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UK Open Banking is at a crossroads
As Open Banking faces its biggest shakeup in years, what’s next after the OBIE, asks Nick Caley, VP of UK and Ireland at ForgeRock.
UK Open Banking is undergoing its biggest shakeup in years. The body established by the CMA’s Retail Banking Market Investigation Order in 2017 to deliver open banking - the UK Open Banking Implementation Entity (OBIE) - is being phased out and a replacement will be needed.
Under the OBIE, the Open Banking system has flourished. It has accumulated over 700 market participants, and other industries have come to eye the space with envy. What comes after the OBIE, therefore, matters for UK financial services as well as other industries and countries looking on.
However, the successor organisation’s precise nature is up in the air. As the CMA notes: “Although the core elements of open banking are now in place… it is not inevitable that it will continue on the same trajectory.” Industry, lobby groups and government all have a view.
Meanwhile, the pandemic has transformed consumers’ finances and spending behaviours. Open Banking is experiencing a resultant surge in interest, investment and innovation - monthly active user rates doubled during 2020 according to the OBIE. The appetite for Open Banking products and services has never been greater.
In this context, and in the wake of recent organisational turmoil at OBIE and lingering concerns around fraud involving Open Banking payments, can the regulator's consumer-centric ambitions be kept on track as fintechs and banks jockey for influence?
Regulators need to keep their hands firmly on the steering wheel
Because the ecosystem resulted from a market intervention by regulators, regulatory oversight has been baked in from day one. Currently, the Implementation Trustee has a dedicated monitoring function, tasked with ensuring that the retail banks subject to the Order - the CMA9 - are compliant and that the system is operating as desired.
To date, this arrangement has mostly ensured that the CMA9 has acted in the interests of the broader ecosystem; the danger is that they begin to prioritise their own commercial interests. The CMA is not unaware of this: “Further [Open Banking] innovation may be stalled where there are conflicts with banks’ commercial objectives.” This is a concern for UK fintech, which raised the commercialisation of the future entity in response to the CMA’s consultation.
Currently, regulatory oversight of the OBIE and CMA9 is tied to the monitoring and enforcement of the CMA9 Order itself, raising the possibility that the oversight currently in place will be decoupled from the future entity. Yet this is exactly what will happen under UK Finance’s current transitional proposal unless the CMA intervenes.
The needs of the ecosystem are evolving beyond the scope of the Order. But this is one aspect of the current arrangement that should be carried over, if only to allay the concerns of other parties in the ecosystem. If the scope of the future entity expands to Open Finance (more on this below) other regulators like the FCA could also have a monitoring and oversight role.
For the future entity, Open Finance should be the goal
The surge in open banking adoption is being driven primarily by a core of tech-savvy professionals, according to a recent McKinsey survey. These same consumers are increasingly demanding more oversight and control of their overall financial health and are ready for API-driven innovations which will allow them to achieve that - beyond just banking.
There is an emerging industry consensus that Open Finance merits the same efforts which kickstarted Open Banking. The FCA has signalled its interest in furthering Open Finance and suggested that the building blocks should mirror the Open Banking framework.
However, as it stands, the future entity will subordinate Open Finance to a secondary ‘Open Futures board’ outside of the primary governance structure (purportedly to avoid conflicts of interest and focus on “more macro, longer-term” considerations).
Eager to expand into Open Finance, UK fintechs have taken issue with this arrangement. Innovate Finance decried this setup as “too narrow” and said that the development of Open Finance initiatives should be the “overarching aim” of the future entity.
It’s hard to disagree. Open Finance would create a variety of secure, trustworthy, and user-friendly tools that empower users to engage more meaningfully with their finances and their data. This would have obvious benefits for consumers and industries and would strengthen the UK’s position in an emerging market in which it already leads Europe, and even the US, in terms of consumer adoption. From insurance to pensions and services catered to SMBs (which represent over 50 per cent of Europe’s GDP and 99 per cent of all businesses), there is an unlimited number of opportunities for disruption.
The road to Open Finance is paved with good intentions
The UK is on the brink of delivering another open data financial revolution but the future is uncertain.
Regulators must embrace their unique role in overseeing a new framework for Open Finance, which is currently unregulated, leaning on the successes of Open Banking and encouraging market participants to expand their focus for the benefit of consumers.
Conversely, UK Finance needs its actions to match its words and place Open Finance at the heart of the future entity so that it can fulfill its role as an ecosystem enabler and service provider.
The views and opinions expressed are not necessarily those of AltFi.
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