The UK’s Open Banking initiative came into effect in early January 2018 as part of the second Payment Services Directive (PSD2). Its introduction marked a significant milestone for the UK banking industry, with technology at the heart of the initiative and a movement towards giving consumers more control over their data.
In time, open banking would increase competition among players in the financial services sector. With banking APIs (application programming interfaces) available for data sharing, financial technology (fintech) companies would have the opportunity to innovate newer and better solutions.
Understanding Open Banking
From the outset, Open Banking was directed at making the UK’s biggest banks release data in a standardized and secure form that is shareable between authorized organizations. This data can be passed on to third parties, who can use it to create new products. Most importantly, the account holders are in charge of this data sharing, as it is only with their explicit approval that data exchange can occur.
The reasons behind the introduction of open banking are varied. The Competition and Markets Authority (CMA) brought in open banking as a way of introducing innovation in the market, so that the data traditionally held by large financial institutions could be used to create and recommend useful products and features in areas such as lending, money management and payments, to name but a few.
Three Years On
The Open Banking Implementation Entity (OBIE) is responsible for ensuring the effective implementation of the initiative in the UK. In early 2021, the OBIE released data to indicate how open banking had been adopted. A key highlight was that over 2.5 million bank customers in the UK were able to connect trusted third parties to their accounts, up from one million in early 2020. A likely factor for this growth is the coronavirus pandemic, which has made more people take up fintech solutions that use open banking to connect to users’ bank accounts.
Underlining the growth in user numbers is a stronger collaboration between legacy institutions and smaller fintech challengers. Innovation has become a shared objective for these two parties, and as fintech entrepreneurs such as Razi Salih know, the benefits are being felt by consumers.
Enhanced collaboration also makes it easier for bank customers to have greater control over their finances, as they now have a clearer view of their personal data.