The emergence of open banking offers huge potential for faster decision making, automation and scalability of financial products. But with mixed adoption, we assess how far open banking has come in the last four years
When open banking emerged four years ago, many industry experts spoke of its numerous benefits and its vast possibilities.
With open banking, banks open up their APIs, which creates opportunities for these non-banks to offer apps that provide fast payments, helpful account information and other services.
Being able to access banking information so openly promises huge potential in being able to download customer and business data immediately and allow for faster decision-making and risk profiling across B2B and B2C financial products.
As we reflect on its impact four years on, we speak to some industry experts to understand how it has evolved and where it has stumbled in the UK.
The use of open banking by corporates, banks, startups, brokers and lenders has certainly gained traction. It was reported that open banking payments are growing at a rate in the UK of 500% year-on-year, with five million transactions made in May 2022 alone, with around 26 million payments made in 2021.
“The pandemic opened a lot of doors for open banking to thrive,” says Benjamin Sweiry, co-founder of consumer champion site Dime Alley.
“With a lot of people living and working from home and less cash being handled, there was a huge surge in the percentage of customer transactions made digitally.
“Studies showed that around 20% of customers were willing to adopt new kinds of payments, whether it was through apps, buy now pay later or other forms,” he adds.
Fintech companies in the form of payment platforms, apps and software providers are most likely to engage with open banking and generate value from it.
“The reality is that a lot of banks are still trying to recover from the last financial crisis and innovation is not as high a priority,” says Richard Allan, Founder of funding platform, Capital Bean.
“By comparison, fintechs and startups are forward-thinking and more likely to innovate but also use data as a competitive advantage, rather than banks who focus on keeping your data and security safe.
“During the pandemic or even now in a competitive business environment, Fintechs are passionate about offering faster payments or purchases of consumer or business products,” he says. “They realise that long processes will lose their customers – so being able to get in there early and offer a fast car purchase or frictionless payment at checkout, will result in securing the customer.”
Regulation and security limitations
While open banking is gaining traction, the 26 million payments processed in 2021 is a small feat when considering its original expectations, with Statistica quoting more than 36 million payments made each day in the UK alone.
So why has open banking not completely taken off?
“One of the main issues is regulation,” says Justine Gray, founder of finance startup Dollar Hand.
“There are a lot of compliance requirements to be able to access, share and utilise so much customer data and this comes with costs and time lags to become compliant.”
But on a privacy level, there are further concerns.
“One of the hardest things about open banking is that we are asked (as customers) to share more data, in an age where privacy is more valued,” says Richard Dent, founder of FingerFinance.com.
“It is hard to sign up to a new app and be able to give them access to all your bank information. On a deeper level, with open banking, the risk of fraud is very high since there are far less entry points to get access to highly sensitive data,” he says.
“After all, you don’t have to send in documents or statements anymore, your data and very personal financial information is pretty much sitting there for someone on the other side to see.
“The advantages of open banking are there but with privacy a very grey area and a lot of compliance to overcome, it may take another 4 or even 40 years for us to see its real impact,” he adds.