How regulation is unlocking the potential of open banking in the UK

With strong regulatory direction and industry innovation open banking in the UK is off to a positive start.

Open banking is getting a boost from regulators and industry groups in the UK; indeed, no other country’s regulators are taking such a prescriptive approach.

The Competition and Markets Authority (CMA) rolled out mandatory application program interface (API) specifications for payment initiation and customer account information. It also mandated standardized formats and coding languages for APIs, and is supervising third-party providers (TPPs) via a TPP register.

This regulatory activity has spurred a thriving FinTech industry, a wave of bank and FinTech partnerships and investments, and the introduction of a first generation of open banking products and services.

Although it is still early for open banking in the UK – the regulatory rules only went into effect in early 2018 – the stars are aligning for open banking. The biggest hurdle is probably consumer sentiment. There is still a reluctance among many consumers to share their data, which is partly a cultural mindset, but also a reaction to several massive data breaches.

Regulatory involvement and consumer protections may help put consumers at ease and allow open banking adoption to take off, potentially creating a hockey stick effect in the not-too-distant future. In fact, the UK ranked first in EY’s Open Banking Opportunity Index, which assessed the readiness of 10 different markets around the globe to foster a vigorous open banking environment. 

In the Index open banking is defined as online banking and financial services enabled through consumers ability to offer third-party providers access to their personal bank account data and payment initiation. Third-party providers can use a variety of mechanisms and tools, including “screen scraping” and APIs.

The Index research assessed four areas: the regulatory landscape, adoption potential, consumer sentiment and the innovation environment. We believe these four pillars are key indicators for open banking success.

The Index also shows that most individual markets need to strike a better balance between implementing regulatory structures, building consumer trust, and encouraging innovation.

Regulators are boosting the open banking agenda

As noted, UK regulators are taking a very active approach to open banking. It has transposed the Revised Payment Service Directive (PSD2), and the Cash Management Account (CMA) has implemented its own open banking reforms, publishing mandatory specifications, formats and deadlines. Further, the CMA has set up the Open Banking Implementation Entity (OBIE) to support industry transformation, and has created a TPP registry.

Interestingly, the UK’s approach is almost the complete opposite of that taken by regulators in China, which has taken a more organic hands-off approach. China placed second overall in EY’s Open Banking Opportunity Index thanks to strong adoption potential and consumer sentiment.

That dichotomy shows that there is no single regulatory path or approach to open banking; local customs, standards and expectations will dictate what is best.

In the UK, not only are regulators spurring institutions to adopt open banking, but their very presence may be critical to getting consumers comfortable in sharing their data and turning public sentiment in favor of open banking. 

Unlike banking customers in the UK, the consumer sentiment analysis indicated China’s consumers are happy to share their transactional data with FinTechs. While Chinese attitudes to data security may be, in large part, explained by cultural norms, it is clear that consumers perceive big payoffs for sharing information.

What feature will drive “hockey stick” adoption? 

Based on the consumer adoption analysis, and data from the 2017 FinTech Adoption index, the UK tied for first in consumer adoption potential with China. One reason is that the big banks are investing and taking the first generation of open banking products and services directly to their consumers, leveraging the inherent trust that many consumers have in their banks.

Today, these offerings are mostly in the form of account information service providers and exist in the personal financial management  space. These are entry-level features that banks will use to get customers comfortable sharing data and interested in open banking.

However, to really power adoption, banks need to decouple data sharing from privacy concerns in the minds of consumers, and align it with convenience and normal, everyday behavior.

Contactless payment is an excellent example of how adoption can create a “hockey stick” effect. A few short years ago, many consumers worried that contactless payments would lead to scams, such as digital pickpockets. Today, consumers are more likely to be miffed at the inconvenience if a shop does not accept contactless payment.

The million dollar question for open banking is what feature will offer that kind of overwhelming convenience to change behavior and drive mass adoption. One thing is certain, that “killer” feature will need to offer more than an incremental improvement.

Consumer sentiment is the biggest hurdle

According to our Index, UK consumer sentiment scored seventh out of the 10 markets we surveyed, by far the UK’s lowest score among the four pillars. The major takeaway is that while the UK is leading in establishing the regulatory framework and conditions for open banking to succeed, consumer sentiment could be a critical hurdle.