A review of the first year of the UK’s groundbreaking experiment in Open Banking. What worked? What didn’t? And what next?
13th January 2019 marks one year since the start of the UK’s Open Banking initiative, which over the course of 12 months resulted in incumbent banks losing their tight grip on payments services, fintechs gaining access to a larger potential customer base, and a springboard created for a - possible - revolution in retail finance.
In 2018, European banks entered a new era of transparency as financial institutions and fintechs alike attempted to deliver application programming interfaces (APIs) to comply with the mandate put forward by the Competition & Markets Authority (CMA) and in turn, ensure that data structures and security architectures were secure enough for customers to confidently share their information.
Despite the UK’s nine biggest current account providers being told to launch their Open Banking initiatives by the 13th January 2018, only four of that group, now collectively referred to as the CMA9, were ready on the due date: Allied Irish Bank, Danske Bank, Lloyds Banking Group and Nationwide Building Society.
The laggards, Barclays, Bank of Ireland, RBS and HSBC were given an extra six weeks, while Santander-owned Cater Allen, got another year.
Compliance vs. innovation
Today, in January 2019, banks are perceiving Open Banking as part compliance exercise, part innovation play, as Imran Gulamhuseinwala OBE, trustee of the Open Banking Implementation Entity (OBIE) stated: “They have worked hard to implement the Standards despite many challenges and an ambitious timescale. Yet already we have seen some impressive early signs of new technologies powered by Open Banking – even though we are only mid-way through our roadmap with lots more to come.”
He went on to say that while consumers are now being offered an increased range of products and services, the often-disregarded UK SME community of over five million businesses is also benefiting from new technology that is being put forward.
Gulamhuseinwala added that Open Banking has transformed the financial industry into an “emerging dynamic, vibrant and developing ecosystem – an ecosystem which is rapidly becoming more sophisticated and expansive in its coverage. But with the line of sight we have into the Open Banking ‘pipeline’, this is going to considerably ramp up in 2019.”
Barclays enabled customers to add current accounts from other banks into their existing mobile banking application in September 2018 and today, over six million users use this service to manage their day-to-day finances.
Luke Ryder, director external engagement for Open Banking at Barclays, expresses to Finextra that “since rolling out this functionality, pick up has been strong and we’ve received positive feedback from our customers. Open Banking is an evolution and we’re looking forward to building on our current product to deliver further Open Banking enabled features for our customers this year.”
Discussing the subject of Open Banking with Finextra, HSBC’s digital chief Raman Bhatia points out that he believes that while other banks are still attempting to educate their customers about Open Banking, “we have had permanent traction with our existing customers. For us, it is less about Open Banking per se because Open Banking as a term, as a phenomenon, doesn’t mean much to a customer.”
The idea of educating customers dominated financial headlines in 2018 and research from Splendid Unlimited revealed that while 9% of adults in the UK have used an app or service that uses APIs, only 22% have heard of Open Banking as a concept.
Bhatia adds: “The whole impetus behind Open Banking is to put customer consent front and centre and empower them to be confident with banks when they are moving their transaction data from one place to another.”
As Matt Cox, Nationwide’s head of Open Banking also explains¸ empowering customers to share their current account data and make payments securely through a third party with CMA regulation was a big focus in 2018. He said that: “the priority is now to extend this in line with PSD2/CMA regulation that comes into effect between March and September 2019.”
Cox suggests that this would enable Nationwide members to share credit card account data, make more complex payments and ensure that the process for authorising with a third party is seamless. In addition to this, Nationwide also intends to forge ahead with the Open Banking For Good initiative that brings together government, charities and fintech companies to help those who struggle with money on a monthly basis.
With the appetite for collaboration increasing alongside the progression of Open Banking, the differences between banks and fintech startups are becoming blurred. Danske Bank’s chief digital officer Søren Rode Andreasen suggests that he perceives Danske as a fintech. “When you look at who applied for a TPP license, you see a wide variety of companies there, some of whom you would traditionally see as a fintech, while others are from entirely different industries.”
