The State of Open Banking
Industry voices Open Finance Weekend Read

The State of Open Banking: Six Years After PSD2

Six years after the implementation of PSD2 mandated open banking for banks, we take a look back at how the open banking ecosystem has evolved with industry experts offering insights into what needs to happen in 2024 and beyond to ensure its continued success.

While open banking has achieved significant milestones, there is a prevailing sense that it has yet to reach its full potential. To assess the current state of open banking, we first journey back to its beginnings to understand the path it has travelled on so far.

The open banking journey to date

Open banking was initially launched in the UK in 2017, shortly after the Competition and Markets Authority (CMA) concluded its market investigation into retail banking. The investigation’s findings revealed the complete dominance of the largest banks in the financial market, prompting the CMA to mandate that the nine largest banks in the UK, known as the CMA9, collaborate to facilitate secure sharing of consumers’ banking data with trusted third parties.

Shortly after, January 2018 saw the revised Payment Services Directive (PSD2) requiring all banks and financial institutions in the EU to do the same.

Both the actions taken by the CMA and the EU directive, PSD2, aimed to drive innovation and competition, as they recognised that consumers and small businesses alike would greatly benefit from the increased competition brought about by open banking. The moves also hoped to significantly enhance the security of payments, as well as the protection of consumer data.

Since then, the open banking space has celebrated several milestones and has continued through its overall development.

Open banking timeline
A brief history of open banking
But is open banking failing to achieve its goals? 

Despite significant goals being reached, not everyone in the financial sector agrees that open banking is where it should be six full years after PSD2 mandated its implementation.

As Hans Tesselaar, executive director at Banking Industry Architecture Network (BIAN) explains, more work needs to be done to ensure open banking can fulfil the ambitions goals initially set out by the CMA and PSD2: “Despite global efforts, open banking has still not met its potential.

Hans Tesselaar, executive director at Banking Industry Architecture Network
Hans Tesselaar, executive director at Banking Industry Architecture Network

“While there have been some developments since its inception, the fact that open banking is primarily initiated and supported by regulators and not consumer demand means that these have been minor.

“The underlying goal in the past five years has been to increase competition within the sector – but no one wants to give away the advantage of their valuable data, and receive limited benefits in return.

“Going forward, increased education on the benefits of open banking, including reassurance of security implications and enhanced customer offerings will be key to wider adoption. Encouraging adoption among consumers, while looking at those who are having success with this globally, such as Singapore, will be a key driver too.”

What else needs to be achieved?

This lack of consumer demand needs to be addressed if open banking technology can reach its full potential.

Stephen Wright, head of corporate and regulatory APIs at NatWest
Stephen Wright, head of corporate and regulatory APIs at NatWest

To find out what steps could be taken in the UK to address this, we hear from Stephen Wright, who initiated the NatWest open banking programme and is now head of corporate and regulatory APIs there, who explains: “While open banking is used by around 10 per cent of the adult population, its use cases are limited and have not yet entered daily or weekly usage for most consumers and businesses.

“To accelerate increased adoption of open banking, there needs to be a compelling user experience and expansion of use cases. We also need clarity from the government on the future of the new implementation entity and the commercial model for open banking.

“Having a clearer sense of direction on this will catalyse the cross-industry collaboration and market investment that is needed to speed up and facilitate the transition to open finance and smart data.”

Also speaking to The Fintech Times, James Hickman, CCO of Ecospend, the financial data and payments platform built exclusively for open finance, revealed his view that regulators are failing to keep up with the uptake of open banking: “The growth of open banking in the UK has surged in the last six years, benefiting users and businesses with efficient and secure payment solutions.

“Growth has been so dramatic that some of the regulatory framework surrounding the technology still lags behind – most notably in terms of consumer protection. The recently published Future of Payments Review underscores a need for greater clarity in this area, particularly regarding liability for open banking transactions.”

Still space to grow

Use cases and regulations aside, Tom Burton, director of external affairs and public policy at payment processor GoCardless, also reveals that open banking payments technology still has significant room to evolve, with much work left to do: “It’s early days for open banking, especially on the payments side.

Tom Burton, director of external affairs and public policy at GoCardless
Tom Burton, director of external affairs and public policy at GoCardless

“We and experts like Joe Garner, through his Future of Payments Review, believe it will be the primary alternative to card payments. For that vision to become a reality, open banking payments need to be truly ubiquitous.

“That requires a few things: the ability to collect recurring real-time payments across every use case, full coverage across banks and a great user experience. Integration into digital wallets will boost adoption, as will improvements to the dispute resolution process.

“This will take years, not months. So while we fully believe that the future of open banking is bright, there are many obstacles to overcome before it reaches its full potential.”

Can 2024 still be a pivotal year for open banking?

With this in mind, could 2024 be a write-off for open banking milestones? Although there is still much work to be done, it may not necessarily be all ‘doom and gloom’ for the coming year.

In fact, 2024 could still prove to be a “pivotal year”, says Tom Burton: “First, as more household names adopt open banking, such as JustGiving which has just partnered with us for open banking payments, more consumers and businesses will get to experience the ease, security and convenience of open banking. Hopefully, this will breed familiarity and gradually pave the way for future use.

“Second, 2024 could be the year we really start to make headway on Variable Recurring Payments (VRPs), especially given the announcement last month by the Joint Regulatory Oversight Committee (JROC) that a commercial VRP pilot will commence in Q3 this year.

“We have played a big part in the process to date and while it’ll be many more years before VRPs reach mass adoption, maintaining momentum and hitting this milestone is crucial.”

What about open banking beyond the UK?

Adnan Chowdhury, UK policy lead at foreign exchange fintech Wise, explains the firm’s view on the success of open banking across the EU: “Wise was an early adopter of open banking when it first launched, giving us considerable market share in a short amount of time.

Adnan Chowdhury, UK policy lead at Wise
Adnan Chowdhury, UK policy lead at Wise

“Even though the past six years have posed some challenges that required a significant amount of bilateral testing, we believe that it offers a feasible, low-cost alternative to traditional cards.

“These issues should have been mitigated by the UK’s more harmonised approach. In the EU, open banking has made slower progress: without a single standard, the majority of firms struggled to get traction without relying on a third party.”

Chowdhury also explained what Wise has witnessed regarding open banking across the rest of the world: “Globally, open banking has not yet fully been embraced – not by policymakers, consumers nor merchants. In some places like Australia, where an open banking equivalent exists, the lack of adoption and compliance means the value it currently provides is limited.

“In other jurisdictions where open banking hasn’t yet been established, delivering an open banking framework needs to be the first step in unlocking another way of paying that is affordable and convenient, and can compete with cards. The true challenge, however, lies in making all of these different open banking setups interoperable.”

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