Only five years after its inception in the UK, open banking has achieved a new user milestone in 2023. According to Open Banking Limited (OBL) this is the first time the technology has been used by seven million small and medium enterprises (SMEs) and customers across the nation. We reached out to the industry to find out what they believed the future held for open banking following this announcement.
UK open banking creation and moderation
In 2017, the Competition and Markets Authority (CMA) ordered the nine largest retail banking providers in the UK to open up customer data to authorised third parties. The aim was to make a cheaper, more competitive landscape for UK SMEs by removing the costly middleman when customers went to make a payment. This sort of data sharing had to be carefully monitored due to its sensitive nature; the Open Banking Implementation Entity (OBIE) was created to oversee and regulate open banking matters.
A roadmap was put in place that set out the specific requirements of the nine banking providers. Five years later, six of the nine banks have fully implemented the requirements of the roadmap. Barclays, HSBC, Lloyds, Nationwide, NatWest and Santander have achieved what was set out in 2017. However, the remaining three: Allied Irish Bank, Bank of Ireland and Danske are yet to do so.
One of the reasons for open banking’s success in the UK has been because of its evolving regulations. In line with this, in March 2022, the Joint Regulatory Oversight Committee (JROC) was set up to help establish the goals for open banking going into 2023. JROC was comprised of HM Treasury, the CMA, Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR).
Reaching the milestone
In November 2019, open banking reached one million users in the UK according to Statista. Since then, it has grown by one million every year. Between September 2020 and September 2021, the technology’s usage grew by two million: from two million to four million. We again saw a similar trend between January 2022 and January 2023, where there was another jump from a total of five million users to the new record of seven million.
Speaking about this growth, Henk Van Hulle, chief executive officer of OBL, said: “I am delighted that we have now reached seven million active open banking users in the UK. It is significant that 1.2 million of these are first-time users. From access to cost-effective credit, building a regular savings habit or making more informed financial decisions – open banking is delivering the means for our citizens to improve their financial wellbeing.”
Financial anxiety is a catalyst
As noted by Van Hulle, 1.2 million users in the past year used the technology for the first time. But why? One reason for this sharp growth was provided by Richard Kalas, client solutions director at GFT, the digital transformation fintech: “Financial anxiety as a result of the cost of living crisis has sparked demand for increasingly granular insights into income and outgoings. Banks recognise this; open banking adoption is due to new market challengers and an eagerness to appease customer demands for more agile banking services.”
Kalas’ view is supported by recent findings from Tink. The European open banking platform’s report showed that 46 per cent of those surveyed, were ‘only just managing’ when it came to whether they expected their income would or wouldn’t cover their essential spending in the future amid the cost-of-living crisis. Further, with one in four of the respondents being identified as ‘financially vulnerable’, the report went on to show how people were responding to their financial situations.
What was concluded was that over a third (35 per cent) of those ‘only just managing’ would switch banks to one that provided them with tailored financial support, and a further 44 per cent would jump ship if a bank provided recommendations on where they could save on spending. Should a bank offer open banking options, it may be enough to cause a consumer to switch providers.
We don’t need no education… Wait. Yes we do
Even if a bank should offer an open banking solution when a competitor does not, a customer may not be sold on switching providers to make the most of this. Why? Because they don’t understand open banking. When we reached out to the industry to find out what challenges open banking might face in its continued adoption, the biggest hurdle brought up was education around the tech.
“Open banking’s greatest challenge in recent years has been the need to drive consumer confidence and awareness in order to accelerate adoption. For open banking’s proponents, the toolkit for future growth lies in the successes of the past where merchants and issuing banks have been the leading agents of adoption,” said Tom Voaden, head of partnerships at paytech, BR-DGE.
“One factor that could accelerate the adoption of open banking in the UK is greater awareness and education. Many customers may not fully understand the benefits of open banking, so increasing awareness and providing education and guidance can help drive adoption. Collaboration between financial institutions, fintech companies, and regulators can also help facilitate the development of new and innovative open banking products and services that can attract more customers,” commented Guy Melamed, co-founder and CEO at Exberry, the SaaS provider.
Security clarifications will see more adoption
For customers that have a grasp of open banking but don’t fully understand what it is, one of the biggest obstacles to adopting the technology can often be security concerns. The idea of a third party having your banking details can be quite daunting. Leon Muis, the CBO at Yolt noted:
“It is vital that customers understand that open banking is based entirely on consent – the customer is in complete control of their data and who they share it with. There is always a consent or authorisation step before any connection and transfer of data occurs between their bank and a registered third-party provider (TPP).
“It is important to note here that open banking is a highly regulated field. To operate any open banking service, you must be fully licensed either by the FCA in the UK or the DNB in the Netherlands, for example.”
Melamed provided similar thoughts as he said: “One significant challenge is the issue of data privacy and security. Customers may be hesitant to share their financial data with third-party providers if they are concerned about how their data will be used or if they perceive the risk of data breaches or hacking. Regulators need to ensure that appropriate measures are in place to protect customer data and maintain trust in the open banking ecosystem.”
A front-runner in open banking innovation
Ultimately, the OBL’s announcement of the seven million user milestone is a huge testament to the UK’s global standing on open banking innovation. According to Statista, there were 18.8 million open banking users across Europe in 2022. This means over a third almost a third of the users came from the UK alone. In fact, Statista estimates that by 2024 Europe will have 63.8 million open banking users. Meanwhile, Statista predicts that the US will only have 5.7 million users, and the Far East and China will have 28.1 million.
Regulation could be the biggest factor contributing to this says Edwina Johnson, head of global at Alloy, a fintech scaleup: “Poor implementation of open banking in other European countries has actively hindered fintechs’ expansion across the continent. In turn, its restricted the availability of innovative fintech products for consumers in those markets. Since much fintech innovation is driven by the goal of reaching previously underserved markets, it’s a shame to see folks are still being excluded from the benefits of open finance.
“If we look at the US, regulation lags behind the UK; open data initiatives are driven by market appetite. A prescriptive approach to regulation has been effective at driving adoption across the UK and also Germany, but the key to success is tapping into the full range of commercial opportunities as new fintech use cases emerge and consumer behaviour evolves.”
Should regulations be introduced we might see these figures change. For the time being, it is safe to say the UK remains a global powerhouse when it comes to open banking innovation and implementation.