Deep Dive: The UK’s Open Banking Experiment

Citizens Advice

The U.K.’s open banking initiatives have been in place since January, intended to encourage greater competition in the financial services space by making it easier for FIs to secure and share consumer data. The following Deep Dive examines the state of open banking, how the initiative is progressing and the broader challenges that lie ahead for a more widespread rollout.

Financial services are no longer limited to banks. The landscape is now crowded with third-party vendors, startups and FinTechs that operate outside the rules of traditional institutions and are eager to offer their services to consumers.

These emerging players lack the leverage, reputation and experience of old-school FIs, however — elements which would prove they can successfully serve their customers — specifically when it comes to consumers’ data. They’re not alone here, either. Even rival banks need access to that data to serve customers who want to switch financial services providers or to enable a third party to execute a financial service on their behalf.

But banks’ grip on consumer data appears to be weakening, and that could create avenues for new players to introduce their offerings to the market. For example, the U.K.’s Competition Markets Authority (CMA) recently ruled that banks do not face enough competition. Its investigation found more than half of U.K. consumers had been with their banks for more than 10 years, another 37 percent had been with them for 20 years and just 3 percent had switched from one bank to another in the previous year. Customers need greater flexibility that makes it easier to control their financial data, the CMA concluded, enabling them to seamlessly switch bank providers and gain access to a wider set of financial products.

The U.K. made its first foray into the open banking landscape in January to address these issues. Under the new regulations, U.K. and EU regulators are requiring the U.K.’s nine largest banks to make it easier for competitors to access their data, and that financial services providers share consumer data with other companies — provided those consumers consented to the data exchange.

In addition to encouraging banks and FinTechs to step up their innovations, open banking aims to provide consumers with greater control over their financial lives by changing how their data is handled. The following Deep Dive explores the financial services landscape issues the initiative aims to address, including how APIs are being used to help both traditional banks and financial newcomers more easily exchange consumer data.

Open banking: An overview

The U.K.’s open banking initiative was born out of a broader initiative, the EU-wide PSD2. Its goal is to make it both easier and safer for consumers to make cross-border EU payments, requiring EU member states to adopt laws and national policies that align with it.

The initiative has three key components. First, it aims to allow consumers to authorize the sharing of their personal data with third-party vendors. Second, it looks to enable those third parties to perform payment transactions — such as a bank transfer — on a customer’s behalf. Lastly, it wants to encourage financial services providers to publicly share product and customer satisfaction information, thereby promoting greater competition and investment in product innovation.

This final component is perhaps the most significant. Industry experts and associations — including the G20’s Anti-Corruption Working Group — believe sharing information is key to promoting greater financial transparency, developing new financial products and driving economic growth.

Challenges and opportunities

API-based solutions are crucial for financial institutions that want to remain compliant with the new rules of open banking. APIs can serve as pathways that enable multiple parties to securely share data in a seamless manner, without investing heavily in updating and overhauling existing infrastructure.

While many incumbent banks — and some customers, too — might be wary of sharing financial data with competitors, such FIs would do well to consider the potential opportunities these changing rules present. Banks are required to more easily provide data, but they are also able to leverage new data sources. This means using information from competing institutions to better understand consumer frustrations, allowing the banks to learn how they could step in to address that need.

APIs also represent an opportunity for banks to invest in a range of new financial offerings that can quickly respond to a variety of payment services. Through APIs, banks can invest in tools that use more innovative technologies, like AI, machine learning and predictive analytics. These investments can prompt banks to ensure their available products properly align with customers’ demands.

Banks also realize the challenges that open banking presents, however. Many worry that APIs could leave them more vulnerable to cyberattacks, or that they will give their partners access to their internal operations, but these concerns can easily be addressed.

If banks abide by a strict set of rules for API implementation, these concerns should all but disappear. FIs are urged to implement a layer of access control over their APIs, quickly detecting potential threats, protecting customer and enterprise confidentiality and maintaining the integrity of all partners involved.

Open banking around the world

Open banking initiatives are designed to disrupt the market by making it easier for third parties to access data, explore opportunities to innovate and develop new financial services products. While the U.K.’s open banking initiative was put in place by the country’s CMA, a similar nationwide initiative would be more difficult to implement in the U.S. market. The U.S. currently hosts approximately 12,000 FIs, meaning implementing a centralized framework for data governance would be nearly impossible.

That’s not to say open banking initiatives won’t ever have a place in the U.S. A recent study found 63 percent of surveyed bank executives in North America are interested in open banking, seeing it as necessary to stay competitive with FinTechs and larger tech players. The U.S. Office of the Comptroller of the Currency (OCC), a division of the U.S. Department of Treasury, recently sought public comments on the potential of a special purpose charter to allow FinTechs to engage in some level of banking activities.

Some U.S. banks have already entered into open banking partnerships with competing FIs and emerging FinTech challengers, however. JPMorgan Chase and data aggregator Finicity recently agreed to allow the former’s customers to share their data with third-party financial apps without requiring login credentials. Chase customers could then more easily share their data with Finicity-supported apps, including personal financial and income verification services. Meanwhile, Wells Fargo already has its own partnership with accounting software provider Xero, enabling it to share bank account data with accounting software programs using APIs.

Other open banking initiatives are underway in other global markets, too. In Sweden, data-driven FinTech Tink recently launched its own API to enable Nordic banks to more easily exchange data with third-party partners. It reportedly also has plans to expand the reach of its API platform. Similarly, YES BANK, one of India’s largest FIs, recently announced it had integrated APIs from digital lending platform into its service to enable a more seamless lending experience for borrowers.

The ability to exchange data more efficiently creates opportunities for both banks and the customers they serve. In the competitive financial service landscape, information is key for all parties to make more informed decisions — choices that will ultimately affect their bottom lines and financial security.