The UK led the world in open banking — and then got left behind
Whether open banking has been a success very much depends on who you ask. The requirement for big banks to share their customers’ data with other service providers, some argue, hasn’t increased competition in the retail banking market in the way that was intended.
The alternative view, as City minister Andrew Griffith recently wrote, is that open banking has sparked a wave of fintech innovation, improving banking services, increasing customer choice and lowering the cost of payments.
Both positions, oddly, are right. The more important issue is what happens next.
It’s surprising really that we don’t hear more about open banking from a government desperate for signs of world-beating regulatory prowess. It is a genuine British success story: the UK pioneered open banking in 2017 (based on a piece of European legislation), after a competition investigation into the cosy state of retail and small business banking ordered the nine largest banks to develop standard ways to share transaction data securely with third parties. It has been emulated in dozens of markets around the world; the US is edging closer to its own open banking rules.
The UK system’s genesis in competition concerns has been a blessing and a curse. It forced the banks to fund a body to make this happen, a process that is now “substantially complete”, according to the Competition and Markets Authority this month. But regulatory guardrails of the remedy have also limited the scope of the work.
Another hangover has been questions about whether open banking has managed to break the stranglehold of the biggest lenders. Digital challengers now have 8 per cent of the market for personal current accounts, according to the financial regulator. But the market remains very concentrated among the biggest institutions, with a share of more than 80 per cent. Willingness to switch primary current accounts between lenders hasn’t picked up in the way many hoped.
It may not matter as much as once thought. More than 200 companies and 70 account providers have products and services based on open banking in the UK, from budgeting tools like Snoop to subscription management systems like Minna Technologies. Credit Kudos, bought by Apple last year, uses the infrastructure for credit decision-making. (HMRC even uses the architecture to take tax payments, including one would have thought from government ministers.) The challenge to the traditional retail banks, apart from keeping up with new arrivals digitally, is less the switching of current accounts and more the waning power of that primary account relationship as other services proliferate around it.
What now? The immediate question, with a report expected early this year, is what entity should take over from the current implementation body and how it should be funded, a contentious point. Open banking, as is, could still function better in terms of error rates for example, and be expanded to encompass more lenders.
The next order of business is to expand into other areas, like investments, savings, mortgages, credit and pensions. But the UK, as a first mover operating within the confines of that original competition order, is already being overtaken by global imitators who watched and learned from its experience.
The UK claims 6mn active users for open banking. But other countries, in part because their existing banking and payments systems were less advanced, have pushed adoption harder: Brazil reached 5mn connected accounts five times faster than the UK, according to Open Banking Excellence.
Brazil last year switched to a broader open finance strategy. Australia has done the same but gone further, implementing a consumer data right which can be implemented sector by sector starting in energy. The UK’s equivalent, a smart data regime that would establish customers’ rights and enable the sharing of data in other sectors, is currently shelved after an on-again, off-again experience in the political turmoil last year.
In open banking, the UK has an honest-to-God, fintechy tale of innovative success. The question is now whether it will allow itself to be left hopelessly behind.
