The UK has been considered a trailblazer in open banking for some time.
Since the Competition and Markets Authority (CMA) ‘s open banking investigation and the implementation of the European PSD2 framework in 2018, the adoption of open banking in the UK has grown from strength to strength.
In May 2022, there were 339 regulated firms in the UK Open Banking ecosystem. This comprised 249 third-party providers (TPPs) and 90 account-servicing payment service providers, representing more than 95% of active current accounts in the market.
However, their leading position is in jeopardy. Now, worldwide, governments are building on top of the example set by Britain and may knock them off their Open Banking throne.
“The UK led the way on Open Banking, but over the last couple of years, we haven’t continued to progress,” said Adam Gagen, Global Head of Government Affairs at Revolut. “Other jurisdictions are now leapfrogging us— doubling down on Instant Payments and expanding to Open Finance and Open Data.”
The global race towards an Open Finance framework is on, and the UK is in danger of being left behind.
A lead on Open Banking
In 2016 the CMA conducted an investigation that set the stage for open banking in the UK.
The entity concluded, after studying the retail banking market, that the sector was weighted to established banks’ favor, leaving them little need to employ significantly competitive strategies. The result was a market that did little to improve terms for smaller customers, blocking access to smaller, emerging banks.
The CMA’s resulting recommendation was open banking.
The introduction of the PSD2 framework in early 2018 gave rise to a more open financial system. As a result, consumers and small businesses could easily share their banking data with third-party providers, which could then tailor apps and services to the consumers’ needs.
Under the supervision of the industry-led Open Banking Implementation Entity (OBIE), the financial services sector has followed a roadmap of development which was completed in January 2023.
“Open Banking has been a catalyst for innovation in the financial services sector,” said Janine Hirt, CEO of Innovate Finance, in a recent report on Open Banking. “As a result of its efforts, the world has looked to the UK as a pioneer and vanguard in Open Banking.”
Now, the sector is at a crossroads, and many criticize the lack of action toward further development.
“The UK’s leadership is increasingly being challenged as other countries make advances,” continued Hirt. “To maintain our global leadership, the UK must put Open Banking implementation systems on a permanent footing: fixing the glitches in the current approach, and building on this to extend Open Banking to other financial services (Open Finance) and beyond to other sectors (creating a digital economy based on portable data).”
Her opinion is echoed by many in the industry.
“The UK has to do three things,” said Gagen. “1. Move quickly to improve performance and broaden the scope of Open Banking to enable new use cases, such as opening up merchant acquiring data to enable small merchants to shop around for tailored acquiring quotes.”
“2. Begin the shift towards Open Data, operationalizing the right to data portability by mandating API-based data sharing across the economy.”
“3. Reinforce and expand the regulatory mandate— with a powerful OBIE 2.0 that involves consumer and merchant groups.”
The UK’s Open Banking ‘glitches’
The OBIE was initially set up to implement a framework for Open Banking, but not with a specific mandate to oversee compliance.
The Innovate Finance report stated, “This organization (OBIE) was not set up to ensure compliance from banks about deviations from the letter or spirit of the CMA Order.”
With the completion of the Open Banking Roadmap in January this year, many, including the Innovate Finance report, are calling for a restructuring of the entity and a push towards a defined regulation.
“The regulatory uncertainty is a challenge. Until recently, there was no clear strategy, and there still isn’t clarity on implementing the next stage of the OBIE,” said Conor Tiernan, Open Banking UK & IE Lead at Klarna Kosma.
“It would be helpful to have clear regulations mandating what Open Banking is. That would be in the interest of consumers if it is outcomes-based and is proportionate regulation focusing on what Open Banking can do for consumers.”
Currently, requirements for tools like variable recurring payments (VRPs) are only applicable to certain accounts in large banks. Industry leaders believe extending these requirements could open the industry to increased innovation for use cases. In the case of VRPs, MoneyHub’s CEO, Samantha Seaton, felt that widespread requirements could enhance products like “smart saving” tools, which could use sweeping to assist customers in saving.
This restructuring includes developing Open Finance and Open Data to realize the opportunities that Open Banking asserted fully.
The path towards Open Finance
Innovate Finance recommended that the framework to move the UK towards a robust Open Finance framework be based on foundational principles. They suggested the paramount inclusion of data ownership and portability, encouragement of competitivity, fair incentives across financial institutions, and a focus on consumers’ economic empowerment.
“Under a principles-led approach, the needs of consumers and businesses would be front and center as part of the dynamics that would drive technology and propositional outcomes. A principles-led approach would also ensure that a wide net can be cast to create the right, innovation-focused ecosystem that drives Open Banking further into Open Finance in the UK.”
In addition, the organization felt that increased incentives for financial institutions were integral to development. In particular, stimuli to share customer data with third parties could boost the sector further.
“At present, incumbent banks have no intrinsic incentives to reveal Open Banking customer data to TPPs,” the report read. “Understandably, banks see such data as proprietary and valuable, not to mention expensive to acquire and securely store.”
The report explained that structured incentives with increased regulatory oversight could allow the sector to reward innovation and enhance products for the needs of consumers and small businesses. This, in itself, could keep the UK viable as a leader within the Open Finance sector.
“For the UK to remain competitive globally and introduce the next generation of financial services, it needs to ensure that Open Banking evolves in a way that is broader, richer in its offering, and commercially viable,” the report concluded.
“As matters of scope, governance, and incentives are gradually addressed, we foresee three ways in which the evolution towards Open Finance in the UK can unlock value …an advanced product perimeter, beneficial use cases, and barrier-free adoption.”
Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.
Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.