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How is open banking progressing in the UK?

Raconteur | Jonathan Weinberg | Nov 8, 2020

opening doors - How is open banking progressing in the UK?It has been nearly three years since the Second Payment Services Directive (PSD2) came into force. A much-heralded move, has this piece of European legislation enabled the UK’s traditional financial services sector to digitally transform or is it yet to fully embrace the potential of Open Banking?

The UK’s Competition and Markets Authority (CMA) had hoped PSD2, which arrived in January 2018, would level the playing field between incumbent legacy banks and smaller fintech challengers.

Enabling newcomers to get a foothold for growth in the market was an issue highlighted in 2016 by the CMA which went on to set up the Open Banking Implementation Entity (OBIE) to “create software standards and industry guidelines that drive competition and innovation”.

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However, experts are divided on whether this has been achieved. Many highlight slow movement by some of the incumbents, despite the new arrangements for secure sharing of current account information with third-party providers, offering transformative tools for personal customers and smaller businesses.

Using new apps and websites, customers can see a single clear view of their finances to deliver more effective budgeting, gain easy access to the best deals, services and credit options from the whole market and spot fraud faster.

Official figures out in September do appear to be promising. Users of Open Banking-enabled products exceeded two million, a doubling in just over six months. Imran Gulamhuseinwala, trustee of OBIE, which is funded by the UK’s nine largest banks and building societies, says Open Banking is “rebalancing the market in favour of consumers and small businesses”.

Banks have not embraced Open Banking fast enough

But others are less sure. Luc Gueriane, chief commercial officer at payment solutions company Moorwand, believes Open Banking is failing. ”Beyond the reluctance from banks, low-consumer awareness and the limited number of services are also key to its failing,” he says.

“The products that are there are often overshadowed by the reliability and security which is associated with incumbent players.

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“It must become both easier and cheaper for new players to build Open Banking APIs [application programming interfaces] and propel their services into the mainstream. Making infrastructure readily available will be key.”

Adam Bialy, chief product officer at OpenPayd, adds: “The APIs are being built and the infrastructure is in place, but few banks are meeting PSD2 requirements.  Open Banking has been less of a catalyst and more of a ‘gentle nudge’, with consumer-facing applications being limited to chiefly account aggregation services.”

And while Mike Hampson, chief executive of Bishopsgate Financial, feels the slowness was due to the difficulty of “adapting API legacy architecture to be flexible and responsive, rather than a deliberate attempt to stifle the competition”, he says: “But now, banks can use the competitive data held by other providers, to expand and rebundle their services, while improving their bottom line.”

One suggestion for such innovation is to take more advantage of account-based payments within the retail sector, as this would cut the cost of commerce, but Bialy explains this is being hindered by “clunky user authentication flows that are different for each bank”.

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This is still the right leap forward, according to Jonathan Hughes, chief executive of payment and banking experts Pollinate Horizons.

”For merchants, there are significant economic advantages to accepting payment through an Open Banking transaction, rather than on the card rails,” he says. “The large enterprises that adopted Open Banking early on have forecast huge savings when compared to using cards, which in turn could result in savings for small and medium-sized enterprises.”

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