By Leon Muis, Chief Business Officer, Yolt Technology Services

The COVID-19 pandemic affected performance in most sectors in 2020, but crucially it did not hinder innovation in financial services. Indeed, many providers have invested to gain a competitive edge in the post-COVID world, making the sector a rare example of progress in 2020.

Open banking already had impressive momentum before the pandemic, doubling the number of users in the UK to reach one million in the preceding six months – but since then it has flourished and now exceeds the three million mark.

The COVID-19 crisis has encouraged millions of people to switch to digital financial services: the high street bank TSB saw the use of its mobile app increase threefold during lockdown, and more than half of UK banking consumers now use mobile money management apps on a regular basis. Despite the upheaval of the past year, a study by Yolt Technology Services shows that firms remain committed to harnessing the power of Application Programming Interfaces (APIs) to improve services, cut costs and boost business activity. Half of the 1,000 professionals surveyed by YTS – from banks, lenders, retailers, and personal finance management firms – said the crisis would make little difference to their attitude towards adoption and more than one in ten said they would embrace open banking even sooner as a result.

The success of open banking to date

Application Programme Interfaces (APIs) are the foundation of open banking, and they enable Account Information Services (AIS), Payment Initiation Services (PIS) and Data Enrichment capabilities.

Open banking is the secure way for consumers or businesses to authorise the sharing of their financial information. Previously a consumer-dominated technology, businesses are beginning to see the benefits of adopting open banking, and they can expect improved customer experience, boosts in efficiency, reductions in transaction and business costs, and improved transaction and data security.

AIS presents opportunities for banks and other businesses to gain a much clearer insight into the needs and behaviours of current and prospective customers. Although AIS is currently only applied to current accounts and credit cards, there are already many different use cases for the technology. For example, it can bring benefits for lenders by providing a way to credit score customers quickly and easily, and accessing customer account information (and combining this with data enrichment services) can allow retailers to offer finance, such as payment by instalments or buy now, pay later deals.

PIS lets customers pay for goods and services directly from their bank accounts, with no need to enter credit card details, benefiting from the security of their bank. Much of the advantage here is felt by retailers, because PIS can save each business up to 90 percent of the usual card processing fee per transaction. The potential to save millions of pounds in transaction fees would be critical in helping retailers recover from the effects of the lockdown, in a time when revenue has been severely affected. PIS also provides a secondary benefit to cash-strapped businesses through the instant transfer of funds, unlocking cashflow issues and providing immediate payment.

There is an increase in security, avoiding the need for consumers to share their card details, which will reassure consumers who are instinctively cautious about using new technology. For banks, it provides new visibility of transactions made on third-party cards, providing greater insight into customer behaviours and the competitive environment. Data enrichment allows AIS and PIS to create additional value from the data gathered, which in turn allows businesses to do things such as provide tailored product or service recommendations or improve efficiency on their side of the process.

 All in all, open banking already empowers businesses to transform the services they provide and the way they operate, but there is still so much of its potential which remains untapped.

2021: a year of great potential

Adoption rates will certainly continue to grow in 2021 as the switch to digital financial services becomes more popular and permanent, but the need for more work and progress is clear. Educating consumers and businesses is vital if open banking is to reach the end goal of open finance.

 Our recent research shows that 23 percent of the 800 firms surveyed did not understand that explicit consumer consent is needed to share financial information, and half of those not using open banking cited privacy concerns as a major reason for not adopting the technology. They were unaware that PIS actually improves the security of payments by removing the need to capture and store card details.  Misconceptions around data security and privacy with open banking are holding back widespread adoption and much-needed progress towards open finance. Making open banking more consumer friendly is another important goal. If the consent process for consumers is too complicated, they are unlikely to participate. More work needs to be done on improving the user experience which in turn will greatly benefit consumer adoption.

To address these challenges effectively, a set of principles needs to be formalised to ensure data alignment and provide clear definitions of what open banking and open finance means. These principles should be drawn up in a collaborative process involving fair representation from all parts of the financial service ecosystem. The Financial Conduct Authority (FCA) can play a crucial role here, providing a set of rules as well ensuring that firms adhere to those rules and act collaboratively, and it should be the mission of the open banking industry to be their partners in this endeavour.

The FCA has already taken the first steps towards open finance with its Call for Input demonstrating that it is firmly on the industry agenda. Ultimately this will allow the extension of open banking data to enable third-party providers to access customers’ data across a broader range of services and products. Open banking APIs currently only cover payment accounts, but around 3 million people in the UK are now using a form of open banking service. The potential for impressive growth is clear, and the groundwork is robust. With a step change in progress over the coming year, the potential of open banking and the world of open finance will become even more attractive.