removing some of the friction and, as instant payments are enabled, speeding up the process of finalising a tenancy agreement to hours. Down the line, their solutions are likely to include credit checks, thereby avoiding having to produce bank statements and pay slips, making the process even quicker and simpler. Open banking allows online property portals to work more closely with financial services companies to provide products such as mortgages.

Functional limitations

It’s still early days for open banking, and there has been a fair amount of media criticism for the lack of promotion by the large banks. However, as functionality is added the various services will grow in popularity. When it comes to banking, the solutions offered are currently pure aggregation operations and a customer cannot use them to act on the information supplied. For example, if one account is showing an overdraft and another a credit, a user cannot move money from the latter to the former because payment and data have yet to be combined.

SMEs: the opportunities

Nor is there much data thus far on how open banking is affecting business. Certainly, the cost and complexity of open banking - connecting to  the APIs for each bank - is proving high for big and small companies alike.  The UK alone has one standard across nine banks that requires approximately 19 implementations. For companies that trade internationally the complexity is even more onerous and difficult for companies of any size. For smaller companies, the cost alone may be putting a brake on the growth of open banking. What is needed is simplified access.

 

While big companies have traditionally been well served by banks when it comes to accounting and payment services, SMEs do not have the same opportunities. However, their value – a combined turnover in the UK of £1.9 trillion – means there is a superb opportunity for banks and third parties to come in with disruptive  propositions  specifically targeted at smaller companies. These might include helping plan cash flow, better access to loans based on credit insights and getting invoices paid faster as the time required to process payments becomes negligible.

For open banking to really take off and fulfil its potential – not just in the UK, but across Europe and the world – we need a standard interface. Once we have that, all the ingenuity of the fintechs will be unleashed on developing solutions for everyone, not just for SMEs.

Less than a year into the UK’s experience of open banking, we can’t know all the areas where it will change the way we bank, but the early examples, even with their limitations, highlight the opportunities.

 

Once functionality catches up with the technology, demand will take off. But before that we need to make it easier for third parties to connect to banks - one API, rather than the myriad of different APIs and configurations. Conquer these and the authorities will see the aims of open banking fulfilled, and business and the public will reap the benefits.

 

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Comments: (1)

Ralf Ohlhausen
Ralf Ohlhausen - PPRO Financial Ltd - London 25 October, 2018, 06:29Be the first to give this comment the thumbs up 0 likes Open Banking, at least in the form of PSD2, wasn’t designed to eliminate credential sharing. It was designed to secure this common practice by bringing it under a licensing regime to ensure that credentials stay safe within supervised and security audited financial institutions. This is to allow licensed TPPs to own the front end and compete in providing the best user experience and most compelling services. Open Banking in the form of bank-redirect services like iDEAL, MyBank, giropay, etc. do not fall under PSD2, because they do not need that level of supervision, exactly because they don’t use credential sharing. Open Banking, as designed in the UK, should fall into that latter category, because it allows the banks to control most of the user experience, at least from a PISP perspective. I would argue that users are actually initiating the payments themselves in that case, meaning that the use of OB UK should not need a PSD2 license either. Why burden UK OB PISPs with all that regulatory overhead, if they don’t have to secure anything and can’t do anything different to PayByBankApp aka Zapp for which no license is required? Many more TPPs would enter the UK market if UK OB was either license free or would allow them services, which do not require a redirect to the bank’s website or app.
Huw Davies

Huw Davies

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Token.io Ltd

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This post is from a series of posts in the group:

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