Since its implementation was mandated for the largest providers, open banking has become a cause for good in the banking sector. It has allowed third-party apps and fintechs to thrive, providing new functionality and added value for consumers.
Open banking is a process that allows consumers and businesses to grant third-party apps access to their transaction history. When a consumer gives a new app consent, they benefit from the features contained within that app – whether it’s payment reminders or new ways to visualise their savings.
Since 2016, the UK’s 9 largest banks have been required to share this data with licensed fintechs when the consumer asks them to. The intention was to increase competition within the banking landscape and allow licensed startups easier access to a consumer’s transactional data.
Gina Clarke, Editor-in-Chief of The Fintech Times, says that ultimately open banking benefits the end-user: “I think the majority of consumers have definitely felt the effects of open banking. There’s always a small minority – those that aren’t integrated in technology and also a population of unbanked which still exists today – but I think for the majority of us, we’ve seen an increase in online accounts being taken up during the pandemic. Most of us use some form of online banking or mobile banking, and that’s where open banking will certainly be the most prominently displayed.”
Since the Competition and Markets Authority (CMA) made open banking an obligation, there has been a rapid rate of change. Fintechs have been able to offer new features and services to consumers by utilising their transaction history, giving them more ways to move and manage their money. Now, new regulation is set to shore up that progress and hasten open banking’s evolution.
“We’re seeing it in our wallets,” Clarke continues. “Every time we make a transaction, we’re finding more prompts on our mobile phones now, more integrations, marketplaces are making things easier and I know [from what] some of the businesses are developing at the moment it’s going to get even easier. Anything from how we pay for things to how we get paid, that’s all changing and it’s thanks to open banking.
“I think everyone’s aware that the open banking landscape at the minute is charging forward at 100mph and there’s a lot of reasons behind that. Certainly here in Europe, open adoption and the launch of PDS2 and the acknowledgment by banks that things need to change is certainly progressing that.”
Nigel Verdon, CEO and Co-Founder of Railsbank, believes that we could be at a pivotal moment in open banking’s journey.
“We’re in an iTunes moment in the financial services industry – the way that, when iTunes was launched, that changed the music industry forever,” he says. “We’re in a similar macro-trend within financial services delivered to consumers, whether consumers are private individuals or small SMEs, and it’s exciting to be there in the midst of it.”
Verdon believes that the reasoning behind open banking was sound, as it creates new use-cases for the consumer and forces banks to share the data required to make it happen.
“I think it’s early days, it’s baby steps for open banking,” Verdon says. “Other things need to change – the payment initiation piece is great for the merchant, but is it great for the consumer? Probably not, because with a card you get embedded protection for buying goods that aren’t delivered whereas payment initiation has no protection. If it doesn’t come, you’ve lost your money. There’s no chargeback mechanisms.
“So I think some of the ‘value add’, which I think people don’t see or don’t have deep visibility of within the schemes like Visa or Mastercard, need to go into open banking as well – and so the network then has the embedded insurance et cetera to help consumers. That, combined with looking at open banking as a business model change rather than a compliance and IT project, will start driving things forward. We’re almost getting there in the industry to make that happen.”
Jason Maude, who is Head of Technology Advocacy for Starling Bank, says that the way consumers experience as a banking is likely to change as a result of its evolution.
“The future of banking is very much more platform- and service-based,” Maude tells MoneyNext. “It’s very much more embedded in the processes that consumers want to use. Banks are an intermediary; they are something that the consumer uses to get what they want rather than something that they want directly. No one is sitting there going ‘oh boy! I get to go to the bank today’. Everyone just uses the bank as a place to store their money and get their money out, borrow money if they need to. That will start to become more and more embedded in what consumers actually want rather than directly accessed by the consumer.”
The matter of how open banking will look in 10 or 20 years’ time is a “million-dollar question”, quips DeVere e-Money CEO Dimitris Litsikakis.
“I think if you want to zoom out, you will probably see banks working with fintechs more often rather than by each other, and fintechs trying to move into profitability rather than just focusing on mere growth. This is very important because investors help pour a lot of money into fintech but, at the end of the day, they will probably need to see some return on their investment. So profitability will be the primary focus for fintechs, and cynergies and partnerships for the banks.”
And Gina Clarke of The Fintech Times believes that, such is the pace of change within open banking, it’s very difficult to predict what comes next: “I think the future of open banking is quite far out for us at the moment to speculate. Obviously there’s the Payment Services Directive that banks are adhering to but the march of technology, the increase of artificial intelligence and how we look at machine learning in the ways that we bank – alongside these API connections that are really progressing open banking forwards – I think the sky’s the limit really in terms of how we, as consumers, are affected. You just can’t put a prediction on anything at the moment because in 12 months’ time, it will have changed.”