Future of Finance


Open Banking needs new regulatory and collaborative catalysts to truly take off 

A summary of the webinar of 9 December 2021 entitled Open Banking is just the opening scene of a three-part drama of total economic transformation, sponsored by Trade and Invest Wales in partnership with FinTech Wales.

Open Banking in the United Kingdom celebrated its fourth birthday in January 2022. Its principal aim is to help consumers and SMEs save money by forcing the traditional banks to compete harder for their custom, chiefly by obliging the incumbents to share data with new market entrants – and neo-banks such as Wales-based Starling Bank and Chetwood Financial have embraced Open Banking from their foundation. Yet progress is slower than anticipated, partly because the legacy systems of the incumbent banks struggle to share data but mainly because the narrow scope of the Open Banking apps offered so far have failed to fire the imagination of consumers or SMEs. The continuing lack of a killer app to spur mass adoption remains the principal obstacle to the realisation of the promise of Open Banking, let alone its eventual transition into Open Finance and ultimately an Open Data economy. Some combination of regulatory encouragement and industry collaboration is probably needed to rekindle the hopes of 2018.

What is Open Banking?

Open Banking aims to improve outcomes for consumers and small businesses by forcing established banks to compete harder to keep their customers’ business. 

It came into effect in the United Kingdom in January 2018, at the same time as the second iteration of the Payment Services Directive (PSD2) of the European Union (EU) introduced a similar regime throughout the EU. 

The principal methodology of Open Banking is to give consumers and small businesses the option to share elements of their banking data with third party suppliers of products and services. 

Four years on, the Open Banking Implementation Entity, which publishes, promotes and supervises adoption of the Application Programme Interface (API) standards which drive Open Banking in the United Kingdom, reports that 123 entities now have at least one Open Banking proposition live with customers.

What Open Banking strategies are banks pursuing? 

Neo-banks such as Starling Bank (which received a banking licence in 2016) and Chetwood Financial (2018) embraced Open Banking from the outset, by giving customers the ability to browse a variety of third-party products and services, rather than trying to tie customers to in-house products. 

To make such services work, banks and neo-banks adopt an API-based operating model that allows their systems to consume data from multiple sources as well as share customer data with third parties to help their own customers access those third-party products and services. 

In addition, neo-banks use data (such as income) to help customers that would otherwise struggle to access financial services to open bank accounts and access services. Eventually, the intention is to use data to improve their access to credit, enabling them to borrow at less punitive rates of interest than those charged by other types of money lender. 

How satisfied are neo-banks with the progress in Open Banking? 

Open Banking has not penetrated the banking markets to the extent its progenitors anticipated. Open Banking Implementation Entity (OBIE) data has identified 123 regulated entities offering at least one Open Banking app, concentrated mostly in less innovative areas such as account switching and aggregation and payments and payments initiation. 

These apps have failed to excite consumers. The 4 million consumer and small business users of Open Banking apps are fewer in number than the collective customer base of the neo-banks – in fact, they are most likely a sub-set of the neo-bank client base – and just 8 per cent of them use an Open Banking app regularly. So the Open Banking marketplace is not yet offering widespread access to a broad range of products and services.

Neo-banks are frustrated by the relatively slow progress in adoption of Open Banking services, especially by under-served and financially excluded consumers.  In fact, Open Banking is exploited mainly by prime customers that are already well-informed and well-served, and not by the financially excluded which would benefit the most.

Are the incumbent banks slowing down progress in Open Banking?

Another source of dissatisfaction is the relatively slow adoption of Open Banking by customers of the nine largest banks, at which the Open Banking initiative was implicitly aimed. 

The incumbent retail banks (which also fund the OBIE) have a limited incentive to make it easier for competitors to poach their clients, but also suffer from legacy systems which inhibit data-sharing (some are still running on COBOL). Nevertheless, they need to compete with challenger banks, or risk losing their franchises.  

How helpful are price comparison websites in promoting Open Banking?

Price comparison websites have earned the trust of consumers, and act as a source of business for neo-banks as well as established providers. 

The same is true of MoneySavingExpert, the news website and price comparison engine founded by Martin Lewis.

Partnerships between neo-banks and price comparison websites have the potential to accelerate adoption of Open Banking apps, by acting as trusted, non-bank intermediaries.

How comfortable are consumers about sharing their data?

The Financial Conduct Authority (FCA) has stated that Open Finance is “based on the principle that financial services customers own and control both the data they supply and which is created on their behalf,” and has written that approach into its draft Open Finance Principles. 

Yet this idea is not gaining traction with consumers, and especially the younger consumers that are the natural pioneers of Open Banking. They tend to dislike the idea of their personal financial information being used by banks – especially of the traditional kind, which are less trusted, because of their history of mis-selling – even with their consent.

