4 Years On, How is Open Banking Revolution Doing?

  • Sabrina Akramova, Editor & Content Manager at Financial IT

  • 19.01.2022 10:45 am
  • #banking #openbanking #PSD2

Open Banking (also known as PSD2) requires the largest banks in the United Kingdom to make their valuable data available to the public, which might have significant implications for the way people manage their finances. The spread of COVID-19 accelerated the rise of Open Banking popularity, which was accompanied by executives showing a positive attitude towards that dynamic. As a result, the estimated number of Open Banking technology users including small and medium enterprises in the United Kingdom exceeds 4 million. These solutions allow third-party providers (TPPs) to gain access to all necessary financial data from banks and other financial institutions through established API-driven ecosystems.

A brief history of open banking

The story of Open Banking in the United Kingdom dates to January 13th, 2018, when the Competition & Markets Authority passed a remedies package in accordance with the European PSD2 Directive. The package was designed to address competition issues in the UK's retail banking industry. This initiative was implemented due to competition issues - it was easier for older and bigger banks to gain new clients and maintain market power before Open Banking, but younger and smaller banks found it exceedingly difficult to expand their customer bases and maintain control of the market. Ever since its introduction, Open Banking has been continuously developing, strengthening the connection between clients and financial institutions while also fostering new collaborations with other industry participants through the development of a more comprehensive service ecosystem. 

The level of e-commerce payments’ popularity skyrocketed since 2020 as a result of worldwide COVID-19 restrictions and the global move to digital services. It is thus no surprise that Open Banking-related partnerships dominated the partnership agreements in the first half of 2021. This was partly due to the emergence of Buy-Now-Pay-Later (BNPL) services, such as Klarna or Afterpay.

Apart from the instant round-up and digital spare charge saving from customer purchases, executives in Europe truly believe that improved customer experiences, innovations, and eventual increase in revenue are also the main advantages of Open Banking. As these technologies help to make cross-border payments cheaper, faster, and secure, traditional bank transfers are simply out of date. With a single application on their smartphone, consumers would have the ability to access many services from a single location, they would be able to take advantage of the best deals available with better transparency, and they would have the capacity to examine their current financial condition. A simple "one-click" will take care of everything.

Development statistics

As TPPs are continuing to play an essential role in the revolutionary development of Open Banking, more than 497 of them were registered on the territory of the United Kingdom and European Economic Area by June of 2021 since the implementation of updated PSD2 in 2019. Executives see Open Banking as a key enabler for their digital roadmaps, and the majority (almost 40%) believe their organization will achieve its current Open Banking goal over the next five to ten years.

According to the Open Banking impact report, around 8 percent of digitally capable customers in the United Kingdom actively utilized at least one Open Banking service in 2021, representing a steady increase from approximately 5 percent in December of 2020. In terms of numbers, that equates to 27,4 million in 2020 and 40,4 million in 2021, respectively. With this rate of development, it is possible that the number of active Open Banking users may increase to between 10 and 11 percent in the following year. 

report by KPMG provided some insights on the financial sector being one of the most affected industries by COVID-19 with detailed evidence of banks still experiencing the price of their stocks sink. While some people saw the Open Banking trend as an end, the smartest executives look for alternative revenue models with an emphasis on change of customer preferences. As a result, the UK is becoming one of the most mature Open Banking markets with leveraged technologies and innovative solutions, such as NatWest’s Spending feature platform.

Opportunities through market changes

Open Banking is already available, and it will fundamentally alter the way we pay for products and services, as well as the way we manage our accounts. Open Banking presents a substantial market opportunity and has the potential to cause considerable disruption in the financial services industry. For market participants, the year 2021 brought about a highly intriguing turn of events. For instance, Amazon announced the termination of their collaboration with Visa, citing the rapid growth of Open Banking and A2A payments. 

Credit card companies such as Visa have claimed that this decision eliminates a frequently utilized customer payment option; nonetheless, Amazon has backed their decision by pointing out the high transaction costs connected with credit card payments. Not only does this entail improvements for Amazon, Visa, and their customers, but it also implies that the rise of Open Banking in other large markets will be facilitated even more. This is a significant victory for the future of Open Banking, and it is certain to inspire other major platforms to follow suit.

As representatives of European markets are switching from traditional to digital banking, consumer expectations about the speed, accessibility, and convenience of the payment processes through mobile applications are gradually rising. Banks, therefore, are finding themselves under pressure to meet those astonishingly rapid changes in demand, while trying to compete with such tech giant offerings as Google Wallet and Apple Credit Card. Besides the tremendous burden of modernizing both the front- and back-end IT systems, banks are also confronted with cultures that are driven by a regulatory mindset rather than creativity, as well as a scarcity of digital talent in the banking industry in general.

Ideally, banks should be focusing their efforts on improving their own digital offerings, but it is commonly believed they should also be looking into the potential in the area of 'banking as a service (BaaS). There is little doubt that application programming interfaces (APIs) are revolutionizing the financial services sector. If banks do not implement Open Banking practices, they run the danger of becoming significantly disintermediated. Ultimately, whether they improve their core offers or implement a BaaS strategy, they will fail if they do not have access to APIs, data, and the confidence of their customers.

What’s next for Open Banking?

With financial institutions' consistent support and growth of digital banking, Open Banking is anticipated to enable the integration of more tech businesses with API-driven Open Banking solutions in the future. As we learn more about Open Banking and how it may benefit customers, we should expect to see a slew of exciting use cases emerge and flourish, such as the proliferation of personal financial management applications.

At first, fintech solutions were perceived as a threat to the whole banking system, but it’s time to change the perspective. As long as the fintech sector is bringing cutting-edge technology with an aim to replace old-fashioned products, banks can use these streamlined, innovative APIs and take a flexible approach to reduce costs. In addition to this, the Open Banking revolution can help banks to present seamless experiences and outstanding service for competitive prices, to solve security issues with the help of diversified solutions. For instance, HSBC was the first UK bank to present an Open Banking application in partnership with other firms. If the fintech partner is chosen correctly, banks can solve the problems and deliver everything that their customers need with the consideration of data security, speed, affordability, and convenience. 

Many consumer surveys have revealed that many individuals are still unfamiliar with the concept of Open Banking. Following the demonstration of many value-adding apps that are enabled by Open Banking technology, Open Banking becomes more concrete. This means that banks should not wait for their clients to express a desire for Open Banking. Instead, their digital services should make strategic use of Open Banking, and they should keep track of how it enhances business results through providing outstanding customer experiences, increasing conversion, and speeding up onboarding.

Shortage of Open Banking services makes financial activities maintenance with important insights into their financial data far more difficult and time-consuming. The fact that Open Banking is here to stay is self-evident, and there are many more interesting innovations to come in the future.

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