An open door for open banking

Just five years ago, it was tough to persuade your bank to give anyone except you access to your account data. The banks did not want to help their rivals, often fast-growing online banks and financial services companies. Security was seen as an insuperable barrier.

Not any more. The sector is marking the fifth anniversary of open banking, a government-backed initiative under which banks were reluctantly forced by the Competition and Markets Authority (CMA) — the watchdog — to share current account transaction data with other companies, called third-party providers (TPPs).

In January, the CMA ruled that the six largest UK banks (Barclays, HSBC, Lloyds, Nationwide, NatWest and Santander) had implemented all the requirements of the Open Banking Roadmap, the industry plan. Sarah Cardell, chief executive of the CMA, welcomed this as “an important milestone” that moves open banking into a “new phase”.

This week, the CMA-backed Joint Regulatory Oversight Committee (JROC) published its recommendations for that next phase, which focuses on security and performance, including lowering prices and improving service quality.

Moreover, the government’s data protection and digital information bill, which had its second reading this week, will push change into other sectors, with legislation to boost data-sharing across the economy, including in energy, telecoms, pensions, mortgages and insurance. Open Banking could soon become Open Finance.

Samantha Seaton, chief executive of Moneyhub, a subscription-based data and payments platform, says: “In the next two years we will see everything financial in our lives shared. The UK is still vastly ahead of the rest of the world in the progress of this.”

But there is still plenty to be done; while open banking is replete with announcements, the practical results have so far been modest, with consumers still awaiting big potential gains — such as accessible switching of loans — and newcomers making only modest inroads into the high street banks’ dominance.

Growing from a small base

Today, 7mn UK customers use open banking regularly, to make informed financial decisions, access credit, or make payments. The Open Banking Implementation Entity (OBIE), a CMA body, estimates that 10 to 11 per cent of online banking consumers use at least one open banking service. These payments have more than doubled, with more than 68mn open banking payments in 2022, up from 25mn in 2021.

That’s still a tiny fraction of the total 34.8bn consumer payments reported in 2021 by UK Finance, which represents the banking industry.

The OBIE’s list of open banking network companies includes 93 account providers such as banks and other regulated financial firms, plus 257 third-party services providers. They range from household names, headed by high street lenders, to small fintech companies with names such as Bippit, Coconut and Snoop.

For security, all participants employ elaborate encryption technology and all must obtain prior approval from the OBIE.

You may be using open banking without even being aware of it. Most major banks have open banking features allowing you easily to see your balance and transactions from accounts with different providers, saving you the hassle of logging into multiple accounts. So you can see your NatWest account looking into a Barclays app, for example. You may also be using it through third party apps that you can authorise to access your transactional information.

Andrew Griffith, economic secretary to the Treasury, wrote in January: “The technology enables fast, reliable, and low-cost payments, allowing businesses to be paid instantly and to save money. In some cases, it offers a competitive, cheaper alternative to card schemes.”

How open banking works

For a third-party provider to access your data, you must first give explicit consent. This is usually done through the TPP’s application, redirecting you to the bank’s authorisation page. You then log in to your bank account and authorise the provider to access data.

Once you consent, the bank shares your data with the TPP through an application programming interface (API), a communications route for two or more computer programs.

Open banking APIs also allow TPPs to initiate transactions. For example, a third-party provider such as PayPal could use an API to initiate payments directly from a customer’s bank account without the customer logging in to their online banking.

In the early days, API calls often failed but these technical teething problems are now mostly resolved. Simon Lyons, a lecturer at the London Institute of Banking and Finance, explains: “Open banking has allowed us to eradicate fat fingers and errors in typing in bank details.”

However, many experts — and customers — worry about the security risks, with just 16 per cent of consumers believing it is completely safe. Tackling cyber security and financial crime is a key challenge set by the authorities for the next two years. Mushegh Tovmasyan, the founder of Zenus, a US bank, says: “Younger people have no brand loyalty. They move for value and convenience. Unfortunately, convenience exposes them to risks and they forget to do the safety checks.” (See below on how to do these).

Others think the terminology creates unnecessary worries. Seaton says: “I don’t think the term open banking was well thought through. All you’re getting is clever insights, alerts and nudges to help you.

