Open Banking: Regulation vs customer needs

Hans Tesselaar at BIAN asks how the UK can lead the way when it comes to Open Banking

 

Open banking will eventually change how we manage our finances forever, promoting a more holistic and transparent way of banking. Currently, the number of users worldwide is forecast to reach 132.2 million by 2024, a significant increase from the 24.4 million users in 2020.

 

If open banking is to reach its potential, it must be a key priority for the industry, regulators, and governments. By failing to prioritise the initiative, obstacles will remain, including a lack of consumer education, industry collaboration and the continued use of legacy infrastructure. One of the biggest ways the industry can overcome these obstacles is to take a more ‘open’ approach to open banking.

 

In the UK, for example, despite initially leading the way and introducing the concept in 2017, the industry should look beyond its own four walls, and asses the different approaches being taken around the world. If it focuses on the local market alone, it will continue to lose its position as a world-leading financial services market.

 

Does regulation stunt innovation? 

Recently in the UK, a report created by the Joint Regulatory Oversight Committee announced its plans to establish a long-term regulatory framework. The framework aims to play an essential part in realising the UK’s vision for open banking and details the role that the Treasury, the FCA and Payments System Regulator (PSR) will have in providing oversight across the open banking ecosystem.

 

While it is positive the UK government is focused on evolving and improving the regulation, much more still needs to be done to make it a real successful.

 

The EU also takes a regulatory approach to open banking, but the UK now has a limited role in driving any change because of Brexit. So, with the European market predicted to be the largest Open Banking market by 2024, the continent as a whole would do well to collaborate to understand the customer’s needs while reacting to market demand and expanding further.

 

If the UK is serious about maintaining its position on a global stage, it must be careful that it doesn’t cut itself off. Instead, it should look to those larger banks headquartered locally – NatWest, Lloyds, HSBC, and Barclays, to name just a few – with international exposure and influence. 

 

Being open to learning from global examples and listening to industry leaders will be important if the UK can incorporate successful practices into its policy to encourage open banking.  

 

An alternative approach 

Across the globe, there are different approaches to open banking being adopted. Outside of Europe, Australia is taking a different regulatory approach.  

 

In Australia, the Consumer Data Right Act (CDR) was introduced in 2019 and allows consumers to share their data with authorised third parties. The main difference, however, is that the CDR is a data policy initiative. This means that it can be applied to any sector, expanding the possibilities for open banking. 

 

The CDR is also the first legislation to introduce ‘reciprocity’, enabling businesses to share real-time data. This further supports open banking due to the ease of sharing payment information.  

 

Data portability, a similar concept that has been introduced in the EU, has failed, however, to satisfy banks, with the industry questioning the lack of reciprocity between banks and third parties.

 

This is because it will open banks up to potential losses. If the customer is looking to take their business to a new financial services provider, their existing bank is obliged to hand over their data - and the relationships the bank has built up over a long time. Yet, the same does not apply if a bank would like to access data held on a tech vendor platform – thereby giving a competitive advantage to those vendors.

 

Elsewhere, some countries are taking a different, market-driven approach. Singapore, for example, has witnessed high adoption among financial institutions.

 

Research has shown that an overwhelming majority (90%) of professionals consider open banking either a ‘must have’ or ‘important’, and 90% of finance professionals agree that it has also had a positive impact on the industry and made it more collaborative. This is despite no mandatory requirements.

 

While adoption has increased in APAC over the past few years, the space remains in the early stages of development. This is because many banks are just starting their digital transformation journeys and struggling with core legacy systems and closed or outdated architectures. This is where a global ecosystem will be key.

 

A global ecosystem

No matter the approach to open banking, the industry must form an ecosystem alongside fintechs, service providers, and aggregators. This will help banks quickly introduce new products and services – while also enabling open banking. 

 

A coreless banking approach can help banks do just this, while empowering them to select the software vendors needed to obtain best-of-breed solutions for each application without worrying too much about interoperability.

 

By translating each proprietary message into one standard message model, communication between financial services is, therefore, significantly enhanced, ensuring that each solution can seamlessly connect and exchange data. Banks can then utilise and combine third-party solutions to deliver the best open banking services for their customers.

 

This means that banks can focus on incorporating the technology they need to enable open banking services and drive demand among customers – regardless of whether they are regulatory or market-driven, at a faster and more efficient pace.

 

Taking a step back 

If the UK continues to focus on regulation alone, it will lose touch with what the customer needs from its bank, and open banking will fail to make an impact. This will ultimately make the UK industry less competitive when compared with more global players. 

 

Instead, it must look to other nations for inspiration and take a more open approach to open banking. This will help them create a more connected and collaborative service designed to get the best deal for both the customer and the bank. 

 

I urge the UK to take a step back and remember exactly why open banking was introduced in 2016. If it can do this, I fully believe it will become increasingly competitive across the globe.

 

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Hans Tesselaar is Executive Director at BIAN, the Banking Industry Architecture Network

 

Main image courtesy of iStockPhoto.com