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Open Banking year three: Insights from the CMA9

Open Banking year three: Insights from the CMA9

The UK banking industry had its hands full in 2020 as institutions had to respond to lockdowns and other restrictions on business activity designed to curb the spread of Covid-19. What effect did this have on the ongoing adoption of Open Banking? In Finextra’s annual review, we look at how Open Banking has grown, what still needs to improve and what will happen next.

At the start of 2020, the emphasis for UK banks was on maintaining the initiative built over the previous two years to develop more mature, resilient and scalable Open Banking propositions so as not to lose momentum over competitors in other markets, particularly in Europe given the adoption of PSD2.

However, once Covid-19 took hold, banks had to turn their attention to adjusting to branch closures and remote working while also supporting their customers and clients as thousands of businesses were shut and millions of jobs hung in the balance.

This however could have been a tailwind to the adoption of Open Banking. With consumers and SME owners more attuned to their day-to-day financial wellbeing, it is possible they were more likely to search for products and services from different providers that could help them manage their finances and keep their businesses afloat.

Finextra looks at what has in fact unfolded in the last 12 months, complete with insight from some members of CMA9 about their 2020 Open Banking experience and where they expect to go from here.

2020 - what worked?

One of the biggest stumbling blocks to Open Banking has been customer inertia, but this could be changing.

Research conducted by American Express in partnership with YouGov finds that 41% of UK consumers have used an Open Banking payment in the past six months or would be open to using one in the next 12.

Furthermore, with Covid-19 leading to a surge in online shopping and digital transacting, 33% of respondents state that they feel confident trying new online methods of payment, including Open Banking payments.

“2020 is the year that Open Banking came of age,” says Hetal Popat, director of global Open Banking at HSBC.

“We have seen a significant increase in the number of Open Bbanking customer propositions being launched across a whole range of use cases spanning personal financial management, accounting integration and automation, payments and credit support.”

There has also been an increase in interest around harnessing Open Banking for commercial purposes, beyond basic regulatory compliance. This is encouraging for the sustainability of the model as it will need to create value for consumers and businesses to prevent increases in take-up from tapering off.

“There is a better understanding of customer needs, likely tolerance for journey friction, and the need for common terminology and industry alignment to ensure customers feel comfortable with what they are signing up to,” says Robert White, head of payments at Santander UK.

“As a result, we are starting to see good growth in customers who are taking up open banking services. Particularly as well understood issues such as the need for Payment Initiation Service Provider (PISP) refunds capability and customer experience is enhanced.”

What needs to improve?

The key area banks are seeking to focus on is customer protection in order to increase trust from their customers. Despite the increased take-up, Open Banking remains a comparably immature financial services model compared to other payment products when it comes to fraud and disputes, thus a significant level of concern about security is to be expected.

“New models such as variable recurring payments (VRP) and sweeping could bring additional risk, so clarity is needed on how many of the potential customer risks would be dealt with and by whom,” says White.

Banks looking to grow their Open Banking proposition into new revenue streams and building customer experience and offering additional value will view trust in their brand as a key differentiator.

Relationships and communication between banks and third-party providers (TPPs) may also need to be addressed, as technical complexities of the ecosystem can lead to problems as different parties make changes.

“While relationships between banks and TPPs have been really positive, ensuring all parties understand the impact of changes they make on the other parties to benefit from even more dialogue and further building of collaboration,” says Chris Jones, strategy and innovation manager at Nationwide.

To this end, Popat believes the industry needs to make Open Banking more accessible with standardised and intuitive use of language and design.

“We continue to look for ways to help customers understand how to use Open Banking and access the benefits it offers,” he says.

“Over time we also need to see more products and services made available to the Open Banking ecosystem. This will drive continuing innovation with new and exciting customer use cases.”

What are these use cases?

Use cases are emerging that are taking advantage of Open Banking capability, with more and more fintechs and challengers accessing customer data and enjoying the benefits that this brings.

Revolut, for example, launched its Open Banking feature in Ireland in June 2020, providing customers with aggregated account data for products they hold with AIB, Permanent TSB, Ulster Bank and Bank of Ireland. The challenger bank had previously launched an equivalent tool for the UK in February.

Among CMA9 banks, products rolled out in the last year that harness Open Banking include Barclays enabling customers to make payments from current accounts with other banks from within its app and Natwest launching a service that lets customers of multiple providers to make instant online payments to retailers without the need of a debit or credit card.

The relative maturity of other payments types means innovations such as these in PISP may experience modest adaption due to reluctance from customers to change their behaviour.

“The fact that currently the business models around payments have not been compelling enough to enable real scale, alongside concern which remains around untested dispute mechanisms,” White warns.

“We do see this changing and growth in the future, as new functionality such as VRP and Sweeping are developed, as there are a number of potential use cases that can solve customer problems such as recurring billing etc, and where Open Banking payments become integrated into broader digital ecosystems such as travel and retail.”

What next?

If 2020 is to be seen as a year of consolidation amidst challenging circumstances, 2021 may be one of stability and evolution.

Open Banking will be a success when we are stop talking about it and it is accepted as a conventional way of managing accounts and making payments, according to Dan Globerson, head of Open Banking at Natwest.

“Banking itself is a rather simple activity - it's money going in and money going out,” he said at EBADay 2020 in November.

“If you look at how we’re trying to facilitate this with Open Banking and PSD2, they’ve been landing really well. It’s just a case of the systems maturing and availability expanding - even if availability is at 99%, that final 1% could be where it’s really needed.”

A more mature and stable ecosystem will focus resources on developing new use cases and further establishing Open Banking as a BAU service.

Popat expects 2021 to be the busiest year yet for HSBC’s Open Banking platform, given what he describes as “unprecedented demand” for such services, with Covid-19 proving a tailwind to digital adoption across multiple industries.

He predicts that total usage across the UK banking industry will double in 2021 with Open Banking payments starting to reach the mass market and compete with cards as consumers’ preferred method of payment.

“Open Banking will power new and exciting use cases outside of traditional banking,” he summarises.

“In particular, I’m expecting to see firms work with us to use our customer data to simplify account opening. This will unlock significant customer benefits and is pro-competitive so is something to welcome.”

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