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Open Banking: The UK Shows Promise, but Struggle Remains

Date:

Seven million
users and counting, that’s the current state of play for the UK’s open banking
usage. To me, it’s a good number, one that shows that data sharing and new
payment products can continue gaining traction among consumers and businesses.
However, it’s not a number that says: “our work here is done,” even though many
analysts put the UK well ahead of other locations.

For example, in the UK, Forrester predicts the combined adoption of account
information services and payment initiation services will rise from 15% of online
adults in 2022 to 44% in 2027, which is a compound annual growth rate of 23%.

The UK
will have the largest number of open banking users in 2027, while Sweden will
have the highest penetration rate.

The UK now
needs to work towards the next seven million users and the continued growth after
that to achieve these aggressive targets. However, we are in a bit of a holding
pattern as we digest the newest announcement from the Joint Regulatory Oversight
Committee on
April 17.

In short, the JROC recommendations set out five steps toward
promoting and regulating open banking:

  1. encouraging better availability and
    performance of open banking;
  2. mitigating fraud and financial crime;
  3. protecting consumers if they are victimized by fraud;
  4. improving information
    flows to third-party providers and end users; and,
  5. promoting additional
    services with variable recurring payments (VRPs) to be used as a pilot.

This is all
welcome news. As we consider the JROC recommendations, we see challenges to
overcome and actions to take that will keep open banking top of mind with
consumers and scale its usage to greater numbers and more valuable
applications. We see three action points coming to the forefront:

Advanced Regulations

The UK
is both market-driven and regulatory-centered. The EU has a similar
market-driven/regulatory approach as we saw with the 2017 adoption of the
General Data Protection Regulations (GDPR) and version two of the Payments
Services Directive (PSD2).

As a point of clarity here, under the GDPR,
consumers must give specific consent to companies who want to access their
personal data for advertising or promotional activities.

PSD2 is built for
financial data access. It requires consumer consent for payment service
providers to access and retain personal data. PSD2 set the stage for
data-sharing protocols. It wasn’t just about data privacy, as is the
perception. It set the ground rules for how companies on the continent could
effectively use data to serve consumers better while protecting consumer
privacy.

Kush Shah, Product Lead at Bottomline

In the UK, a
similar directive is now being considered by Data Protection and Digital
Information (No. 2). It was debated in mid-April, sent to a committee, and will
return before the House of Commons by mid-June.

The explanatory notes for this bill alone are 130 pages and take a big cut at
data usage, privacy, and research projects. But, the most important part of it
concerns open banking and the open frameworks beyond.

Yes, like the EU
regulations that focus on consumer protection, this bill will extend data
privacy protections. And, like the GDPR, it will set the ground rules for
companies that use data to service, not harass their customers.

I like what Michelle Donelan, the Secretary of State for Science, Innovation
and Technology, had to say: “Trusted and secure digital verification services will
enable smoother and cheaper transactions. ‘Smart Data’ schemes across the
economy will ensure everyone benefits from lower prices with trusted,
innovative services like those in Open Banking.”

Secure
the API Economy

Open
banking is founded on secure communications through APIs. The products and
services using these APIs are the intersection of the consumer, their data and
the data permissions they extend to third parties. As such, they are ground
zero for the next seven million open banking users and need to be secured much
more effectively than they are right now.

We can
improve on this in the UK. As it currently stands, the UK has standards in place for
open banking APIs.
However, they are guidelines and were only mandated for the largest banks.
These standards provide a good foundation for companies designing and
maintaining their own APIs and services. But, track record and reputation are
what we must go by right now in terms of securing APIs. We need to do better to
close any potential fraud gaps for APIs if open banking is to continue its journey
toward the subsequent seven million users.

Expand
B2B Payments And Applications

After we secure the API
economy, I believe more B2B applications could drive greater adoption. There
are a few use cases that come to mind immediately. For instance, banks can assess the
creditworthiness of small business customers in real-time through an open
banking API instead of waiting weeks for a decision.

