It’s been nearly three years since the Second Payment Services Directive (PSD2) came into force in the UK. Back in September, the country hit two million open banking users among the big nine high street banks, increasing from one million in January. Of the 66.65 million people living in the UK, at least 3% now use open banking-enabled services, which is certainly an improvement. However, when speaking to Bobsguide, Luc Gueriane, Moorwand’s chief commercial officer, said that “It’s way behind target still […] the usage is so incredibly low, that even though we’ve got a huge regulatory burden we’ve got hardly any benefits.”
Luc Gueriane isn’t the only one to admit its slow uptake. In June, Maha El Dimachki, then-head of UK payments for the Financial Conduct Authority (FCA), told PYMNTS: “The development of open banking has continued […] during the pandemic, although the speed of development may have slowed a little.”
Despite open banking adoption lagging behind, COVID-19 has driven digital banking adoption in the UK to its tipping point. The BAI found half of Britons are using digital financial products more since the pandemic, and EY says since national lockdowns Europe has seen a 72% rise in the use of fintech apps. So consumers are getting more comfortable with digital banking, as well as third party fintech apps, but it seems there is still hesitancy around connecting the two experiences, particularly in the UK.
In South Korea, at least 20 million consumers (70% of the population) are using open banking services within just a year of launch. That’s more than 23 times the adoption rate in the UK.
Why is that? Well it can partly be explained by the lack of a British, or European, Big Tech to fast-track adoption. South Korea’s homegrown fintech unicorn Toss has been instrumental in the government’s roll out of open banking, causing it to break even in May. “Some of the popular apps in South Korea are ‘super apps’, so imagine a WhatsApp or similar jumping into open banking in the UK. That would boost uptake very quickly,” Marie Steinthaler, TrueLayer’s global vice president for go-to-market strategy, told FinTech Futures in September.
Banks vs fintechs
Consumer attitudes and the lack of a pan-European Big Tech are pieces in a much larger jigsaw puzzle. But it still feels like banks and fintechs are working against, rather than with, each other to tap true value.
A Salt Edge survey published in May found 90% of UK banks have ‘API availability’. But banks simply having these APIs doesn’t translate into them actually responding to requests from third-party providers (TPPs). Because the survey also found that across Europe, a notable 58% of integrations between banks and fintechs take more than ten days to complete. And 46% of banks don’t allow TPPs to test scenarios with the data used in their consumer apps.
There’s also a feeling held by some major banks that PSD2 only works one way. That is, for fintechs, and not for the banks. ING’s chief executive, Steven Van Rijswijk, said at Sibos in October that regulators need to offer banks a PSD2 equivalent. “They [fintechs] get access to our customers’ data, and at the same point in time, they can use their own data as well which they get from customers.” This might explain why some banks are dragging their heels.
But as David Monty, director at Tell.Money, tells Bobs Guide – the industry needs to trust open banking, even if it might not seem like there are benefits for everyone at first. “We need to encourage the industry to see open banking as a positive opportunity, even if the immediate benefits aren’t clear.”
And just as it’s important that banks improve their APIs and openness to TPPs, it’s equally important new payment companies and fintechs recognise the need to operate a compliant service.
A sleeping dragon
”Beyond the reluctance from banks, low-consumer awareness and the limited number of services are also key to its failing,” Gueriane told Raconteur in November. “The products that are there are often overshadowed by the reliability and security which is associated with incumbent players.”
Andries Smit, CEO and founder of Upside, agrees. He told Fintech Magazine last month: “The reality is, open banking still remains shrouded in mystery for many. [..] There’s a lot of mistrust around allowing access to bank accounts. […] We need to educate – both consumers and businesses – about the sleeping power of open banking.”
Smit highlights an important point here. It’s not just consumers who mistrust open banking, it’s some of the businesses too. In January, the majority of small businesses were still “wary” about sharing banking data electronically, according to the Federation of Small Businesses (FSB). Just 15% of small firms currently share their business bank account data with TPPs, whilst roughly two-thirds said they would not consider using open banking at all.
For businesses, open banking offers up a wealth of benefits stretching far beyond account updates – which is all the 15% in the FSB’s survey currently use it for. The OBIE has tried to boost both consumer and business awareness around open banking by launching an app store on its website. It currently displays some 96 apps, and is a helpful resource. But for many Brits, they simply don’t know it’s there.
Beyond data aggregation
Data aggregation was just the start for open banking. What’s already starting to emerge in more use cases by the day is open banking-powered account-to-account (A2A) payments. In the Netherlands, ‘iDEAL’ – an app which allows online retailers to take payments directly from a customers’ bank account – has already been around for years. But in the UK, a recognisable brand for open banking enabled payments is yet to emerge.
“In the opinion of all observers, open banking on the one hand and instant payment on the other is the recipe for all tomorrow’s payment solutions,” the European Payments Association (EPA) said in its 2020 report.
Recent research by TrueLayer shows the use of Payment Initiation (PI) grew by 832% between March and July in the UK. The large majority of that growth – 88% of it – was down to incumbents. In September, Tesco Bank activated its ‘Pay by Bank’ service with Mastercard. And three months earlier, NatWest developed Payit – an open banking-powered payment service designed for e-commerce transactions.
It’s this combination of open banking data and payments which has sparked consolidation. Because not only does it present new competition, it also paints a very different picture for what the payments ecosystem could look like. This year saw Visa buy Plaid for $5.3 billion – though the deal is still under scrutiny – and Mastercard buy Finicity for a significantly lesser $825 million.
So how can the industry change?
In Luc Gueriane’s opinion, it’s got to “become both easier and cheaper for new players to build open banking APIs and propel their services into the mainstream”. This is clear when we compare the UK’s approach to the likes of South Korea, or the Netherlands. “Making infrastructure readily available will be key”.
Karl Illing, managing director of Netherlands-based open banking consultancy Innopay, thinks incumbents need to change the way they work with PSD2 too. “Many banks […] still perceive regulation as a burden and not a chance. They miss the strategic perspective.”
Illing also agrees with the likes of David Monty at Tell.Money, that the benefits of exposing APIs to fintechs are often “not really tangible from the start” for banks. Which is why banks “need to take a longer-term view” of open banking.
One of the reasons why these benefits still aren’t clear is because they’re only being thought of in relation to retail, when corporate banking could also benefit from the technology.
Mario Benedict, JPMorgan’s API and digital product solutions head, said at EBAday 2020 that the bank was looking “to create [a] holistic payments and reporting service for clients with real-time data”. Dan Globerson, NatWest’s open banking head, agreed that corporate use cases were key to open banking’s success in the UK.
Globerson thinks the corporate side of open banking has been “under invested and under discussed”. “If we can create products and services that are competitive and effective for companies as well as consumers, it will help drive competition, compress margins and disintermediate the whole space.”
We may be a while off before people are speaking about open banking in their daily conversations, but there is no doubt that open banking will play a big role in the future of payments – whether you like it or not.
Discover more insights from Moorwand by reading our other articles.