Open Banking
As of 2022, the internet user penetration rate in the United Kingdom (UK) was nearly 93 percent. This share is projected to grow to 94 percent by 2027.
The UK population’s use of the internet had increased in recent years, going from around 89 percent in 2018 to over 92 percent in 2021.
Whilst the FCA was inhibited from requiring any bank or payment provider to implement standards, the CMA was restricted from mandating any banks that were out with its competing investigation. As a result of this, the implementation in the UK of open banking became both narrow in scope, restricted to payments data and also 2-tier as a result of the legal parameters within which the regulators were working. Soft power and incentives (of an easier way to become compliant) were used to encourage other providers to adopt the standards. This was largely successful although OBIE has no power to mandate and supervise the technical qualities of the providers who were not subject to the CMA order.
As the first country globally to require API standard delivery of open banking, there were a lot of operational, technical, governance, security and user experience challenges to overcome. Whilst the implementation was expensive and took a lot of time, it remains from a technology perspective the benchmark by which other global implementations are measured.
Following the initial implementation of scope in 2019, the FCA formed a working group of private sector and regulatory actors to explore the journey to open finance, bringing other financial verticals into scope. In parallel, other ‘Open Data’ sectors, such as utilities, property, transport, telephony and health, were contemplated by the UK government following the lead of Customer Data Rights (CDR) from Australia. This work which represents an update to privacy law (GDPR) has been encapsulated in the smart data legislation (Data Protection and Digital Information Bill). This bill has had numerous delays but is generally viewed as bipartisan and as of July 2024, the market is expecting the new government to pursue the bill and make it law.
Following Brexit, the UK had some autonomy to address some of the structural issues in the law-making and rule-making that had led to a 2 tier system where the various stakeholders in government and regulatory agencies combined to seek to level the playing field by bringing other providers up to the standards of the CMA9. One of the key challenges with the blocks on the bill has been on providing the regulators with sufficient power to drive the change. At the same time, there have been challenges in considering the future of open banking and the role of the entity set up to deliver it. There have been various attempts by trade associations in the market to provide a platform for forward planning of governance and funding and the evolution of the technical standards.
In parallel to the role of the FCA as the lead regulator for PSD2, the Payments Systems Regulator (PSR) has been developing belief in the role of payment initiation in stimulating competition in the UK payments market. There has also been a lot of work done by both regulators in exploring consumer protection and preventing scams and fraudulent activity. In order to remain coordinated on planning the future of open banking and open finance in the UK, and the role of the OBIE, the PSR, FCA, CMA and HM Treasury formed a Joint Regulatory Oversight Committee (JROC) which has received reports and market input which will maintain levels of mandation in key areas whilst also fostering an environment for commercial activities.
In January 2023, the CMA announced that the standards had been fully implemented by the six largest banks in the UK.
In April 2023 the JROC released their much-anticipated report, outlining the regulatory landscape for the next two years. It highlights the ambition for Open Banking payments to rival card payments. The report also promises concrete steps, including establishing a framework for fraud data collection, a crucial step for wider Open Banking payment adoption. Additionally, it expects the future entity to facilitate multilateral agreements for variable recurring payments (VRPs), addressing a longstanding challenge in creating a sustainable commercial model for the industry.
The report envisions a commercially sustainable environment for all stakeholders, with a focus on premium APIs like VRPs and data APIs. While it mentions improvements in API performance and error message reporting, specifics are lacking. The report also addresses the design of the future entity, with broader representation and funding from all authorised payment service providers (ASPSPs). It explores various funding options, excluding the use of the FCA levy or similar mechanisms, emphasising the need for a more adaptable approach.
Looking to the long-term regulatory future, the report expresses optimism about Open Banking’s prospects in the UK. It outlines 29 actions to ensure scalability and readiness for Open Finance. Furthermore, the report discusses the Data Protection and Digital Information bill, which delegates powers to create smart data schemes, including Open Finance, under the relevant ministers of state.In July 2024, the new UK government brought back the bill as the Digital Information and Smart Data Bill, which opens new areas for data access such as mortgages, pensions, investments and savings, as well as creating powers to build on OBL by creating a standards body. . The OBL response to JROCs proposal as at May 2024 can be found here
In their European Open Banking league, Yapily ranked the United Kingdom 1st out of 18 countries. The UK comes out on top as the leading adopter of Open Banking, with its clear functionality and more widespread mandating of other features, such as Bulk Payments and VRP (variable recurring payments). Yapily states that Open Banking has been implemented successfully in the UK and continues that the focus should now be on fixing some of the remaining issues in the technical implementation, such as the user experience and API quality.
The UK also tops Yapily’s Open Banking League table due to high digital readiness among the public, a pro-innovation regulatory environment, and the most TPPs (Third-Party-Providers) across Europe.
As of June 2024, version 4 of the open banking standards was released in the UK, and the key changes in that iteration were as follows:
According to The Global Findex Database, 100% of British adults had bank accounts in 2021.
