It is no secret that the financial industry was in dire need of a makeover, I mean except for a few bankers (if that), no-one really understood how most of banking worked even though it plays an integral role in our everyday lives. The 2008 global financial crisis was evidence of that and this disaster led to a review of regulations, from which Open Banking – the first enactment of PSD2 – was birthed.

Since January 2018, we have heard a lot about Open Banking, the regulation that has released the financial data of consumers from the banks’ ownership and into the hands of consumers. That means regulated banks in the UK are now required to let customers share their transaction data such as spending habits and regular payments with authorised third-party providers (TPPs) offering other services – as long as the customer has given permission. This is done in a secure manner through the use of Application Programming Interfaces (APIs), which provide TPPs with access to banking systems and customer databases. This allows end-users to manage bank accounts via third-party service interfaces that do not belong to the primary bank. There has already been a lot of discussion on what it is and how it will revolutionise the financial industry going forward, so I will skip all that and focus on the impact that it has had on the UK banking industry thus far.

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Many of those in the media and the financial industry are still questioning whether there has been any change as a result of Open Banking’s implementation. The short answer is “Yes, a lot has changed.” It took us over a century to build the mess that was the banking industry, especially the lack of transparency for consumers, and somehow Open Banking is expected to result in a complete overhaul in one year (go figure). We can liken this to how contactless cards are now an essential component of payments, yet they were only initially introduced in 2007. The massive rates of adoption we’ve seen (and even then only in some countries) have only occurred in the past three years. Change takes time and the wheels are in motion.

Open Banking has brought a lot of significant propositions that were impossible two years ago to market. The use of open APIs to expose various data from a bank to TPPs has become one of Open Banking’s great achievements. To assist with delivering Open Banking, the organisation Open Banking Implementation Entity (OBIE) formed by the Competition and Markets Authority (CMA) have developed a suite of tools to enable firms to join the Open Banking ecosystem, share data securely and swiftly via the APIs and implement the standards consistently. More in-depth analysis on Open Banking APIs can be found here.

Open Banking platforms

In response to the introduction of Open Banking standards, a lot of financial services providers launched their own Open Banking platforms. These platforms enable access to various banks in different countries through a secure, single API.

One of the largest such platforms is offered by payments firm Klarna, the most valuable fintech company in Europe as of August 2019. The firm offers a range of online services including direct payments, instalment plans and pay-later options, for both consumers and businesses. Klarna’s XS2A API enables access to more than 4,300 banks across 14 European markets and can be used by fintechs and other businesses, to develop, test and bring new services and products such as payment initiation and switching services to market.

Volt, a Dutch payments provider, is another platform which operates across 14 markets and enables TPPs access to over 4,000 banks. By connecting to this platform, these TPPs can perform a range of services such as the ability to initiate payments on behalf of consumers.

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The significant advantage Open Banking platforms promise to the industry is the ability to empower consumers by increasing their ability to find new products and offering clarity over their finances and, in doing this, bringing the focus back to customer needs. Firms can meet this goal by connecting to the platforms in order to develop offerings like payment initiation, new credit products, advisory services and the ability to switch between mortgage providers.

What is also interesting is that in an effort to maintain their positions in this ever-changing market, card scheme providers are also looking at ways in which Open Banking can expand their offerings. Mastercard recently launched suites of Open Banking applications and has four separate offerings, which include verifying the real-time status of TPPs and an advice centre for banks building out Open Banking strategies. Educating consumers on the potential benefits of Open Banking will be critical to enabling adoption at scale and the platform aims to assist banks in this. As an organisation with a global reach, it will be helping banks explore and access solutions that are safe, reliable and trusted by customers. By entering the Open Banking ecosystem, it can also provide the nascent sector with expert advice – especially regarding data security, one of the key concerns when it comes to consumer adoption. Therefore, an organisation that already specialises in payments technology and securing consumer data will support adoption.

Such platforms are essential components of the Open Banking ecosystem, as they assist both financial institutions and TPPs navigate the opportunities and challenges presented by the API economy.

