Open Banking – The Past, the Present and the Future

Over the past few years a series of directives and rulings have freed the way for open banking technology to make its debut in many countries globally. In the United Kingdom cautious optimism about its advantages was slowly replaced with more enthusiastic reporting as numerous open banking-powered applications entered the marketplace. At its outset open banking made some hefty promises about what it would contribute to the financial ecosystem. However, as with any new technology, it needed supporters at all stages of the supply chain. Opening up traditional banking infrastructure was the first hurdle, getting technology providers to step into the space was the next. But arguably the biggest obstacle was ensuring businesses and consumers would become aware of these glitzy new products, understand their benefits and ultimately start using them.

Some of the numbers

So, how’s it going? According to Open Banking Ltd as of November 2021 there were 334 regulated entities making up the open banking ecosystem in the UK. These were split between 243 third party providers and 91 accounts providers which was roughly a 15% increase from November 2020. If we take a look at a snapshot of these companies, it’s clear that both traditional banks and startups are getting involved. The products and services are now there. But who is using them? By August 2021, one in thirteen digitally-enabled customers had adopted an open banking service which compares to one in forty in January 2020.  That’s around 4 million people. Growth might not be huge and rapid, but its definitely trending well. The introduction of open banking powered products and an increase in adoption rates are not the only indicators of whether the sector is hot or not.  

How attractive open banking is to investors is also an important sign for its future health. In the third quarter of 2021, TrueLayer raised £96m in funding, Yapily’s Series B brought in £38m, Volt’s series A raised £17.5m and Visa bought Tink for £1.5bn. These are just a few of the big investment headlines. There are many more which shows that investors are confident in open banking’s potential. As a payment services company, at Pay iO, we’ve been keeping a close eye on the numbers in our area of business. By monitoring the amount of API calls, Open Banking Ltd can estimate what the infrastructure is being used for and this is interesting for us. Improved financial decision-making, savings and investments proved to be the most popular open banking driven products in 2021, with payments making up roughly 5-10% of API calls. This shows that payments are an up and coming area and what’s even better is its percentage of API calls has increased since the previous year.

A big advance in the world of payments came with the open banking announcement by HM Revenue & Customs. It became the first tax authority to enable payments by open banking. When this idea was in its infancy in 2020 there was a lot of talk about the benefits such a streamlined approach could bring to SMEs, sole traders and self-employed people in the UK. At the beginning of 2020 there were 5.94 million small businesses in the country which means they made up 99% of all private sector companies. So, this announcement by HMRC in 2021 was a hugely important development for the business community. Many open banking powered apps also entered the market which are specifically designed to help SMEs with their accounting processes. 

It’s not just for payments

There are many applications of this technology beyond payments, some better known or more obvious than others. This flexibility is what makes open banking truly revolutionary as it stretches across the entire financial ecosystem. The more useful it is to an individual and business, the more consumer confidence will grow. One application of open banking technology that’s having an impact in the UK is the management of personal finances. Products in this space connect an individual’s bank accounts into one dashboard and help a user monitor their spending, create budgets and make savings. Many of these products even give suggestions based on market prices for a user’s most common expenses. Household versions help families to save money by checking their bills against similar sized homes and encouraging them to switch utility providers when it makes sense to do so. There are also an increasing number of apps offering investment options. Traditionally, buying stocks and shares has been seen as an option purely for the rich or exceedingly well-informed. These new apps make it easier for everyday people on much lower budgets to educate themselves and make small investments. 

The term ‘democratising finance’ has been used a lot to describe open banking. Whilst some commentators see new fintech products as being particularly off-putting to lower income individuals, many are looking at the way in which it can benefit them. For some people, achieving a good credit score in the traditional ecosystem is not easy since many factors are not included in the assessment. Open banking can go several steps further by monitoring spending habits and healthy financial behaviour that would otherwise be ignored, thereby opening up borrowing options for these under-served people. A number of apps now offer loan matching services driven by open banking and these have the added benefit of speeding up the application process. Some of these products are designed for SMEs who may also have challenges with traditional lending providers. 

In fact, if you think about it, many applications of open banking technology can be considered as democratising finance. Helping households save money by switching utility providers and offering more accessible savings and investment schemes are all handy for a broader number of people from different backgrounds. The data sharing at the core of open banking infrastructure can even help people and businesses with wage transparency ensuring the right salary for a particular job. Challenger banks are also making it easier for people to give to charity. Some apps give users the option to round up purchases and give the difference to charity or make donations straight from their dashboard. This means charitable donations can be made in pennies, more frequently and effortlessly bringing help to those who need it. 