The UK Open Banking impact report published in October 2023 showed that within 4 years, 11% of UK consumers were active users of Open Banking as well as 17% of small businesses. Financial decision making, payments and borrowing account for 75% of propositions, but by far the most dramatic change is the increase of Open Banking payments which continue to accelerate. Whilst there is still a way to go, to catch up on card payments, the total monthly value of electronic payments initiated by a third party via API was £4.5bn at time of publication. As a comparison, the UK Finance report from April 2024 shows that combined debit and credit card transactions in the UK have trended down 1.9% to £73.9bn in the month. Whereas the average transaction value of an Open Banking payment, which runs over the rails of UK Banking Faster Payments, is £450, the average transaction of combined debit and credit cards is £36.
In a recent study researching the Open Banking adoption among consumers, British consumers scored higher than average Europeans in nearly all areas measured. 36% of British consumers were interested in receiving intelligent assistance to manage payments, 34% were interested in having their data used to develop convenient new payment methods, 32% having their data used in aggregating financial information and storing it in one place and 29% in having their data used to offer a better range or better quality of services.
The UK has one of the highest Fintech adoption rates in the world at 71%. Ernst & Young Global Limited (EY) asked consumers about their use of 19 Fintech services across five categories. Fintech adopter was defined as someone who has used two or more “buckets” of services since this indicates a habitual change in behaviour in a way that the use of a single service does not. A bucket consists of a major Fintech service or two or more related services, such as online stockbroking and online investment advice.
In addition, Open Banking is well adopted in the UK, where over 9.97 million people reportedly use Open Banking-enabled products and services according to OBL as at June 2024. . TPPs develop apps that allow the consumer to keep track of their finances, and savings, stick to their budget, and so on. 76% of consumers using Personal Finance Management (PFM) apps acknowledged that these services have helped them save more and build a financial cushion. 75% said that PFMs helped them to keep on top of expenditures, 62% reduce unnecessary expenditures, 64% keep to a budget, 59% shop around more and 55% reduce fees and costs.
Savings app users clearly believe the apps are helping them to save. For more than one in five, this was their first savings account, and overall, nearly two-thirds had seen their savings go up since they started to use their app. Three-quarters agreed that they now found it easier to regularly save money left over each month, with 71% now feeling more confident that they have a financial cushion or buffer to meet unexpected spending.
There are clearly idiosyncrasies resulting from the CMA order, PSD2 and commercial activities in the open finance domain. Having completed the delivery of original PSD2 scope and implementation of the CMA order (but still waiting for the smart data legislation to conclude to provide additional powers) the JROC has proposed a three stage approach which has Open Banking Limited (OBL), which now replaces OBIE, continuing to operate in its current role before transitioning to an Interim Entity which will split the governance and funding from the standards maintenance and compliance. The third stage will post date the conclusion of the legislation to provide enabling regulatory powers to complement increasingly commercial adaptations
According to Deloitte’s research there are more than 2,500 Fintechs in the UK. The Open Banking ecosystem in the UK is thriving with 325 regulated providers made up of 234 third-party providers and 91 account providers. As of March 2022, there were 128 fully regulated firms with live-to-market Open Banking-enabled products and services. Estimates for OBL in June 2024 suggest open banking is worth more than £4bn to the economy and predicts the future value of open banking and smart data schemes to be worth £28bn. The fully regulated market remains dominated by propositions addressing improved financial decision-making , expanded payments choice and better borrowing . Most agent propositions are clustered around improved financial decision-making (, expanded payments choice and better borrowing . However, this market sector is highly innovative, with unique propositions to meet specific market needs.(28m estimate form DTI)
Yapily’s analysis found that the UK processed the largest number of API calls and payment volumes over the last 12 months compared to its European neighbours, with payment conversion rates also increasing between 2021 to 2022. UK banks are some of the most advanced in Europe when it comes to enabling APIs for TPPs to utilise. They are also keen to improve and evolve their capabilities as well as resolve reported issues when they arise. UK banks also offer wide coverage and a consistently high API standard. The UK’s Faster Payments System, designed to speed up the process of sending and receiving money via bank-to-bank transfers, is enabling Open Banking payments to accelerate at speed.
At the end of 2021, over 26.6m Open Banking payments have been made; this is an increase of more than 500% in 12 months. Earlier in 2021, HM Revenue & Customs (HMRC) became the first Government department in the world to allow users to make Open Banking payments. To date, more than £2.4bn has been made using this method, which significantly reduces the risk of fraud, and customer error when making the payment as well as the cost of the transaction too – saving taxpayers money.
The Financial Services Skills Commission (FSSC) reported that 92% of their member firms had hard-to-fill vacancies in 2021. Almost a quarter of firms cite technological change as a key driver, and a similar proportion cites changing customer behaviour. Changes to products and services and to business models and strategies are also widely mentioned. Skills are the key to adapting to this rapid change, leveraging technology for competitive advantage and sustainable growth. 42% of firms globally that have not pursued technological transformation say it is because of difficulties sourcing talent.
Another report by Consultancy Core-Asset stated that there will continue to be significant candidate skills shortages. The report highlights demand within Fintech for business analysts and developers, particularly those with cloud technologies and technical and solutions architects and engineers. The skill set ‘hot spots’ include fund accounting, performance, client services, implementation/transitions, third-party oversight, corporate actions, trade support, settlements, derivatives and client governance.
The UK FCA created a regulatory sandbox in 2016. The Regulatory Sandbox allows firms to test innovative propositions in the market with real consumers. It is open for applications at any point throughout the year.
The United Kingdom uses the UK Open Banking Standard.