Third-party providers

PSD2 has identified two types of TPPs; Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). An AISP is any business that uses a customer’s account data to provide services such as aggregating financial information in one place, tracking their spending or planning their finances. A PISP is any company that initiates digital payments on behalf of the user, directly from their bank account, offering an alternative to the use of a card.

All TPPs wishing to connect to bank APIs have to be authorised by the UK’s financial regulator, the FCA and can be found on this register. There were 137 regulated providers, made up of 85 third party providers and 52 account providers, and 32 regulated entities with at least one proposition live with customers by the end of June 2019, according to OBIE. This is in comparison to 57 regulated providers, 36 TPPs and 21 account providers a year earlier, evidencing the growth of the ecosystem and potential for its use.

So far, AISPs are the most common type of TPP, and a lot of the changes enabled by Open Banking that this report will explore are heavily linked to AISPs. Some of the services and tools that are associated with ASIPs include; price comparison, money management tools, quicker and more accurate access to financial products and speeding up manual processes such as applying for a mortgage, a loan and so on.

Services already being offered by banks

A single view of accounts

Account aggregation is the most common implementation of Open Banking so far, as account information APIs were the first type of API mandated on the CMA9 banks. It is a service which many customers including those unaware of this regulation are taking advantage of. Those customers that have adopted account aggregation found the benefits of keeping track of many different bank products in one place out-weighed the reluctance to share their data.

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The initial focus was just on debit accounts; however, banks found customers needed to see different types of accounts in order to get the most use out of the products, and are starting to include credit and savings account aggregation. Lloyds has already introduced this feature to its app, and Monzo will be rolling out this functionality soon. It should be noted, however, that though open banking will be applied to this, this functionality is still largely achieved via screen scraping.

Aggregation also paved the way for new personal finance management (PFM) tools, something newer market entrants built in-house, from the beginning as part of their customer acquisition strategies. PFM tools and the best-in-class offerings in this space were already extensively covered in a previous report.

PFM

Traditional banks have done well at providing basic payments functionality and infrastructure but arguably have done less well at helping customers effectively manage their spending. PFM tools help with this by providing insights into spending habits and guidance around budgeting and savings they can garner from accessing transactions. HSBC was the first UK incumbent bank to offer PFM tools via it’s Connected Money app, which lets customers view their accounts at up to 21 different banks; however, this is done via screen scraping. Other providers in this space include Yolt, built and owned by Dutch bank ING, which is integrated with all CMA9 banks and many more. It also offers a marketplace of services, connected via APIs, and payment initiation services.

A change in business models

Challengers vs. Incumbents – who benefits most?

On the surface, Open Banking plays into the hands of challenger banks as connectivity and agility of this nature are very much their domain; they are selling themselves on their technology and the ability to provide integrated, on-demand and tailored services. At the same time, the regulation was widely hyped as bad news for incumbent banks as it risks turning them into commodity providers. That’s because most banking solutions are outdated, and interfaces are not intuitive. However, Open Banking APIs offer real opportunities to deliver innovation internally. It has provided mainstream banks with the opportunity to increase loyalty by offering their customers the best-of-breed products and services via already widely-used APIs.

That said, the enforcement of Open Banking threatened the very existence of the traditional banking business model and incumbents couldn’t help but resist. Deadlines were met with excuses, case in point, five of the UK CMA9 having to be issued with warnings after failing to implement Open Banking functionality meant to allow third parties consent within their mobile apps by March 2019.

A lot of the resistance has been blamed on the lack of clarity and the debates around how to comply. It could also be argued that incumbents were non-cooperative as they felt it was not in their best interests to actively engage in something that offers new challenger brands even more opportunity to disintermediate them.

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One thing is becoming evident though, the incumbents have come to the realisation that their disdain for Open Banking is not going to stop it, and if anything it will only slow their progress in addition to costing them a lot of money in hefty fines for failing to comply, not to mention the potential loss of customers. This has resulted in a tangible shift on the part of banks, who are now viewing Open Banking as an opportunity to compete and innovate, rather than a compliance exercise. This is evidenced by the number of incumbents introducing account aggregation.