Changing the way people buy and sell

Retail is an area set to see big changes brought about by open banking. When merchants add an open banking app such as Pay iO to their online check out customers can pay directly with their bank account. This means funds are transferred immediately and refunds are super easy to process. It also prevents the issue of card fraud and charge backs, as well as giving customers the streamlined and fast check out they expect from a modern retailer. However, there are other ways it’s affecting the sector. Since integrating an open banking option is simple, cheap and involves no set-up fee, it’s excellent for smaller retailers or shops that have only just gone online. With better margins and easier payment processing, retailers can spend more time looking at other ways to grow their business so the effect is cumulative and far reaching. Open banking also gives manufacturers a reason to sell direct to customers. eCommerce platforms and shipping providers are helping to drive this change. If a manufacturer wants to sell direct using a platform such as WooCommerce/Wordpress, the set up is simple and Pay iO can be added via a simple plug in. 

Although eCommerce is a multi-billion pound market that’s on a colossal upwards trajectory, traditional brick and mortar shops still have their place. To increase efficiency and speed many stores are offering self check out and it is here that open banking can also move centre stage. But delivering a queue-less and quick shopping experience, and of course an amazing product, are not the only ways retailers attract and retain customers. Rewards schemes have been around for years and have had varying degrees of success. However, with the data sharing aspect of open banking, this is changing in a substantial way. More third party apps are being designed around rewards programmes. Working with retailers they are able to create personalised offers for customers and make it easier for them to get the most out of their shopping experience, both physical and online. There are also several apps which help customers compare products and services in a vast marketplace. Some apps even cancel subscriptions that a customer isn’t using and take out different ones for them if they agree to the recommendation. Everything is designed to save time and money and improve the customer journey.

The biggest challenge

Getting customers onboard was always going to be the most challenging part of the open banking rollout. However, the trend towards digitisation is ongoing, especially amongst younger demographics and it is this tech savviness that is playing a crucial role. More and more people are carrying out daily activities online such as shopping and banking and consumers have become accustomed to making cashless and cardless transactions. That said, there are still those who are unaware of open banking or who have an idea of it but aren’t rushing to download apps powered by this relatively new technology. This is an excellent opportunity for legacy banks who already have the budget,  infrastructure and customer base to market its benefits. Startups have the advantage that their brands are new and fresh. It’s already quite clear that they are talking to customers differently. The language they use is jargon-less, straightforward and young. It’s making finance fun. Some apps even encourage people to share discussions on their finances with close friends and family, a subject that was traditionally taboo. 

For those customers who are resistant to sharing their data, companies in this space need to spend time educating them on how secure open banking is and also on the numerous ways in which they can benefit from it. How to educate and what to communicate are goals that need to be set by everyone championing the new ecosystem. The varied way in which customers can use open banking might not be the best place to start. Perhaps a good way to begin the conversation is to explain how open banking can streamline the things they are already doing everyday. One key advantage of open banking that is often overlooked is the idea of real time data and information. This is a powerful tool for everyone when keeping track of finances and has an immediate positive benefit for anyone banking and shopping online. When and who to educate are other important goals. Should companies spend time talking to the older generation who aren’t using digital or mobile banking already and rarely shop online? Or should they focus on the digitally enabled segment of the population? What about children? Making them financially aware at a young age means they will grow up understanding open banking technology. Some financial institutions are even offering children debit cards in cooperation with their parents so that they can educate them early and hopefully keep them as long-term customers. 

What’s next?

The word ‘holistic’ is thrown around a lot but it’s not as fluffy as it sounds. In the connected world we live in today, so many things rely on each other to make stuff work. This also applies to a financial ecosystem with open banking technology at its centre. A holistic approach is truly the right one. Providers need a fully functioning technology with standards and regulations that are clear and structured. Customers need to feel confident in the ability of these providers to keep their data secure, to give them a service far above what they are used to and ultimately to help them save time and money. The technology needs constant feedback to keep improving and this can only happen with services live and millions of active users. On top of this, all the different types of provider, from payments to loyalty schemes, need to move in the same direction because the success of one sector positively impacts another. In this fast and tech-driven society the infrastructure and the providers also need to be flexible. More features and new use cases are inevitable as other technologies such as artificial intelligence, blockchain and open insurance become more active in an individual’s everyday life. Open banking already is and will become even more, a collaborative effort.

Pay iO’s articles do not constitute financial advice and are for information only.