Open Banking is amazing - but could be so much more

"The rewards could be game changing.” Triple Point’s Seb Wallace explores how Open Banking is gathering momentum in FinExtra. 

Open Banking is a flop; it’s too costly, “clunky”, and businesses struggle to make money from it. That was the view of Anna Boden, CEO of Starling Bank, speaking to MPs on the Treasury Committee in October 2021. However, there's increasing evidence that the revolutionary initiative has been gathering momentum recently. While there may be hurdles to overcome in the widespread adoption of Open Banking data, once these challenges have been addressed, the rewards could be game changing.  

Rumours of Open Banking’s demise

Open Banking celebrated its 4th birthday this January, born when the Payments Services Directive 2 (PSD2) came into force, with the aim of connecting banks, third-parties and technical providers. Open Banking enables the simple and secure exchange of customer data, effectively breaking the long-held monopoly of established banks and financial services providers on holding that data.

According to the Open Banking Implementation Entity (OBIE), the body responsible for creating the necessary software standards and industry guidelines, there were over 4.5 million regular users of the initiative at the end of 2021 – 3.9 million consumers and 600,000 small businesses. The number of new customers increased by 60 percent on the 2.8 million in December 2020, with the addition of 1 million new regular users every six months. 

Yet, despite this momentum, the rollout has been faced with cynicism. UK high street banks have complained to the CMA about the amount they’ve had to pay to help set it up, while challenger banks have criticised UK regulations they believe prevent them from competing with their more established counterparts. 

Open Banking is far from dead in the water though. There are a number of innovators within the space, many backed by venture capital, that have full faith in the initiative, and that are likely to thrive once it achieves its full potential. 

Faster, convenient, more secure payments

Many believe that for Open Banking to truly enter the mainstream it needs to be more widely adopted by online merchants, replacing cards as the primary payment option. Indeed, although it has now been settled, the recent dispute between Visa and Amazon regarding the use of its credit cards on the ecommerce giant’s UK site highlighted a need for a quicker means of paying for purchases. 

By enabling safe and easy account-to-account payments, Open Banking can provide just that. And by working closely with banks and other financial services providers, it’s this aspect of Open Banking in particular that has seen many fintech startups flourish. 

Vyne, for instance, reduces the expense and friction of online payments for merchants, enabling customers to make instant account-to-account payments in as little as three clicks. Elsewhere, Vipps, a Norwegian fintech backed by several of the country’s banks, allows users to instantly send and receive money using only a phone number, while Swish, a mobile payment system launched by six large Swedish banks, is currently used by more than eight million Swedes to make secure real-time payments – almost 80 percent of the population. 

The future of Open Banking lies in innovative fintech companies such as these. Banks are catching up, but their size and legacy means they don’t have the agility needed to lead in this innovation. All that’s needed for it to succeed is for these fintechs to have greater freedom to innovate. 

Looking to the future 

There are still regulatory hurdles that must be overcome before the full potential of Open Banking can be unlocked. Challenger banks, for example, are currently required to provide historical data to demonstrate they can effectively manage their risk, which Starling’s Boden suggests companies like her own could force to seek outside capital. There are geographical issues too. PSD2 regulatory policies can be interpreted differently in different countries, with various subtle nuances hindering a smooth Europe-wide rollout. 

But there’s a demand from consumers – and enough innovative companies seeking to meet that appetite – that means Open Banking isn’t necessarily the flop that Boden suggests it is. In fact, once these regulatory challenges have been addressed, and the initiative is more widely adopted outside of just the financial services industry, the best may still be yet to come.