Open banking: Where next for the UK following the King’s Speech?

In 2017, the UK introduced open banking, a concept born from an initiative by the Competition and Markets Authority (CMA) aimed at improving retail banking. The CMA required the nine largest retail banks in the country to open up customer data sharing through secure data portals. As of September 2024, this initiative achieved a significant milestone. All nine banks successfully completed their open banking implementation with their customers now being able to access the full suite of open banking payment and account information services.

This development ties closely into the broader initiative for the future of financial services that was presented by His Majesty the King in July. During his speech he addressed the importance of Smart Data, which includes open finance. The aim of this is to build a stronger foundation of open banking in the UK to enable customer data to be shared securely between organisations and with third parties. 

The speech highlighted the government’s plans to enhance open banking practices in the UK and move more toward an open finance framework. In particular, he noted that “Open Banking is the only active example of a regime that is comparable to a 'Smart Data scheme' – but needs a legislative framework to put it on a permanent footing, from which it can grow and expand.”

As such, this would enable real-time sharing of customer data, beyond that of just financial data. From banks having access to a myriad of information for each customer, they can then innovate and offer more personalised products and services. Not only does this enable financial services organisations to expand their offerings and be on the front foot of innovation, but they can also make sure that their customers are receiving what they need the most, at the right time and in the right context.

What have we seen so far, and where is open banking going?

Open banking has the potential to unlock a number of innovations for the financial services sector. Over the years, open banking has significantly evolved since its beginnings. Open banking began as account aggregation and better personal finance management for customers, but with the growth of FinTechs and challenger banks, this drove innovation and open banking Application Programming Interface (API) technology in the space. 

As we continue to move through the development and wider acceptance of open banking, with 10 million consumers and small businesses now using open banking technology, this has continued to captivate markets. With the groundwork for open finance being laid, it has expanded the use of open banking to wider financial sectors, which includes insurance, mortgages, and pensions to create a much more holistic financial ecosystem. 

The future of open banking looks bright, especially with the stronger leap toward open finance, and so providing tailored financial products and services to customers, better meeting their needs. The successful delivery of variable recurring payments (VRPs), which happened earlier this year, managed to build stronger financial control, smarter payments, and greater flexibility to all customers. Additionally, it opened up a number of opportunities for FinTechs and other third parties to collaborate with banking providers. This drives the next wave of open banking in the UK and plays a key role when it comes to embedded finance to offer streamlined and seamless financial services to customers.

The regulatory consideration

For open banking to be successful, it is important for there to be strong guardrails to protect customer data. Initially, open banking was regulated using the European Union’s Revised Payment Services Directive (PSD2) to ensure that the data that has been shared has only been done when the customer has given explicit consent. As well as the PSD2, both the CMA and Financial Conduct Authority (FCA) regulate open banking in the UK to protect customer data.

As mentioned in the King’s Speech, a permanent legal framework is needed to make sure that open banking is safe for customers and for the financial services institutions themselves. So, having strong regulations around open banking will not harm innovation nor data sharing, it will just make sure that this is done in a safe way and all parties involved are protected. 

Going forward and with the continuing development of payment methods, there needs to be strong regulations around instant payments, such as instant credit transfers and digital wallets. As well as this, new proposals have been put forward by the European Commission on The Third Payment Services Directive (PSD3) and the Payment Services Regulation (PSR) to bring the sector closer to the digital age. This aims to protect customers when it comes to electronic payments and enable them to share their data in a much safer way.

The move to open banking has been crucial to ensure that the UK is the front runner in the global financial services race. And this has been made clear in the King’s Speech, which highlighted the great need to promote better and safer real-time data sharing to improve customer services. From the CMA mandate in 2017 to the King’s Speech in July 2024, open banking continues to play a key role in the financial services sector in the UK. Where it heads next is as much up to regulation and protection as it is about market offers as customers share their data.