The UK's open banking regulations came into effect on 13 January 2018, bringing changes to the sector that could drastically transform financial services.
Open banking forces UK banks to open up their data via a set of secure application programming interfaces (APIs).
In short, the Competition and Markets Authority (CMA) mandated that from January 2018, the nine largest current account providers must offer standardised APIs for approved third parties providing Account Information Services (AIS) and Payment Initiation Services (PIS).
On top of this banks must also comply with the European-wide second payments directive (PSD2), which also mandates the opening up of data and the introduction of strong customer authentication for more secure online payments, which has been delayed until at least 2021 amidst growing industry pressure.
Put simply, AIS is the opening up of direct access to customer's account information data – transactions, essentially – to third parties, allowing for services like automated advice based on live information, and comparison services. Payment initiation is where providers can initiate a payment from an account held with another provider, enabling transactions that are more like a direct bank transfer than going through traditional card payment or direct debit channels.
In its July update for 2019, the Open Banking Implementation Entity (OBIE) announced that API calls within the open banking ecosystem were effectively doubling every month, peaking at around 18 million "at last count", according to Huw Davies, head of premium APIs for Open Banking when he spoke at an Innovate Finance event in September 2019.
In the same update Open Banking shared that it had whitelisted 151 regulated providers to access said APIs, 38 of which had a live proposition available to customers.
That number will soon include American Express, which announced that it was launching a new 'pay with bank transfer' feature by the end of 2019. This will allow anyone with a UK current account, regardless of whether they are an American Express card holder or not, to pay using an instant bank transfer with retailers like Hays Travel, JustGiving, Oak Furnitureland and Richer Sounds.
Managed roll out
The banks were set an original deadline of 13 January 2018 to release this data via a set of standard APIs, but, somewhat predictably, five of the UK's biggest banks were granted more time to comply.
This began with a 'managed roll out' programme to prove the account data access functionality – which allows customers to link their existing bank account to a third party provider – was ready to be extended to the public. This was officially completed on 17 April 2018 and finally allowed open banking services to be offered directly to customers by fully authorised companies.
One of the first companies to start offering these services was Yolt, the smart banking app created by Dutch banking giant ING. The company claimed to be "the first app to successfully complete the open banking integration with one of the CMA9 providers - the RBS Group", on 23 April.
Following this, the OBIE – which is responsible for the rollout of the regulation – turned its attention to payments functionality.
"As regulated companies have focused on the data capabilities of open banking, it has not been possible to test the payments functionality to the same degree and, therefore, new payments-focused services will still be put through extensive proving as they engage with the system," the OBIE said in a statement in April 2018.
Open banking one year on
The one year milestone for open banking passed in January 2019, with good progress being made on the integration side of things but less early success when it comes to public awareness and adoption.
Imran Gulamhuseinwala, trustee of the OBIE noted in his reflection on the first year that while it was first regarded as a "a typical compliance exercise championed only by a handful of fintechs," the past year has shown that "banks have very firmly moved from viewing open banking as a compliance exercise to an opportunity to compete and innovate".
"In short, it is clear that there are signs of an emerging dynamic, vibrant and developing ecosystem – an ecosystem which is rapidly becoming more sophisticated and expansive in its coverage," he added.
Read next: Open banking one year on: where are we?
Tom Renwick, strategy analyst at challenger bank Atom, added: "Whilst open banking began not with a bang, but the proverbial whimper; very few aside from the most ardent of open banking enthusiasts were expecting a 'revolution' in January. The promise of open banking will only be realised when there are fintechs and banks alike producing innovative products and services leveraging APIs that seek to address real customer needs."
Who stands to benefit?
Open banking in all of its glory will, presumably, lead to a massive land grab from the big banks and smaller challenger banks and fintech companies in order to provide customers with the best possible banking experience.
Huw Davies, head of premium APIs for Open Banking also said during the Innovate Finance event in September 2019 that, having spent 20 years working in the industry, open banking provides "the most interesting opportunity for banks that I've seen in my career".
"Banks have been transforming their businesses to become a more digital platform, that opens up a huge opportunity to innovate in new ways," he added. "I think we will see more and more partnerships... If you have a great digital platform to partner with other businesses, you can build new propositions, get them out to new markets, potentially under new brands, far quicker than you ever could before, and monetise those access points that you are creating."
Jeremy Light, a managing director at Accenture as part of its Payment Services Practice in Europe believes that uptake will only come with greater confidence however.
"Open banking has the potential to transform consumers' relationships with financial products, but it hinges on consumers' willingness to embrace it. Until new entrants to the financial services sector can earn consumers' trust, banks can draw on their extensive heritage to secure an important early advantage," he said.
Data sovereignty and security concerns around open banking
These issues of security and trust have long come hand in hand with open banking regulations.
Matt Cox, head of insight and innovation at Nationwide Building Society addressed some of these questions when he said: "In a world where the data is freely available and the consumer chooses where to do their digital banking, this raises some interesting questions around accountability... this is something we will have to decide upon collectively as an industry.
"Practically we need to ensure security of that change of data... GDPR rightly ensures the way we get consent for sharing and securing that information is in line with what members [customers] expect."
