What does open banking mean for the UK’s banking industry?
Open banking is ushering in a new era for the banking industry at large. Introduced to the European public in January 2018, open banking feels like the first big - and most exciting - development in the banking space since the advent of the credit card and ATM so many decades ago. And while the initiative presents an enormous number of opportunities for those in the financial industry and consumers alike, it hasn’t been without its detractors. If firms can build trust with customers and offer genuine value in return for their data, the future seems near limitless for open banking - but how do we get there?
Here’s everything you need to know about the UK’s open banking revolution.
What is open banking, and where did it come from?
In essence, open banking allows customers to share their personal financial data with other providers. Before the open banking regulation was passed in 2018, banks had sole ownership of this data, however the introduction of the new regulations means regulated banks are now obligated to let customers share their transaction data with authorised third-party providers, known as TPPs. Customers must give permission for this data to be shared, which is completed through Application Programming Interfaces (APIs) that connect TTPs with banking systems and customer databases. For challenger banks, fintechs and tech disruptors, this presents a significant opportunity.
What does open banking mean for consumers?
In a post-GDPR, post-Cambridge Analytica environment, consumers are increasingly aware of their personal information and data they produce online. The misuse of personal data by corporations remains a major concern for many, with 81% of consumers saying they’ve become more concerned about how companies use their data and 75% saying they’re less likely to trust companies with data than they had been in the past. Despite this fear, however, the emergence of new technologies and software is encouraging many consumers to consider how they can greater benefit from the sharing of data with reputable providers. An Axios survey suggests nearly three-quarters of consumers are willing to give up privacy to access what technology can offer, while PwC research shows that 39% of bank customers would share their financial data with other banks and third parties in order to receive benefits such as product offer comparisons and multi-account overviews.
This latter benefit - account aggregation - is one of the most common and popular uses of open banking thus far, enabling consumers to keep track of different bank and financial products and accounts in one place. Applications such as Mint and Yolt can be used to not only see all of your various accounts in one place - and in real-time - but also as personal finance management (PFM) tools. This is an area where traditional banks have struggled in the past and one of the key spaces where open banking can shine. PFM tools provide consumers with live insights into their spending habits across all their financial products as well as providing guidance on saving and budgeting, using transaction data to highlight what people are spending their money on and where and when they do so.
Open banking ultimately provides consumers with more freedom and choice over where, how and with whom they manage their finances. Incumbents and challengers who utilise open banking will create new products and services to offer value to customers whilst also putting pressure on banks to improve the services they offer to keep up with market disruption. PFM tools will become increasingly sophisticated, using AI to help consumers select products that might save them money or predict events in their account, while comparing and securing loans will likely become much easier thanks to lenders being able to access all the information they need electronically, effectively and efficiently. Essentially, consumers will have more options - and power - than ever before.
What does open banking mean for the industry?
The banking market will experience significant disruption and diversification thanks to open banking. New companies are already emerging to offer new, extremely specific, banking services and products, providing alternatives to the outdated, technologically-resistant banking solutions of the past.
Traditional banks that adopt open banking and view it as an opportunity are the ones who are most likely to thrive in the future. Open banking APIs can be used to offer customers new products and services and provide more insights, whether these APIs are used by third parties or by the existing data-owners themselves. Open banking should be seen as a clear opportunity to remain competitive and innovative, not to mention provide the best possible service to customers. Traditional banks that work alongside the technology may be able to build up their product and service offerings more quickly, whether integrating with other service providers or building solutions in-house, to prevent their customers looking elsewhere for these solutions.
Meanwhile, those banks that choose not to embrace open banking may risk losing customers to competitors who are willing to offer API-enhanced products and services. Legacy architecture will provide a challenge for many high street banks looking to integrate open banking, which means they’ll need to move quickly in order to update their technology to a more modular system. As for disruptors, challengers and fintechs, the possibilities are endless. With 94% of fintechs looking into how open banking can enhance their service offering, it’s clear that many organisations in this market place consider open banking to a very real opportunity for growth.
Partnerships will be key in the coming years as banking and finance organisations of all sizes look to maximise on - or merely survive - the open banking revolution. By and large, the biggest impact open banking will have on the industry is that of competition. For lenders, the ability for consumers to compare offers quickly and easily may lead to commo ditisation and margin pressure. For banks, the rise of challengers and start-ups creating data-driven products that offer consumers enhanced solutions may be the push they need to innovate themselves - or be a nail in the coffin of traditional banking.
What impact has open banking had - and what does the future look like?
While some in the industry are quick to point out that open banking has had a quieter and less impactful journey so far than we had expected, that doesn’t mean that the wheels aren’t in motion for a massive banking overhaul in the near future. In less than two years we’ve seen open APIs expose bank data to TPPs, leading to the creation of consumer-driven products and services that put financial power back in the hands of the customer. Open banking hasn’t been met with glee across the board, however. Earlier this year we saw five of the UK CMA9 (largest banks in the nation) issued with warnings after they failed to implement open banking functionality by the agreed time. Now, all nine banks support open banking to various levels, and the UK remains the leader in this field after being the first to adopt open banking legislation.
Moving forward, we’re expecting a see wider adoption of open banking - but this will only be possible if banks openly engage in innovation and establish partnerships with the companies that use their data sets, establishing trust with consumers and ensuring data is secure. If customers feel that their information is safe and they are being provided with enhanced value, the potential for open banking into the future is almost limitless. Products will become increasingly tailored to specific customer behaviours and desires, consumers will use fewer interfaces to view more of the products and services they use from across the banking sphere, and the major traditional banks will continue to be threatened by up-and-comers who use technology to their advantage.
Speak to Search Technology about open banking
At Search Technology, we’re excited about open banking and the myriad opportunities it’s presenting to the market. If you’re interested in this field, we’d love to talk about how we can work together.