Anniversaries in the business world are often an occasion for mixed emotions. On one side there’s a temptation to look back and tally your accomplishments. On the other side it’s time to take stock of the future and assess the actions needed to grow.
So it is with the introduction of open banking. Looking back on its four-year anniversary we’re near the end of an impressive run of banking adoption and consumer usage. Looking forward there are many changes that still need to be made to make open banking a better experience for consumers, banks and corporates. Ed Adshead-Grant, General Manager, Payments, Bottomline shares his thoughts.
First, let’s glance back to where open banking started: in the UK. A victory lap is definitely in order. Whilw adoption has been slower than hoped, one of the greatest successes in the UK for open banking payments has been the HMRC’s program to empower taxpayers to settle their tax using account-to-account (A2A) payments.
According to Yapily, an open banking infrastructure specialist, by the end of 2021, over 26.6 million open banking payments had been made in the UK, which is an astounding spike of 500 per cent over 2020. Yapily also found that faster response times for open banking APIs indicate that banks have invested over time in the right technologies to deploy the ‘smart data’ that defines open banking.
There are now over 60 countries actively engaged in open banking programmes. Some of the adoption is not as dramatic but the business models and capabilities developed in other countries are innovative and deserve a close look.
Some are market-driven as in the US where an API-based data sharing initiative coordinated by FDX (a not-for-profit organisation with 200 FI members) already has 28 million consumers sharing data with third-party providers and other banks.
India’s Unified Payment Interface (UPI) enables its 100 million-plus users to use a single interface to initiate real-time payments 24/7 from and to multiple banks. UPI’s user base is due to grow to 500 million within three years.
Looking to the future, we see ourselves moving across the spectrum of open banking (current accounts only) to open finance (all financial products) and ending with open data (telcos, utilities, banks and more). As the digital ownership and portability of data around the world continues to reinvent itself, perhaps the most interesting approach is underway in Australia.
Australia has started with a regulation called the consumer data right (CDR) giving consumers greater access to and control over their data and improving their ability to compare and switch between products and services. It will encourage competition among service providers across industries extending beyond financial services to include telco, utilities and the like.
The world outside of the UK could well represent much of the innovation still to come as open banking evolves. And it’s here that we turn the anniversary celebration toward the future. And I’d like to start that outlook with a caveat. Open banking is a capability, not a product. It’s an important distinction. Data analytics, security and the trust that comes from deploying these well and responsibly, are capabilities with a desired outcome.
The capabilities are the foundations that products rest on, like APIs, real-time payments, confirmation of payee (CoP) and over time, the use of enhanced data and request to pay, to name a few. For all the success we’ve had as an open banking industry in using technology to solve pain points for banks and their users, it’s important to understand that it’s the broad capability that has been introduced underneath the final products that makes it all work so conveniently and in real-time.
Variable recurring payments
One example of this is in variable recurring payments (VRP). It’s the bright shiny object right now, but it’s a capability enabled by open banking. VRPs are the most important short-term expansion of open banking and completes the legal mandate that forced banks to open up their data domains for more competition and innovation.
For those in need of background, VRPs are API driven permissions that will enable third-party processors to automate payments for a customer at specified intervals and amounts. Phase One of its deployment (sweeping between accounts belonging to the same account holder, sometimes referred to as a me-to-me transaction) are due to be launched by the CMA9 banks in July 2022.
The second phase of VRPs does not have a launch date, but will involve the ability for any approved organisations such as utilities and telcos to get approval from consumers to collect multiple payments for varying amounts for a specific period or until the customer ends the instruction. In this way, VRPs present exciting potential to complement or even replace direct debits. It is quite possible that the introduction of this second type of non-sweeping VRP will be left to market forces, instead of forcing the UK’s major banks to offer this new payment instrument to everyone.
This expansion of capabilities heralds the evolution from open banking to open finance. Open finance will feature the development of smart data, which moves beyond banking and financial services into other regulated entities like telcos and utilities. It’s a huge feature for consumers as well as the new types of companies that can participate. But don’t expect the dam to break wide open for open finance.
Here’s why. Banks have invested heavily in data analytics and the ability to provide a better customer experience by being closer to the customer journey. They’ve opened the door to other financial institutions, but they’ve still been able to control the customer journey for its products like mortgages and savings accounts. With open finance you’re allowing a third-party provider to access data and pull the whole payment experience together. Will banks baulk at that potential lack of control and risk around a whole bundle of differently regulated products?
They might. It’s a smart bet that the market will continue to open and the customer will find it normal to be able to access their own data footprints 24×7 across various branded organisations. Open finance becomes simply another digitisation initiative across the web, which will demand an expert and experienced partner and probably a new round of regulation to build trust and make it the de facto way of working across the future internet.