What does ‘Open Banking’ actually mean?

Take a quick look at your LinkedIn newsfeed and you’ll see a range of buzzwords and hollow industry-specific phrases that can have a hundred different meanings.

(We’re thinking ‘Elevator pitch’ and ‘Blue-sky thinking’ here.)

Sometimes though, there are terms that are 100% genuine (even if they sound a bit trivial). Phrases you should pay attention to, terms that are interesting and affect us all.  Open Banking is one of them.

Open Banking isn’t a fad, it’s the catch-all term for a set of processes, rules and products that are transforming the financial services industry and bringing it into the 21st Century.

A fundamental change in customer behaviour

It’s taken a while, but we’re now all used to using online banking in the UK.

Statistics from 2019 show that well over 75% of UK bank account holders now use some form of online banking. (With Covid and the inability to bank in person, some commentators expect this to now be at around 90%).

Initially online banking was pretty basic, an extension of that classic service: telephone banking. You could schedule a payment, see your balance and maybe report a card lost or stolen, but that was it. It was more of a novelty than an actual useful tool.

Yet as online banking grew in popularity, challenger banks started to emerge, new banks who were aiming to shake things up. We’re thinking the digital-only banks like Monzo and Starling.

What started to became clear over time though was that the mammoth top banks simply didn’t have to work as hard to gain and retain customers.

It became clear to all that the market was fundamentally stacked against the challengers, who could shake up the market and drive real competition.

Something pretty unhealthy in a market based economy like the UK.

Open Banking becomes the Law

In 2016 the Competition and Markets Authority launched an investigation into the banking sector. Their aim was to find solutions to make the banking sector much more customer friendly and increase competition.

Their investigations produced a report that found that the banking sector was: “not as innovative or competitive as it needs to be” and that: “the older and larger banks, which still account for the large majority of the retail banking market, do not have to work hard enough to win and retain customers and it is difficult for new and smaller providers to attract customers.

This was damning for the big banks and a lifeline to their challengers. What most people knew in the sector was now written in black and white and endorsed by the Government.

The report was not just a set of criticisms though, crucially also looked at how to remedy the situation. It came up with a number of proactive solutions to improve things, the main one being the legally enforced implementation of Open Banking.

To put it into context, the UK is home to a thriving fintech sector, however there was real frustration that the big banks were simply sealing off their customers from innovation and technological advancements by stopping third party integrations.

Here’s a hypothetical example of the problem that Open Banking addressed:

An app was launched that allowed a current account to be reviewed by AI and then have the most appropriate savings accounts suggested to the holder.

Challenger banks could easily plug into it (and were), yet the big banks could not or would not do the same. Sometimes because it would cost money to let the app in, other times, to seal their customers data off to keep them within their own ecosystem.

The challenger banks were competing on modern rules, yet the big banks were still playing the game from the previous century.

An artificial two tier system was at play.

To address this the UK launched the OBIE, Open Banking Implementation Entity. The OBIE oversaw a timescale that forced 9 of the UK’s biggest banks to get Open Banking up and running.

Several years later we get to today where the big 9 banks are having to play on a much more level playing field with their challengers than ever before.

A world of possibilities

The OBIE wasn’t set up just to knock down big banks a peg or two. It was set up to oversee a wholesale transformation in the way individuals and companies manage money in the UK.

Now on an almost monthly basis new tools are being introduced, tools that are only available because of Open Banking.

Examples include linking any current account with accounting or expense management software, tools that help you track and manage personal finance and tools that round up your daily spend and donate it to charity.

As the OBIE say themselves:

As the open banking programme matures, the OBIE is evolving from a singularly focussed programme delivery entity, into a broader ecosystem enabler and services provider.

The UK is building a reputation as being at the forefront of financial technology and it is thanks in a large part to the Open Banking Initiative that we are able to claim this.

As time evolves we can expect to see many, many more ways that Open Banking will be used.

The possibilities really are endless!

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