A company with multiple
bank accounts could consolidate them into a digital dashboard rather than
manually downloading them from each account into an Excel sheet. Invoices can
be created, paid and reconciled using open banking data instead of spreadsheets
or manual invoice processing. With open finance, a world of embedded finance
awaits; innovators will lead the market and think about creating new
investments, savings and lending products.

We have made
progress on the B2B front. According to Open Banking Limited (OBL), approximately 750,000 small to
medium-sized enterprises (SMEs) currently use open banking products. Its data
shows adoption by businesses is higher than consumers, with a 16% penetration
rate versus 11%.

It contends that B2B usage is driven by small businesses using
cloud accounting software that uses open banking to import transaction data. It
seems to me that we don’t need to limit B2B applications to small businesses.
We could increase overall usage and drive the industry at large toward more
secure data usage and payments.

And finally,
let’s promote open banking to businesses and consumers alike. When I
look at the nine banks that have combined forces in the OBL consortium, I see
no shortage of marketing and promotional funds available for banks to shout
from the rooftops on open banking.

Let’s be more aggressive about promoting
applications like variable recurring payments that can help consumers during
the cost-of-living crisis. Better collaboration between banks,
FinTechs, and businesses can create more open banking products and services for
consumers.

For example, applications like payment initiation services
bypass credit card usage with more secure direct debits. Account aggregation
services put all consumer accounts in one easy-to-manage dashboard. And, open
banking data can afford businesses and consumers access to lending platforms
with competitive rates and fee structures.

We’re on the
cusp of something special here in the UK as we navigate our open banking
journey. Let’s be smart about regulations, secure current processes, and work
harder to expand B2B applications. While reviewing the JROC directives and
supporting the ambitious roadmap presented, we can still move toward the next
seven million consumers.

And, in the process, we can build a future that makes
open banking a set of products and services that equips the next seven million
for financial wellness, security and agility.

Seven million
users and counting, that’s the current state of play for the UK’s open banking
usage. To me, it’s a good number, one that shows that data sharing and new
payment products can continue gaining traction among consumers and businesses.
However, it’s not a number that says: “our work here is done,” even though many
analysts put the UK well ahead of other locations.

For example, in the UK, Forrester predicts the combined adoption of account
information services and payment initiation services will rise from 15% of online
adults in 2022 to 44% in 2027, which is a compound annual growth rate of 23%.

The UK
will have the largest number of open banking users in 2027, while Sweden will
have the highest penetration rate.

The UK now
needs to work towards the next seven million users and the continued growth after
that to achieve these aggressive targets. However, we are in a bit of a holding
pattern as we digest the newest announcement from the Joint Regulatory Oversight
Committee on
April 17.

In short, the JROC recommendations set out five steps toward
promoting and regulating open banking:

  1. encouraging better availability and
    performance of open banking;
  2. mitigating fraud and financial crime;
  3. protecting consumers if they are victimized by fraud;
  4. improving information
    flows to third-party providers and end users; and,
  5. promoting additional
    services with variable recurring payments (VRPs) to be used as a pilot.

This is all
welcome news. As we consider the JROC recommendations, we see challenges to
overcome and actions to take that will keep open banking top of mind with
consumers and scale its usage to greater numbers and more valuable
applications. We see three action points coming to the forefront:

Advanced Regulations

The UK
is both market-driven and regulatory-centered. The EU has a similar
market-driven/regulatory approach as we saw with the 2017 adoption of the
General Data Protection Regulations (GDPR) and version two of the Payments
Services Directive (PSD2).

As a point of clarity here, under the GDPR,
consumers must give specific consent to companies who want to access their
personal data for advertising or promotional activities.