Paradoxically, the distrust of traditional banks might eventually be overcome by Open Banking, as consumers get used to sharing their data with non-banks or neo-banks. 

Neo-banks have recognised from the outset that consumers want to control their personal data and choose which providers can make use of it, and for what purpose – and a positive experience with non-bank and neo-bank providers should over time lessen consumer resistance to working with traditional banks.

One further potential obstacle to data-sharing is the limited appetite of consumers for managing and consenting to the use of their own data. Many lack the technical expertise to do it themselves and may not trust third-party providers that offer to do it for them.

Are consumers too apathetic to exploit the potential of Open Banking or has the Open Banking industry failed to deliver the “killer app” that leads to mass consumer adoption?

The problem lies more on the supply side than the demand side. Open Banking APIs such as account-switching and aggregation and payments and payments initiation have yet to deliver a compelling use-case for consumers to share data readily. This lack of a “killer app” to drive mass adoption is a major barrier to the success of Open Banking.

Access to credit might provide it. However, there is also a counter-argument for injecting some friction into the use of data to facilitate purchasing and payment on credit, especially online, since it makes it easier for consumers to get into debts they cannot afford to service.

Automated switching of consumers to better deals as their contracts expire, across mortgages, savings accounts, energy tariffs, insurance premiums and broadband subscriptions are another candidate to provide the compelling use-case that leads to mass adoption of Open Banking by consumers. 

Adoption will depend on the ease with which consumers can sign up to such services. If they have to do a lot of work to sign up, it probably will not happen.  

In addition, automated search-and-switching services will not succeed if they do not command the trust of consumers, a consideration that probably precludes banks from providing such services while offering a major opportunity to neo-banks looking to capitalise on the trust they have earned so far.

Partnerships, such as the distribution partnerships between neo-banks and price comparison platforms, might also spawn a compelling use-case by enabling non-financial businesses to offer embedded financial services products as part of the service they provide to their customers.

Have SMEs failed to exploit the potential of Open Banking? 

Another possibility is that the truly compelling use-case lies not with consumers at all but with the other main users of Open Banking: small and medium-sized enterprises (SMEs). Small businesses are both under-served and bedeviled by the complexity and lack of interoperability between banking, accounting, payroll and benefits systems.

The Pandemic has already accelerated SME adoption of digital banking. If they embraced Open Finance and Open Data more widely, it could accelerate digitisation of the SME sector as a whole.  If that happens, it could lift national productivity, because one factor constraining the rate of growth of productivity in the United Kingdom is the low level of digitisation in the SME sector.

Does Open Banking need more explicit regulatory encouragement, such as passage of an Australia-style Consumer Data Right Act? 

Additional measures by government, especially if they pushed Open Data beyond the financial services industry, would be helpful by encouraging other industries to embrace the concept of using consumer and SME debt to improve the value and quality of services. It would shift the onus for adoption of Open Finance and Open Data from the banks to other sectors of the economy.

To some extent this is happening already. In energy, the Office of Gas and Electricity Markets (Ofgem) is running the Midata initiative to enable energy consumers to consent to sharing data with third party service providers who can help them get better deals from energy retailers. 

In telecommunications the Office of Communications (Ofcom) is running the Open Communications initiative to introduce portable consumer data sharing in broadband and pay TV.

Would digital identities accelerate the adoption of Open Banking?

The government is encouraging the use of digital identities – which the FCA has made clear are crucial to making Open Finance work, not least by admitting digital identity vendors to its regulatory sandbox – by in February 2021 publishing a “trust framework” to govern the manufacture and use of digital identities, which is expected to become law. The attributes necessary to comply with the framework can be retrieved from consumer (and SME) data sets.

Digital identities would also make it much easier for neo-banks reliant on digital technology to comply with customer due diligence requirements and for search-and-switch providers to automate the movement of consumers and SMEs between finance, pension, insurance, energy and broadband service providers.

What can the private sector do to accelerate the transition from Open Banking, through Open Finance, to Open Data?

The first stage of the transition is now done, in the sense that organisations are now exchanging data regularly via APIs. The next step is work out what new products and services can be created and distributed successfully with the data that is being exchanged.

Successful new product development requires understanding of what problems data can solve for consumers and SMEs. Such an understanding could uncover the compelling use-case (the “killer app”) that leads to mass adoption. But it also requires a degree of collaboration between traditional banks, neo-banks, FinTechs, public authorities and universities. 

FinTech Wales exists in large part to facilitate collaboration of that kind between the various parts of the financial services eco-system. It works with incumbent banks and FinTechs in Wales and Cardiff University and its Foundry is already incubating, accelerating and scaling new financial services ventures in the Principality and beyond.

Highlights of 9th December Webinar

If you would like more information or we can assist in any way or you would like to pose questions ahead of the discussion please email Wendy Gallagher on wendy.gallagher@futureoffinance.biz