Jake Ranson, CMO at credit rating agency Equifax UK, said after the one year anniversary of open banking that: "Many challenges still lie ahead, namely an educational deficit regarding how open banking can improve consumers' financial lives, as well as understanding data's positive predictive capabilities.
"It is equally important that reassurance is provided around the control and maintenance of individuals' data, reiterating the information will only be used with their permission and they can revoke access at any time."
Writing for Finance Monthly, Kevin Day, CEO of HPD Software said: "The opportunities created by initiatives such as open banking, which have the potential to transform the industry, of course come with responsibilities, and one of the major challenges will be around managing risks related to security. A lack of homogenous technical standards may make operating processes susceptible to corruption and companies need to be clear on how they will safeguard their data against fraudulent activity.
"With complex chains of data access, both banks and fintechs must also consider the obstacles associated with responsibility for any security breaches, and ensure that their software is able to identify, predict and react to risks or breaches in good time."
What the banks say about open banking
The banks tend to be positive about open banking, at least in public, despite it posing a potential threat to their businesses. A report by McKinsey titled A Brave New World for Global Banking estimates that banks in Europe and the UK currently have $35 billion, or 31 percent, of profits at risk because of digitisation.
The report reads: "More severe digital disruption could further cut their profits from $110 billion today to $50 billion in 2020, and reduce returns on equity in half to one to two percent by 2020, even after some mitigation efforts."
That being said, HSBC UK proved itself to be an early mover with PSD2 by launching a new iOS app in May 2018 – called Connected Money – which would display current, savings and mortgage accounts from up to 21 different banks, including Santander, Lloyds and Barclays. This followed more than six months of testing an HSBC Beta app. Then in September the bank took the decision to fold the best features of the Connected Money app into its core mobile banking application, signalling further commitment to the opportunities afforded by open banking.
to open up its core banking app to allow customers to see other accounts, regardless of where that account is held.
Cox at Nationwide is a touch more sceptical about the initial impact though. Speaking with Computerworld, Cox said: "So when this thing launches do I think there will be an explosion of people using it? No.
"Traditionally you see a relatively consistent take-up profile, with early adopters and 5-10 percent of users waiting to consume this. There will be an adoption curve and the steepness of that will come down to how we as an industry get trust and security right."
This view is backed up by some 2017 research from Accenture, which found that two-thirds of consumers in the UK won't share their financial data with third-party providers such as online retailers, tech firms and social media companies.
The research, which surveyed 2,008 UK consumers during August 2017, found that 69 percent of respondents would not share their bank account information with these third-party providers. More striking still was that 53 percent of the consumers said they "will never change their existing banking habits and adopt open banking".
What UK challenger banks think about open banking
UK digital challenger banks like Atom and Monzo are well placed to thrive in this new open banking ecosystem. They have both acquired their banking licences and both of their CEOs have spoken about becoming the open banking platform of choice for consumers.
Atom CEO Mark Mullen told our sister publication Techworld in December 2016 that its intention is to provide basic banking products for its customers such as current accounts, mortgages and small business loans, and "present them on an open platform".
Tom Blomfield, CEO at Monzo started the bank with this strategy in mind and rival challenger bank Starling has also fully embraced the marketplace model.
Blomfield wrote in an early blog post that "the bank of the future will be a marketplace" and that "is why [Monzo] has a singular focus – to build the best current account in the world – rather than selling dozens of different financial products. We can focus on what we know best, whilst offering our customers access to the best products and services from across the market."
Monzo has exposed its APIs to third parties since February 2017. Chief Technology Officer Jonas Huckestein wrote in another blog post: "We'll allow developers to build applications that can request access to other customers' data on an individual basis, using OAuth 2.0. For example, in the future you could make an accounting app that connects to [Monzo] and customers could authorise you to access their account to extract their expenses."
Bank of England view of open banking
Mark Carney, the governor of the Bank of England, made a speech at the Deutsche Bundesbank G20 conference in January 2017 that detailed the impending benefits and risks open banking could bring to the UK market.
"Fintech's true promise springs from its potential to unbundle banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital," he said.
"This possibility is being driven by new entrants – payment service providers, aggregators and robo advisors, peer-to-peer lenders, and innovative trading platforms.
"Aggregators, making use of banks' Application Programme Interfaces (APIs), are providing customers with ready access to price comparison and switching services. New pro-competition policies are reinforcing this competition."
Carney recognises that open banking will bring with it a series of risks though for the market.
"Specifically, while fintech may make conventional banking more contestable, improving efficiency and customer choice, the opening up of the customer interface and payment services business, could, in time, signal the end of universal banking as we know it," he said.
Final thoughts on open banking
Although 2019 may not be the year that open banking becomes widespread, it will be the year that we start to see if the technology works and how banks and fintechs are looking to leverage it.
The broader impact will depend on if the transition is a smooth one and whether developers truly embrace these new data streams and create applications that consumers actually want to use.
Traditionally UK consumers have been extremely difficult to convince to switch things like bank accounts. The new rules offer a chance to convince them otherwise.