Open banking was first launched in January 2018 and received much attention from the financial community as the potential bringer of fintech disruption.
The regulations require UK-regulated banks to share their customers’ financial data (with permission) with third party providers through the use of application programming interfaces (APIs) in order to make it easier for customers to access financial services and for TPPs to develop new products.
Today marks open banking’s second anniversary and while it has impacted the financial landscape, prompting incumbent banks to adapt to innovation and opening up new opportunities in terms of consumer experience, some have argued that the regulation is yet to live up to expectations.
Banks had until March 2019 to establish a “sandbox” environment that third party providers could access and use to test products and until June to make their APIs available to third parties, but many European banks have not adequately met key deadlines, stalling innovation. Although many traditional banks are now adhering to open banking regulations, more could be done to ensure that they also benefit from the new landscape in terms of their digital services.
It can be argued that this, along with a lack of awareness, has meant that many are yet to reap the benefits of open banking. According to predictions by PWC, 64% of adults will use open banking technology in some way by 2022, but YouGov research from 2018 indicated that 72% of adults had not heard of open banking.
This is also the case for many businesses, with new research from the Federation of Small Businesses finding that 65% of small firms would not share their banking data with other financial services providers electronically, with the majority those not currently sharing their data “wary” about doing so in the future.
Open banking anniversary: “Meaningful change takes time”
Tim Waller, partner at law firm TLT LLP explains that one of the results of open banking has been a decline in account switching:
“Commentators have recently observed a decline in the number of banks incentivising current account switching, and have argued that one of the effects of open banking has been to make it less necessary to switch personal current accounts. These same commentators argue that the clearing banks are now working harder than ever to interact with customers through new digital channels that can ‘talk to’ their traditional current accounts.
“These new digital, open banking channels have put a fresh face on traditional current accounts, a sort of digital wrapper. It raises the question of why a customer would wish to go through the perceived difficulty of switching accounts for a one off incentive payment, when they can instead interact with their existing account in a more convenient way.”
He believes that progress in other areas, such as telecommuciations, will help support challenger banks and fintechs:
“In addition, these new digital wrappers are only going to become faster and more powerful as 5G is rolled out in the UK over the course of 2020, which is good news for customers and the development of open banking in traditional banks, challenger banks and fintechs alike.
“This theme of open banking leading to new digital channels, rather than a revolution in banking is borne out in other trends in the industry such as the number of new banks attempting to disrupt the UK banking market. While things haven’t moved as quickly as they might have over the course of 2019, with just two new banking licences being issued, the sector is changing and is under increased scrutiny, as exemplified by the PRA conducting stress tests on 20 new deposit-taking firms. The change is gradual but it is certainly real, with challenger banks expanding their services.”
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“While current trends are suggesting that fintechs and challenger banks are ‘nice to have’, they are not yet seen as essential. Meaningful change takes time however and new entrants to the banking sector should feel invigorated by the opportunity they have to revitalise the market.
“The 2020s will see open banking and a whole host of fintech services come into their own. As the financial power of younger tech-savvy generations grows, the change we have already begun to witness will gather momentum. Not all revolutions happen overnight.”
“A real difference in how businesses are dealing with open banking”
Martin Buhr, CEO and Founder at Tyk, believes that open banking will open up more opportunities for smaller organisations to take on larger financial institutions:
“Open banking not only opens up opportunities for faster, better and more useful banking for existing and challenger banks, but also opens up a wide field of highly-specialised single-service opportunities to innovate beyond the scope of traditional banking services. By finally adopting service-oriented and API-first principles, banking has properly joined the information age.
“Over the past two years, we’ve seen a real difference in how businesses are dealing with open banking. It widely varies depending on the size of the company, with some big firms treating it as an operational concern, while start-ups see it as a transformative opportunity. The difference is essentially between someone embarking on a greenfield programme as opposed to a transformation programme. Changing course at a big firm can take time, whereas smaller firms – with no tech debt or entrenched positions – can respond quickly.”