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The history of Open Banking: Birth of a billion-dollar revolution
Open banking has been around for years in various forms, but it’s only now that its full potential is being realised.
This is an excerpt from AltFi’s Open Banking State of the Market Report 2022, which is available for free here.
Ask a banking executive when they first encountered open banking, and they are likely to struggle to put an exact date on it. Unlike the moon landing, the arrival of open banking (or its key tenets: the use of open source technology to bring greater financial transparency, improve services and increase banking competition) has not been a single event but has crept into the banking firmament over the years in different guises. Yes, there have been milestone events—the two European Payment Services Directives in 2007 and 2016, and the CMA ordering the UK’s biggest banks to start open banking in 2018—but the seeds of open banking were kicking around before these events.
Heard Of Open Banking?
“For me [I first heard] the term open banking, or trying to create better consumer outcomes, probably in 2012 or 2013,” said Michael Donald, founder and CEO of ImageNPay, the digital payments firm.
It was, however, a little later for another finance executive. Brendan Jones, COO and co-founder of Konsentus, an open banking SaaS business, said: “The term open banking is something that has been used now for the last three or four years. Initially, it was called Access to Accounts, which was the more technical term. And then it sort of developed into this term of open banking.”
Some might date open banking’s provenance, in Europe at least, further back, to 1980 when Deutsche Bundespost (German Federal Post Office) ran an experiment with five computers and 2,000 participants, which saw a few participants being able to process their banking transactions via screen text. The experiment, deemed a success, was viewed as the first appearance of a self-serving bank machine.
Germany, in fact, was something of an open banking pioneer and also developed the Home Banking Computer Interface (HBCI), an open standard for customer self-service machines and electronic banking, which launched in 1998. HBCI was later combined with screen scraping technology to form what became Sofort, the German online payments firm snapped up by Klarna in 2013 for around $150m. Fast-forward to 2007 in Europe and the arrival of a milestone event, PSD1, devised by the European Commission, to harmonise payment services regulation across the EU and also increase competition across financial services.
Midata And Early Open Banking Incarnations In The UK
In the UK, meanwhile, the devastation wrought by the 2007 financial crisis not only led to the deepest recession ever experienced in the UK, but was also a spark to reform the banking system, which had been saved from collapse by billions of pounds of taxpayers' money. The government, many believe, did not forget the billions spent on rescuing Lloyds Banking Group and the Royal Bank of Scotland from imminent collapse when a new law challenging the dominance of the big banks was later introduced. Before that, however, came the Midata initiative, first announced in 2011, a government-orchestrated scheme helping Britons download their current account transaction data and put it into online tools to increase bank switching.
Voluntarily backed by the likes of RBS and Visa, Midata eventually rolled out in 2015 with the grandiose pledge that it would “change personal banking forever”. Anthony Browne, the then chief executive of the British Banker's Association: gushed: “This is an exciting innovation that will give customers more help when searching for the best current account for them from more than 200 on the UK market.” But the initiative rolled out beset by problems: the customer experience was poor; it offered just a snapshot of data rather than an on-going feed; and customers could also alter the data, undermining its use for areas like credit scoring. However, experts noticed that the Open Banking Implementation Entity (OBIE), set up in 2016 to increase competition in the banking sector, pointedly referenced learnings from Midata in creating open banking, as it’s known today. Meanwhile, other commercially driven open-banking focused initiatives were taking place, but were largely testing the waters.
Struggles Of Early Incarnations
Experts believe these open banking forerunners didn’t fail in as much as they struggled to scale. Adam Moulson, chief commercial officer at Griffin, the banking-as-a-service provider, said: “They didn’t really fail, it was just very difficult to scale efficiently. Think about the SME accounting systems from Sage, Xero etc. They all required easy, safe and reliable access to their customers' bank account data. Back then, they would have to gather account login data from each customer in a non-standardised way and enter that information into bilateral arrangements with all of the big banks, while simultaneously integrating with each bank. Never mind the maintenance this requires.” Helen Child, the founder of Open Banking Excellence (OBE), the open banking community made up of fintechs, banks and regulators, cites the lack of “interoperability” in the early days. She said: “Before open banking, there was no interoperability between different providers. Without standards, we risk witnessing the creation of walled gardens that kept customers from accessing rivals’ products…”
Want to keep going? Read the full feature in AltFi’s Open Banking State of the Market Report 2022, out now!