There has been a shift in how fintechs approach the market and many third-party providers are directly reaching out to banks with the knowledge that they will need help with gaining trust and distribution.
“There is a similar shift in mindset for banks, who are now more willing to work with partners. For a bank it is great to work with a TPP. It allows us to deliver more customer value than we would have been able to complete using only in-house development,” he says.
However, rumours were circulated in 2018 that perhaps high street retail banks have not been cooperating as they should be. In a recent blog posted on Finextra, Stuart Jackson, founder and managing director of Regency Analysis highlighted that following the advent of PSD2, traditional players have been struggling to comply with the law.
Jackson said: “Despite the giant step forward for consumers that Open Banking represents, there are still hurdles to overcome to make the whole thing really work, the biggest of these being the sneaking suspicion that retail banks are complying with the letter but not the spirit of the law. And after all, why would they want to help their competition? This is business, it’s not a game.”
Colin Swain, global head of platform, Travelex had a similar sentiment and says that despite 2018 being “the year of Open Banking”, “progress has been slow – the concept is only now starting to penetrate the public consciousness, mostly thanks to banking apps showing balances from a customer’s account with a rival bank.”
Swain adds that while a major driver to Open Banking has been the creation of new banking marketplaces, few financial services institutions are “offering a compelling suite of third-party products that Open Banking makes possible.”
CMA9 and fintech collaboration
In the same month that the Open Banking Standard was launched, money management platform Yolt and Lloyds Bank scooped the honour of making the first successful account information transaction.
In an interview with Finextra, Yolt’s chief operations officer Leon Muis drew attention to the fact that after becoming the first third party provider (TPP) to successfully connect to all CMA9 banks using APIs in September 2018, the number of users across the industry has exploded as more and more customers benefit from the personalised products that were not previously available.
“The Open Banking Implementation Entity has reported there are now 100 regulated providers, of which 17 TPPs are now using Open Banking in the UK. Open Banking technology was reportedly used 17.5 million times in November 2018, up from 13.9 million in October and 6.5million in September.
“2019 is set to be the year Open Banking really takes off, but this won’t happen without all UK banks continuously improving the quality and availability of their APIs. Only then we will be able to see the real impact as more consumers benefit from the initiative,” Muis said.
By March 2018, the second version of the Open Banking Standard was released a month later, the owner of Clydesdale and Yorkshire (CYBG) banks offered its users access to Open Banking technology via its smartphone application so that they could view their accounts from other lenders.
By May 2018, the UK’s leading consumer groups had published a Consumer Manifesto for Open Banking which what was needed to ensure that customers would benefit from Open Banking.
In June 2018, Token became the first licensed Payment Initiation Service Provider (PISP) to complete an end-to-end transaction using Open Banking APIs. The £4.99 payment was executed via the Token network using Santander’s API payment initiation endpoints and in an interview with Finextra, Token’s co-founder and chief marketing officer Marten Nelson says that this was a major milestone for the company, and for the wider industry too.
“The rest of the world has been watching and learning from the UK’s experiences with Open Banking, and Token is now experiencing significantly increased interest in commercial relationships outside Europe.
“Tier 1 banks and networks have now recognised the need for a premium API on top of existing APIs to fully capitalise on open banking, and there’s much more widespread understanding that PSD2 has created an opportunity for banks, rather than just regulatory complexity.”
Following the release of the third version of the standard in August, Open Banking highlights during the latter half of the year included Allied Irish Bank (AIB) rolling out APIs in Ireland and iwoca making the first business loan using Open Banking data.
Speaking to Finextra, Christoph Rieche, CEO and co-founder of iwoca, reveals that "since iwoca funded the first small business to use Open Banking in November, we’ve found that more than two thirds of our customers are choosing to use it and twice as many are completing applications in one hour or less with Open Banking compared to those manually uploading files, so we’ve seen the difference the Open Banking makes.
"The sad truth is a majority of SMEs approach only the UK’s largest four banks for funding and more than half of smaller businesses find it difficult to get approved. Open Banking can encourage more small business owners to shop around and get the best offer.”
