Assessing the current progress of open banking

Open banking has come a long way in just five years, establishing itself as a key driver of innovation within finance. But do consumers know what it means?

Open banking refers to the concept of consumers granting third-party app developers access to their transactional information, usually from their bank, directly through an API. This then allows the fintech ecosystem to build out more value, creating tools that support those customers through their daily lives and bring meaningful insights to their banking data.

Open banking has been around as a concept for several decades, but it has only come to life in practice in the last couple of years. In fact, it may have reached mainstream status at just the right time. According to Constanza Castro Feijoo, Stakeholder Engagement Manager at the Open Banking Implementation Entity (OBIE), open banking in the UK – one of the pioneering markets for it – has only been around since 2018 and it took two years to get the standard live.

Like most things in fintech, it began relatively slowly. After 1mn people had started using open banking in their daily lives, it took a year until the industry reached the 2mn people mark. Yet it took only 3 months for open banking to accumulate its latest million customers, going from 5mn to 6mn users. Today, there are 6.6mn users of open banking technologies in the UK, with 90% of banks adopting the standard and offering this service to their customers. Over 250 fintechs have joined the open banking ecosystem and there are regularly 1bn API calls a month involved in facilitating the technology, Castro Feijoo says.

Part of the reason for this success is that regulators and government agencies have got on board with open banking early, recognising its potential to completely reshape the banking landscape. In the UK, open banking was initially mandated to the nine banks who, together, offer 85% of all business and personal current accounts – but of course, since those days, the sector has surpassed all regulatory minima. According to Grand View Research, the size of the global open banking market is expected to grow to over USD$135bn by 2030.

Open banking is still learning, still tweaking

“We’re still learning and we’re finding things we need to improve as we go,” says Nicole Green, VP Product Strategy and Operations at Yapily, summing up the current juncture that open banking finds itself at. “That’s where we are as an industry – we’re a teenager maybe, if we wanted to age ourselves. We’re going through that awkward stage.”

Broad adoption and rapid acceleration inevitably mean challenges along the way: Green acknowledges that, with open banking being so dynamic and constantly evolving, there are bound to be pitfalls and obstacles. But when done correctly, open banking has the power to improve the banking relationship from three different sides.

Green thinks of the beneficiaries of open banking as three distinct groups. There’s the fintech players within the ecosystem itself, who bring new open banking solutions to market and have created whole businesses based on this new approach. Then there’s the businesses who are able to consume these products and create more personalised financial products for customers – like affordability or credit assessments that can improve financial inclusivity, or payment products that can eliminate chargebacks and reduce the cost. The final, and perhaps most important, group is the customers themselves: they get the benefits of all of these products, which can potentially have meaningful impacts on their financial security.

Yapily published a report towards the end of last year that cited the cost-of-living crisis, driven by high inflation and interest rates and rising energy costs, as a major source of concern for 95% of people. This is an area where open banking could have a really positive impact on consumers’ lives. According to the report, around two-thirds of respondents had started using new financial tools for the first time to help them budget, manage their bills or check their credit score.

Do people need to understand the term ‘open banking’?

Despite these promising signals for adoption, Yapily’s survey also raises a potentially detrimental side-effect of open banking’s meteoric rise to success. It found that 52% of ordinary consumers have not heard of the term ‘open banking’, despite an increasing number of people enjoying financial tools that rely on it. So is it important that consumers are educated about open banking and understand what’s involved ‘under the hood’, so to speak?

Rolands Mesters, CEO and Co-Founder at Nordigen, believes that it’s important for consumers to understand that open banking is a trustworthy technology. “The early adopters need to be sure that nothing funky is going to happen with their most precious assets,” he says. But this doesn’t mean they have to call it the same thing that industry calls it. After all, few people understand the wires and the signals that happen behind an ATM, but they know what it’s for – and, crucially, they know how to use it.

“The further we go into adoption, the less open banking as a name is going to matter,” Mesters explains. “Today, for example, when we’re making payments, we’re not really thinking about what sort of payments there are. We tend not to wonder whether paying with your phone on a counter is a card payment or not. It is and it isn’t. Open banking hopefully gets to that scale, and the faster it gets to that scale the better. At that scale, it really doesn’t matter how many people know what open banking means and what it is.”

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