The Path to Commercial Open Banking: Insights from the UK
Open Banking is a phrase used around the world that describes a new way of engaging with banks. If we consider the 20-plus countries that have embraced the concept, they all have taken a slightly different approach than the UK, the first territory to embrace the change.
This misalignment causes some issues as interoperability is key in any global ecosystem, and performance is paramount.
The global shift of APIs and banking
In simple terms, Open Banking is API connectivity to banking. This means you don’t have to use legacy channels such as branches, telephone, and bespoke digital anymore.
Variable connectivity has been available from banks for many years. Mostly this was consumed by large corporations with customized access points. Open Banking changes that; it standardizes API connectivity and allows mass customer populations to start their banking experience and transactions from other platforms. You can now get the banking experience you want, where you want it, instead of where the bank directed you to.
A common comparison for Open Banking is against the credit card scheme where global standards exist. This is driven by the fact that the key card players aren’t driven by a single territory. They’re truly global.
Open Banking needs to have a global play as a goal. However, parochial endeavors are necessary to define the most successful and effective way to utilize Open Banking.
Why Open Banking?
There are many benefits promised by Open Banking, but it’s become apparent in the early years that achieving them can prove challenging.
- Enhanced data accessibility: Open Banking mandates banks to open up access to customer financial data (with customer consent) to third-party providers (TPPs). This shift creates a landscape where data is more freely accessible, allowing for innovative financial services and applications.
- Data interoperability: With standardized APIs, data can be seamlessly shared and integrated across different platforms and services. This interoperability is crucial for creating a cohesive financial ecosystem where institutions, TPPs, and customers interact more efficiently.
- Open Banking at scale: Open Banking demands a scalable platform — for example one that will support authentication at 100,000 transactions per second (TPS) and much more.
- Personalized financial services: The availability of rich, customer-centric data enables TPPs and financial institutions to tailor their services to individual needs and preferences. This can lead to more personalized banking experiences, better financial advice, and customized product offerings.
- Data-driven decision-making: Financial institutions and TPPs can harness this wealth of data for more informed decision-making. This could range from risk assessment and fraud detection to market trend analysis and strategic planning.
- Innovation and competition: The data-driven landscape fosters innovation as both established banks and new entrants can develop novel financial products and services. This competition ultimately benefits the consumer, offering more choices and potentially better rates and services.
- Regulatory compliance and consumer trust: While data accessibility increases, so does the emphasis on privacy and security. Complying with regulations like GDPR and PSD2 becomes essential, not only for legal compliance but also for maintaining consumer trust in how their data is handled.
The lessons and evolution of UK Open Banking
To understand areas of success and challenges in the early years of Open Banking, let’s focus on the UK, where Open Banking was launched in 2018.
In the UK, we have seen growth in many areas. However, these areas weren't the areas that were initially seen as the key sectors.
Data sharing (AISP)
Data sharing (AISP) has been widely adopted. The largest accountancy platforms such as Sage and Xero have used Open Banking data extensively to enable bookkeeping and record entry. The swathe of statements and receipts that were once sent to finance professionals by post and delivered to the door is no more.
Over 85% of bank statements from Open Banking enabled banks are now shared. The proof of this adoption is underlined by the core banks removing legacy connectivity to these platforms and using Open Banking.
It’s now normal for an accountant to ask a small business to share their data and not pass this info manually. Banks that don’t have this capability yet are seeing a loss of customers and unrest in the serviced population.
Accountants are key in adopting technology for small businesses, and the core accountancy professionals are advocating for all clients to adopt Open Banking. The automatic collation of the data does enable multiple other benefits to be realized. Cash flow, capital planning, and lending requirements are all driven by accountants. Open Banking is helping in this area.
Payments
In the payments space, we see a profound difference. We see very few payment initiatives, and these are mainly in specific retail outlets.
Major supermarkets have not adopted Open Banking in core shopping journeys as they see it as too slow. In coffee chains, travel, and retail stores, the adoption is less than 1%. However, we must look at the reasoning for this.
Instant fulfillment is owned by the credit cards. The confirmation of the payment is key, and in credit cards, the authorization code (as used in the UK and other countries) wins this battle every time. It’s the way a seller can confirm goods are paid for (say, a coffee) and then release those goods. Without authorization codes, this process can’t be immediate and doesn’t conclude the shopping experience fast enough.
In the payment space, Open Banking has been immensely successful when the goods are in arrears or when the gap between fulfillment and delivery is longer. For example, HMRC, the UK tax authority, has processed over £10 billion in value of payments; JustGiving, a charity platform, has Pay-by-Bank (Open Banking initiative) on every donation; car dealerships use Open Banking for the payment of deposits and is a growth area for the top three UK banks; Trailfinders and energy companies have all adopted Open Banking initiated payments as they see them as high value.
In the lending space, the banking competition is strong. Better lending brings a competitive advantage to banks. Today, banks must commercialize Open Banking to do better lending to attract customers with interest rate choice — as well as the ease and speed of lending.
Open Banking adoption is all about suitability based on performance. At present some use cases are suitable and some are not.
Why is Open banking failing in some areas?
So why is one use case valid and another not so? If we explore this adoption challenge, we see performance and consistency as the main factors.
Open Banking is reliant on the connectivity at the bank that is completing the payment. At present the performance of those banks can dip as low as 40% in successful payment completed up to a best of around 90%. These aren’t strong enough for all initiatives or use cases. And few initiatives will adopt Open Banking unless the performance is strong AND consistent.
YouTube works every time, Open Banking must do as well every time to be a viable alternative to other banking and payment methods.
In the early days of Open Banking in the UK, the technology delivered was built internally or provisioned by traditional legacy players. Quite simply it wasn’t good or performant enough. Legislation existed to enable Open Banking. That legislation is now stalled due to these challenges. So the market must define its own path to unlock the potential of Open Banking with modern, performant, and reliable technology.
Choosing the right Open Banking technology is key
Kong and OBconnect have been helping UK banks for years. We recognize that the role of technology at the bank is the key attribute to enable Open Banking. The consumption is irrelevant if the central infrastructure isn’t high-performing.
We have and can deliver a high-performing, consistent, and secure Open Banking solution.
Contact us to start your business case of commercializing Open Banking.