Make way for the challengers
It would be an understatement to say that challenger banks dominated the Open Banking customer offering last year, but a Bloomberg article published at the start of 2019, reiterated that a sea change or the much vaunted fintech revolution had not occurred.
Quoted in the Bloomberg article, Starling Bank founder and chief executive officer Anne Boden said that the UK has not “seen the hockey stick of growth in disruptive new players everybody was predicting. Everybody was expecting PSD2 to happen and all these companies would be fighting with each other to provide services to customers.”
Boden continued: “What big banks have been asked to do is very difficult – they don’t necessarily have a commercial reason to do this, they’re being forced to by a regulatory big stick. But I do believe PSD2 and open banking will revolutionize the relationship between consumers and lenders. It just won’t happen quickly.”
Speaking to Finextra, Tom Renwick, strategy analyst at Atom Bank shares a similar attitude. “Whilst Open Banking began not with a bang, but the proverbial whimper; very few aside from the most ardent of Open Banking enthusiasts were expecting a ‘revolution’ in January. Whilst the OBIE has made significant strides towards a more expansive API specification – there is still much to be done.
“The implementation of Open Banking in the UK is still very much in its infancy. Equally, compelling API enabled propositions are still nascent in their development. The promise of Open Banking will only be realised when there are fintechs and banks alike producing innovative products and services leveraging APIs that seek to address real customer needs.”
Renwick adds that PSD2 requires strong customer authentication and while at the moment, some current market implementations fall short of critical design principles, September 2019 will herald regulatory technical standards that will enforce this. “And it is this date that triggers the real starting gun,” he states.
Matt Ford, product director of Tandem, echoes the notion that the first 12 months of Open Banking have been a learning process for both banks and customers. “There’s still a mental block when it comes to sharing financial data with third parties, despite the potential advantages. For the established older banks it’s simply that their systems weren’t capable of delivering upon the promises of PSD2. Some of them still aren’t."
Simon Wilson, global software sales director at Icon Solutions, suggests that Open Banking’s slow start may be due to friction derived from the human psyche, regulation and technology. “Addressing this friction will be key which requires better ongoing education, regulatory standards and industry collaboration.
“However, ultimately it will come down to use cases. Once the benefits outweigh the risks, concerns and hassle induced by something ‘new’ momentum can build extraordinarily quickly. Just look at what the implementation of contactless on the London Underground did for wider acceptance in the UK. The challenge for the industry now is finding that killer app.”
While the UK has been the first to experiment with a standard such as this, Open Banking is starting to find its place in a number of markets globally, fuelled by PSD2, the rise of fintech/bank partnerships and the pursuit of relentlessly escalating customer expectations.
“Many fintech lenders are already using open APIs to improve services and offer products to their customers. Alipay and WeChat, for example, are building some exciting integrations and tech infrastructures that could revolutionise the financial services industry globally,” says Viktoria Ruubel, chief product officer at IPF Digital, raising the question of whether the Asian banking market will overtake Europe, or indeed overtake the capabilities of European technology providers, for that matter.
Are banks the best at Open Banking?
Recent research commissioned by Pepper, the mobile bank created by Israeli Bank Leumi found that 66% of financial decision-makers feel that technology giants such as Google and Amazon will offer retail banking services in the UK in five years because of Open Banking.
In addition, according to 34% of respondents, traditional banks as we know them will effectively cease to exist by 2023 and 64% of decision-makers said they believe that the new regulations have already given large tech companies an advantage over traditional banks, opening the door for their entry into the retail space within the next five years.
Michal Kissos Hertzog, CEO of Pepper said: “The two main challenges for banks today are utilizing the huge amount of data they have gained for the benefit of customers; and collaborating with fintechs and third parties - which are made possible in light of Open Banking – in order to offer the best value proposition".
Imran Gulamhuseinwala concluded that the focus of Open Banking in 2019 is “fixed on an enhanced user experience – what we have today is, for sure, a step in the right direction but it does not yet meet the high standards of conformance and performance we expect. However, I am confident that 2019 – post March and the implementation of v3 of our Standards – will bring a mobile-enabled and frictionless customer journey.”