PSD2 is built for
financial data access. It requires consumer consent for payment service
providers to access and retain personal data. PSD2 set the stage for
data-sharing protocols. It wasn’t just about data privacy, as is the
perception. It set the ground rules for how companies on the continent could
effectively use data to serve consumers better while protecting consumer
privacy.

Kush Shah, Product Lead at Bottomline

In the UK, a
similar directive is now being considered by Data Protection and Digital
Information (No. 2). It was debated in mid-April, sent to a committee, and will
return before the House of Commons by mid-June.

The explanatory notes for this bill alone are 130 pages and take a big cut at
data usage, privacy, and research projects. But, the most important part of it
concerns open banking and the open frameworks beyond.

Yes, like the EU
regulations that focus on consumer protection, this bill will extend data
privacy protections. And, like the GDPR, it will set the ground rules for
companies that use data to service, not harass their customers.

I like what Michelle Donelan, the Secretary of State for Science, Innovation
and Technology, had to say: “Trusted and secure digital verification services will
enable smoother and cheaper transactions. ‘Smart Data’ schemes across the
economy will ensure everyone benefits from lower prices with trusted,
innovative services like those in Open Banking.”

Secure
the API Economy

Open
banking is founded on secure communications through APIs. The products and
services using these APIs are the intersection of the consumer, their data and
the data permissions they extend to third parties. As such, they are ground
zero for the next seven million open banking users and need to be secured much
more effectively than they are right now.

We can
improve on this in the UK. As it currently stands, the UK has standards in place for
open banking APIs.
However, they are guidelines and were only mandated for the largest banks.
These standards provide a good foundation for companies designing and
maintaining their own APIs and services. But, track record and reputation are
what we must go by right now in terms of securing APIs. We need to do better to
close any potential fraud gaps for APIs if open banking is to continue its journey
toward the subsequent seven million users.

Expand
B2B Payments And Applications

After we secure the API
economy, I believe more B2B applications could drive greater adoption. There
are a few use cases that come to mind immediately. For instance, banks can assess the
creditworthiness of small business customers in real-time through an open
banking API instead of waiting weeks for a decision.

A company with multiple
bank accounts could consolidate them into a digital dashboard rather than
manually downloading them from each account into an Excel sheet. Invoices can
be created, paid and reconciled using open banking data instead of spreadsheets
or manual invoice processing. With open finance, a world of embedded finance
awaits; innovators will lead the market and think about creating new
investments, savings and lending products.

We have made
progress on the B2B front. According to Open Banking Limited (OBL), approximately 750,000 small to
medium-sized enterprises (SMEs) currently use open banking products. Its data
shows adoption by businesses is higher than consumers, with a 16% penetration
rate versus 11%.

It contends that B2B usage is driven by small businesses using
cloud accounting software that uses open banking to import transaction data. It
seems to me that we don’t need to limit B2B applications to small businesses.
We could increase overall usage and drive the industry at large toward more
secure data usage and payments.

And finally,
let’s promote open banking to businesses and consumers alike. When I
look at the nine banks that have combined forces in the OBL consortium, I see
no shortage of marketing and promotional funds available for banks to shout
from the rooftops on open banking.

Let’s be more aggressive about promoting
applications like variable recurring payments that can help consumers during
the cost-of-living crisis. Better collaboration between banks,
FinTechs, and businesses can create more open banking products and services for
consumers.

For example, applications like payment initiation services
bypass credit card usage with more secure direct debits. Account aggregation
services put all consumer accounts in one easy-to-manage dashboard. And, open
banking data can afford businesses and consumers access to lending platforms
with competitive rates and fee structures.

We’re on the
cusp of something special here in the UK as we navigate our open banking
journey. Let’s be smart about regulations, secure current processes, and work
harder to expand B2B applications. While reviewing the JROC directives and
supporting the ambitious roadmap presented, we can still move toward the next
seven million consumers.

And, in the process, we can build a future that makes
open banking a set of products and services that equips the next seven million
for financial wellness, security and agility.

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