From open banking to open finance

It’s only in 2020 that we see the quality, reliability, and range of APIs connecting to accounts that realise the regulators’ vision

It’s over two and a half years since the UK’s Competition and Markets Authority (CMA) insisted banks give customers the ability to share account data with third-party providers, paving the way for the first wave of open banking services. The same is true across Europe, with the Second Payment Services Directive (PSD2) coming into effect in January 2018.

Despite this, it’s only in 2020 that we see the quality, reliability, and range of application programming interfaces (APIs) connecting to accounts that realise the regulators’ vision.

The number of people in the UK using open banking technology reached one million at the start of the year, according to the Open Banking Implementation Entity (OBIE), set up by the CMA. The number of open banking service providers numbers over 200 organisations and, in June, the OBIE even launched its Open Banking App Store to help consumers and businesses navigate the growing range of offerings. At the time of writing, it lists 78 apps.

Build it and they will come

For those consumers and businesses who have embraced open banking, the benefits have been significant. APIs permit a wide range of applications: Account information services mean customers can track their various accounts from a single app or grant access to lenders to smooth the application process for loans or mortgages.

Payment initiation services allow them to pay online retailers straight from their bank without using a card or PayPal account. Data enrichment services based on APIs can help with everything from budgeting and accounts, to protecting against fraud or finding the best deals on financial services based on unique user profiling.

But it hasn’t gone nearly far enough. In part, of course, that’s because the technology is still relatively new. Consumer knowledge, understanding and demand for services will grow over time.

But it’s also because the industry has been slow to embrace the opportunities. For example, six out of the UK’s nine largest current account holders missed the CMA’s January 2018 Open Banking deadline and had to be issued with new directives and implementation dates.

Even now that the regulatory requirements have been met, though, the limitations frustrate efforts to promote greater uptake. To give the most obvious example, APIs are limited to payment accounts – principally current accounts and some credit card accounts. A few banks have proactively included savings accounts, but they’re in the minority. That limits the benefits and use of account aggregation tools, for instance, since many customers still can’t get a single view of all their accounts. And that has a direct impact on demand, take up and consequently awareness.

Nor should it stop at savings accounts. The benefits of open banking could equally be felt with mortgages, investment accounts, pensions, and insurance if they are all included on APIs. Consumers could not just quickly move money between accounts, but manage their entire financial footprint, in one central place. They could save with automated switching and renewal services tailored to their actual needs, get faster, cheaper finance, or tailored debt advice.

In short, we need to stop thinking just about open banking and start thinking about open finance – and ultimately open data, incorporating bills and smart meters, for instance. Yet with the drive to boost uptake of open banking services at the forefront of the industry’s mind, open finance seems a long way away.

Sticks and carrots

However, there are initial steps being taken. Implementing open data, is the sort of issue the FCA will be looking at with its Call for Input on open finance, published last December. It’s open until October, and anyone with an interest in open banking and possibilities should be encouraged to contribute.

Ultimately, it suggests that regulators will have a significant role in driving the development of open finance, as they did open banking. And it’s right that they should – not least to ensure that the less technological and financially sophisticated businesses, don’t miss out on the opportunities that open finance presents.

But the financial services industry shouldn’t have to wait to be compelled to develop the next generation of open finance solutions. Open banking has demonstrated the business benefits in terms of lower costs, increased efficiency, improved customer insights, better retention, and new markets.

The future offers even greater possibilities, and there is real hope universal adoption will take place over the next few years. And, as such, it will likely be those who make the first moves to embrace open banking and open finance technology who will be best placed to reap the rewards.

By Leon Muis, Chief Business Officer at Yolt Technology Services