Five years on: is open banking at risk of becoming an echo chamber?

Today marks five years since PSD2 came into force, or, depending on how you look at it, open banking’s fifth birthday.

Open banking has been described as a disruptive new concept that will change the way we pay, move, and manage our money for the better. 

Whilst correct in theory, the reality is much more nuanced than this: 1) open banking, like all disruptive technologies, will only mature as quickly as its ecosystem allows it to; and 2) open banking only scratches the surface of the much bigger journey we are on towards open finance, and beyond this, open data. 

Whilst the industry has seen encouraging steps towards greater adoption, innovation and competition over the last few years, open banking’s progress is at risk of being stifled by its own echo chamber. 

The policymaking voices that agree it has huge potential are the same ones moving too slowly to regulate for a future in which open finance exists.

So where are we now, and what could we achieve with more widespread industry participation in the years to come?

Where are we now?

In 2022, we saw adoption continue to grow exponentially with the number of people using open banking surpassing six million. 

We’ve seen new use cases emerge as a result of the Competition and Markets Authority mandating Variable Recurring Payments (VRP) for sweeping. 

And we’ve seen incremental progress in regulation, too, from the Financial Conduct Authority scrapping the 90 day rule to the formulation of the Joint Regulatory Oversight Committee (JROC).

However, inevitable hurdles lie ahead in transforming early adoption into mainstream implementation. The Government and regulators have two key opportunities to bypass these hurdles. 

First, we need to see the open banking opportunity converted and solidified, securing ‘quick wins’ like expanding API-first access to all banking data, agreeing new protocols for non-sweeping VRP, and mandating stricter minimum performance standards. 

Second, for open banking’s next five years to be even more transformational than the last, we will require faster Government movement on open finance. 

Regulators must accelerate the development of an open finance framework, while governance structures are still being built, expanding the principles of open banking to the wider financial sector.

Without a longer-term focus on open finance, and indeed open data, policymakers and regulators will lose out on the countless ways in which the principle of open banking can be fashioned into something truly game-changing. 

Against a backdrop of existing trends shaping the future of fintech, here’s what the next five years could have in store for us if we all move quickly to embrace open banking.

1. Democratisation is in; monopoly is out

Over the last year, nine in 10 consumers and three in four businesses used financial products and services to help tackle the cost of living crisis. 

Now more than ever, people need tailored financial products and services that are right for them, particularly as the UK goes into 2023 on unsteady economic footing. That means the golden word is access.

Open banking is founded on the idea of access and guided by the principle of better financial services for everyone. That means monopolies on data and payments held by banks and card networks are fading into obscurity – and for good reason.

As an example, legacy scoring systems have prevented credit-worthy borrowers from accessing affordable finance for too long. 

But open banking is helping to serve the underbanked population by enabling businesses consented access to customers’ financial data.  

Analysing factors such as income and expenses to assess creditworthiness means lenders can make better informed decisions and improve access to finance for customers when they need it most.

As open banking and the democratisation of financial services grows, so too does the potential for open finance, which would open up data and payments across all financial products and services (think insurance, mortgages, savings, pensions, consumer credit – the possibilities are endless). 

As the inevitable direction of travel, an open financial ecosystem would mean a true shift towards access, equipping consumers and businesses with the tools they need to have better control and visibility over their finances.

1. Disruption is in; invention is out

What does it mean to truly disrupt a space? It doesn’t mean reinventing the wheel; it means identifying markets ripe for change and finding a better way of doing things for its participants.  

True disruption is led by two things: need and opportunity. Across the tech sector, but particularly in financial services, years to come will offer both. The need? Demand for more innovative, personalised, and accessible financial solutions that solve real-world problems for consumers and businesses. The opportunity? To create an open financial ecosystem that works for everyone. 

Open banking has been embedded in banking and payments from its conception. But in 2022, we witnessed its disruption across a wider range of verticals including property, insurance, and crypto. And as we head into 2023 and beyond, we can expect even more new and innovative use cases to be realised.

1. Integration is in; isolation is out

If open banking in 2022 was all about data or payments, looking forward, we can expect to see the two working more in tandem. 

Crucially, regulators will need to move rapidly to provide the frameworks in which payments and data work hand-in-hand. 

The first steps could include developing protocols for non-sweeping VRP, or expanding API-first access – both of which catalyse the move towards a more integrated open banking ecosystem.

Open banking has, of course, always championed the concept of interconnectedness. But it is still stuck in silos when we come to think about data and payments. Often referred to as the two sides of the open banking coin, we need to start changing this narrative going forwards. 

Bundling multiple products together to create a more convenient experience is hardly new (think: a McDonalds Happy Meal or vehicle MOT). But open banking has only just begun to dip its toe into these waters. 

By integrating payments with data, we will see the rise of ‘smart payments’, where data insights will help optimise payment success rates, anticipate fraudulent transactions before they even happen, and offer more sympathetic lending and repayment solutions to customers. 

If the last five years are to be remembered as when open banking took flight, the next five will be when it becomes the norm – but only with the nourishment of a healthy regulatory ecosystem and an honest critique of how we create the most long-lasting change. 

With the right steps from Government, fintechs, and financial institutions, we could see real transformation in the next five years. In the more immediate term, the evolution of the sector rests on policymakers’ and regulators’ willingness to act, sowing the seeds that will allow open banking to flourish.

The views and opinions expressed are not necessarily those of AltFi.