Today, Open Banking celebrates its fourth birthday in the UK. Four years later, it is still growing and evolving into an exceptional alternative to traditional banking. This is great news for all open banking providers. Since Open Banking was first established in the UK in 2018, there have been many changes that have challenged our approach to banking as Open Banking has made it easier to share financial data. To celebrate this transformation, we’ll take a look at the biggest milestones in Open Banking and what the future holds.
Baby’s first steps
The UK open banking story began on January 13, 2018 when the Competition and Markets Authority (CMA) passed a compensation package in line with the European Directive PSD2, in order to tackle competition problems in the UK retail banking market. Before open banking, the older and larger banks did not have to work as hard to get new customers and dominate the market, while the newer and smaller banks found it very difficult to grow. The adoption of open banking has made financial services more competitive by allowing new players to enter the market, as well as making data and information more accessible and secure through APIs that can be accessed by Account Information Service Providers (AISP’s) such as Nordigen. Since its implementation, Open Banking has continued to expand steadily, improving interactions between customers and financial institutions, and building new partnerships with other players in the industry by creating a larger service ecosystem. Open Banking is an exciting and innovative driver of change and contributor to the development of new services that improve customer experiences and meet individual needs.
open banking adolescence
Adolescence is only beginning recently, as Europe and the UK have been slow to implement open banking. However, e-commerce payments have grown rapidly since 2020 due to global COVID-19 restrictions and the global shift to digital services, so it is not surprising that in the first half of 2021, open banking-related partnerships were dominant among the top 200 partnership agreements. This was largely due to the advent of BNPL (buy now, pay later) services with the help of sustainability investments from the Green Dot and Commonwealth. According to a research report by Equifax, 55% of UK credit institutions plan to implement open banking in 2021, which is a clear indication that open banking is beginning to survive and expand. This is great news for players in the open banking market, as the financial industry continues to integrate open banking solutions into practices and third-party services.
The Open Banking Impact Report showed that around 8% of digitally enabled consumers in the UK actively used at least one open banking service in 2021, a steady growth from around 5% in December of 2020. In numbers, that’s 27.4 million in 2020 and 40.4 million in 2021. With this growth speed, estimates for the next year could range from 10-11% of active open banking users. Long-term estimates suggest that these numbers will continue to grow significantly in the near future.
Opportunities through market changes
2021 presented a very interesting turn of events for market players – Amazon announced the discontinuation of their partnership with Visa due to the rapid development of open banking and A2A payments. Visa argued that this decision cuts off a widely used consumer payment option, however, Amazon supported their decision by highlighting the large transaction fees associated with credit card payments. While it does not directly affect open banking, players in the market are highlighting open banking through this case. This not only means changes for Amazon, Visa and their customers – it also facilitates the growth of open banking in other key markets. This is a huge win for the future of open banking and should encourage other big platforms to follow suit.
What the future holds for Open Banking
With the rapid development of FinTech services, it is clear that open banking has huge potential and will contribute to pioneering solutions in the future. With the continued support and development of digital banking by financial institutions, open banking will likely allow more technology companies to be integrated with API-based open banking solutions. Exciting use cases are expected to emerge and evolve as we learn more about open banking and how it can help consumers, such as the growth of personal finance management applications. The most anticipated change this year will occur in March when the current 90-day re-authentication rule will be replaced with a more user-friendly solution. The 90-day rule, which was intended to protect users by requiring apps to re-authenticate permissions every 3 months, limited the adoption of open banking. As of March 26, 2022, banks will only need to authenticate their first account information service provider access request, which is a significant achievement. This will simplify the end user experience and lead to more satisfied users with open banking solutions, while ensuring data integrity.
Without open banking, it would be much more difficult and less efficient to track financial transactions and provide consumers with valuable insights into their financial statements. Needless to say, Open Banking is here to stay and many other exciting developments can be expected. Happy birthday, open banking!