“Hackers can’t get through the APIs. It’s done with distributed architecture for the data and an encrypted key that only the bank can pull back together again. If they hack in they will get rubbish that’s not usable, for example my name and your postcode.”

The LBIF points out that third-party providers must go through a robust, OBIE-led process, taking up to 18 months. Justin Basini, chief executive of ClearScore, which owns the MoneyDashboard app, says: “With the OBIE there’s not really any latitude. There’s a set of standards and you need to adhere to them and they are secure.”

A data breach would be at worst an invasion of privacy, with the criminal knowing that you’ve spent on petrol or at Sainsbury’s. “Phishing and vishing fraud attacks could come afterwards. But it’s just the general fraud risk that people face anyway,” says Basini.

Where are the benefits?

So who benefits from open banking today? Kanika Hope is chief strategy officer at Temenos, which provides open banking products to leading banks. She says: “It’s mandated [by law] so you have to share the data. . . How you monetise it is the question.”

Institutions gain from seeing in aggregate what their customers are doing. Seaton explains: “That will stop them targeting me for things that I don’t need, because I already have it. They will also develop better products, for example, if they see everyone wants offset mortgages.”

Existing open banking-based solutions include payment initiation services which enable consumers to make payments directly from their bank account to a merchant without needing a card payment. It is faster and secure and has recently been adopted by HM Revenue & Customs for self-assessment tax payments.

A downside is that it’s slower than contactless payments. Lyons says: “It takes 31 seconds to make an open banking payment and six seconds to do contactless. I’m not sure I’ll ever pay for a coffee with open banking. But if there’s a gap between payment and delivery of goods, for example a car purchase, open banking is a good fit.”

Banks and specialist app tools both provide account aggregation services, allowing consumers to manage their financial accounts in one place, and personal financial management tools. At Temenos, Hope says: “In a cost of living crisis it’s taken on new significance. Subscription management is one area it has extended beyond banking.” The app can check subscriptions to TV, newspapers, fitness services etc and make recommendations for cutting costs.

But there’s little evidence to suggest that open banking data is changing behaviour — yet. And while the apps are all about saving money, Lyons says: “Nobody has done cash flow yet to tell you when you can afford to splurge.”

Lending is perhaps where the most value is being added. Open banking data can offer consumers and businesses access to a wider range of lending products with more competitive terms, based on sharing transaction history. Through apps such as Cardeo, some customers are getting credit on better terms by allowing lenders to look at their transaction history.

Some say the initiative is yet to deliver on its initial aims. Lyons says: “Open banking began as a remedy from the CMA to improve competition and give better choice to consumers. It didn’t achieve any of those things.”

Traditional banking providers continue to dominate the market, according to market intelligence analysts Mintel, which found that the top six banking groups hold an 87 per cent of the UK current account market.

Nevertheless, the Current Account Switch Service has completed more than 8.8mn switches since launching in 2013, including nearly 1mn in the past 12 months. Mintel estimates there are about 75.6mn current accounts in the UK.

But many commentators are sure Open Finance — where data sharing extends outside banking — is coming within the next decade. Some utilities, such as United Utilities and Eon, already use open banking data to help consumers switch tariffs. And some investment and pension providers use the APIs, for example AJ Bell Youinvest. The Investing and Saving Alliance, a consumer finance trade body, has completed a pilot project on open finance that included Fidelity and Hargreaves Lansdown.

Seaton says: “The exciting part is we’ll be able to help everyone with their finances by applying AI and machine learning across the data.”

Independent financial advisers could soon use open banking and open finance with clients. For example, Hope says: “You give your adviser authority to see your current account and your adviser can see your bonus coming in and suggests you put it into a venture capital trust. It saves you time — they will see it without you having detailed discussions.”

Gavin Shuker, a former MP, who is now chief executive of Cardeo, says: “Open banking is pro consumer, pro transparency, pro liberalism and pro opening up markets. It ticks every box.”

All that needs to happen now is for that dream to become reality. But, while the government is moving in the right direction, banking history tells us that success is not inevitable. And the slow progress of the past five years shows there are no quick solutions.