Open Banking has opened doors within the world of fintech — and beyond. The innovative concept has undoubtedly shaped much of the financial landscape that we see today, and almost half a decade on from its implementation, it continues to benefit fintechs, financial service providers and consumers.
Since its introduction in the UK, and across Europe, Open Banking has helped to dramatically improve the level of service that banks, fintechs and lenders can offer their customers. Within the field of payments, one particularly notable impact has been the facilitation of instant settlements via third-party providers (TPPs).
In fact, this concept paved the way for companies to develop faster and more convenient payment services that benefit merchants and consumers.
Open Banking: A game changer?
In the UK alone, around six million people actively use Open Banking services, according to the Open Banking Implementation Entity, and while Britain stands out as a clear frontrunner, usage rates across many major European countries are steadily rising, based on data from Open Banking provide Yapily and the World Bank.
Payment solutions utilising the Open Banking framework have noticeably accelerated growth, driving adoption across the continent in multiple sectors.
Despite these positive indicators, I believe there is plenty of untapped potential for those who could benefit most from Open Banking. Here, I want to draw on my payments expertise, as well as my experience with Open Banking, to explain why there is still value to be created.
I also want to offer actionable insights on how the situation could be improved.
The issues we’re facing
Open Banking is still affected by issues around API standardisation and inequitable service-level agreements between banks and third-party providers. But the issue more broadly is that many perceive legacy banking institutions as undervaluing the tangible benefits that Open Banking can deliver to their businesses, despite a growing stack of evidence.
For many in Open Banking, the attitude that is still held by some is frustrating, but not wholly surprising, given the relative recency of its introduction. While five years may seem like a long time in the fintech world, for a concept of this magnitude it has not been long enough for everyone to fully understand and adopt the idea at scale.
Today, we’re in something of a transitionary period, but that doesn’t mean we can’t identify areas for improvement.
Fulfilling the potential of Open Banking
I believe many of my peers in the Open Banking-based payments space would cite a lack of standardisation of APIs as the primary and most specific concern, with plenty of scope for improvement. Right now, a lack of standardisation across banking APIs presents a huge hurdle for those of us trying to drive further adoption and unlock value for businesses and consumers.
Lack of standardisation does not only affect Open Banking – it is a wider issue that has emerged as many legacy banks progress their digital transformation journeys. However, within Open Banking specifically, non-standardised APIs lead to more costly and complex implementation projects, which negatively impacts a key Open Banking proposition – more cost-effective payment methods. In effect, the friction that arises with a lack of standardisation is slowing down adoption.
There have been efforts to address this problem, for example, through regulations from the EU such as PSD2, or the introduction of standards bodies including the Berlin Group, STET and PolishAPI.
However, the issue has not gone away, and needs to be quickly rectified if we are to continue unleashing the benefits that mass Open Banking adoption would offer across Europe.
One avenue is through the ongoing revision of PSD2, with some of the key areas for revision and improvement emerging through the European Commission’s Targeted Consultation earlier this year. Notably, the European Banking Authority (EBA) asked the Commission to consider a common API standard across the EU. While this could bring additional compliance costs, there would be significant benefits for established players and new market entrances. If this were added to PSD3 it could also help pave the way for more Open Finance propositions.
The EBA also suggests removing the option for banks to offer TPPs access via the consumer’s API, thereby streamlining the way TPPs can access payment accounts to a dedicated API.
Regulation alone – especially given it will take some time for PSD3 to take form and come into effect – is not enough to realise the potential of Open Banking. It’s a common rallying cry to say that we need more education and collaboration in the industry. But in this case, there needs to be a concerted effort by all players to work with the banks in a way that they see the upside of providing standardised and stable APIs – whether it is mandated through regulation or not.
Speeding up the process
Open Banking would also be dramatically improved if banks made a more concerted effort to improve the reliability of access to the infrastructure required to complete payments. At the time of writing, outages and service downtimes are still too common and present a significant obstacle to further adoption of Open Banking-based services, such as those offered by TPPs.
The good news is that the Competition and Markets Authority (CMA) is beginning to clamp down on UK banks that are falling short. In fact, the regulator has previously reprimanded lenders and legacy banking businesses for failing to effectively deliver Open Banking functionality across their platforms.
It is also expected that Financial Supervisory Authorities will increase their supervisory activities in the (PSD2 regulated) Open Banking area. They have now built up their internal knowledge and have sufficient benchmarking information to perform thematic audits, for example, on performance and availability of APIs for TPPs, or if TPPs face any obstacles when accessing payment accounts.
It’s not only third-party providers who lose out when these downtime issues occur. Banks’ customers may face a frustrating user experience, which may discourage future use of Open Banking-based payment solutions, or lead them to look elsewhere for providers.
From the customer’s perspective, the downtime may mean abandoning a payment entirely, rather than simply selecting another method of payments. As consumer adoption of Open Banking payments grows, this has implications for the banks. The continued perseverance of the CMA to reduce outages is certainly one part of the solution, but real change cannot be effected through regulatory enforcement alone.
Again, it is incumbent upon all in the Open Banking space to educate and to inform, in particular around the wider benefits of stability and access to APIs.
An opportunity for change
There is a significant opportunity for banks to maximise the potential that comes with Open Banking – moving past the view, held by some, that it is primarily a regulatory requirement. For example, there is value for banks in increasing visibility and interaction at the point of sale, especially amongst younger demographics who may no longer see legacy bank brands as a natural choice for financial services.
Exposing the bank brand in the context of what is often considered an enjoyable experience can also incentivise consumers, not to mention aligning banks with some of the exceptional customer journeys that many merchants are now delivering through digital channels.
Currently, we face the issue that Open Banking inertia within banks creates a knock-on effect across the ecosystem. It’s an issue that can make partnerships harder to establish – ultimately, to the detriment of consumers.
A new chapter opens
There’s clearly a lot to love about Open Banking, and little doubt of the impact it has already had — and will continue to have – within financial services and fintech. However, as Open Banking becomes more ingrained into the financial solutions we use in our daily lives, the areas that need improvement become more acutely obvious.
Thankfully, there is now a vocal cohort of Open Banking proponents, including us at Brite, who are determined to address these challenges head on. Together, we believe that Open Banking remains the future of finance, but a concentrated, collaborative effort is needed to help ensure that the concept lives up to its full potential.
Lena Hackeloer is CEO of Brite Payments