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Three years since the launch of PSD2 – where is Open Banking now?

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Three years since the launch of PSD2 – where is Open Banking now? 1

By Jonathan Hughes, Co Founder and COO of Pollinate International and CEO of Pollinate Horizons

January of this year marked the three-year anniversary of Payment Services Directive 2 (PSD2), and while Open Banking is still arguably in its infancy, it’s proving to be an attractive opportunity for fintechs and banks to work in partnership.

The fundamental benefits of Open Banking – improved customer experience, new revenue streams, and a sustainable service model – underpinned by a regulatory imperative, have ensured that banks and fintechs have kept momentum, and moved to roll it out, despite the complexity and challenges that such a change inevitably presents. The nirvana of a truly open, accessible and low-cost infrastructure is still a long way off, but significant progress has been made that suggests we are well on the road.

Since its inception, 300 fintechs and innovative providers have joined the ecosystem, and over 2.5 million UK consumers and businesses now use open banking-enabled products to manage their finances, access credit, and make payments, according to Open Banking.

The landscape has started to move beyond compliance, into genuine competition and innovation. The ability for consumers to share product and transactional data has seen the biggest uptake in new products and services. In fact, Open Banking’s figures have seen an increase in API call volume from 66.8 million in 2018 to nearly 6 billion in 2020.

While the UK has led the Open Banking market, the rest of Europe is starting to follow, offering account aggregation services. Customers are being given the ability to share their product and transaction data to regulated third parties securely, when using new services or applying for products such as mortgages.

Beyond Europe, other countries worldwide are starting to adopt Open Banking. Some are introducing regulation to drive changes, while others are looking to encourage change. Australia, Norway and Iceland are at the forefront with the likes of Thailand, Japan, Mexico and Brazil following quickly behind.

The landscape is also moving beyond banking and into other mainstream financial areas through the concept of Open Finance, enabling a wide range of financial services to use the same principles of data sharing to provide value-added products such as pensions and investments, among others.

Other sectors have been watching the revolution of Open Banking and seeing the advantages of data-sharing to provide better services and products to customers. Open Energy is another initiative that is currently being explored with non-profit making organisations, such as Icebreaker, driving change in this sector.

However, there are some warning signs on the horizon. For UK fintechs, Brexit has had a detrimental effect on market size, shrinking it from 720 million across UK and Europe, to just the size of the UK population – 60 million. European fintechs can continue to operate in the UK thanks to passporting, but UK-based fintechs would need to set up a parallel infrastructure in Europe, creating a costly logistical burden.

In addition, there is a real danger that the UK starts to lose pace in this important initiative. Over the past three years, the UK has been positioned as a global leader in fintech innovation, growth, and competition – with Open Banking contributing to this. Originally put in place by the Competition and Markets Authority (CMA), the industry has delivered Open Banking functionality that was mandated, such as data sharing or AISP deliverables, but throughout that process some banks have pushed back on some of the exciting roadmap items that were not enforced. This has led to the delivery being optional or banks charging for their use. Some in the industry are now arguing that Open Banking has met the objectives of the CMA order and should continue its journey through competition alone, which will inevitably cause innovation to stall without the regulation driving it forward.

There are clear benefits to Open Banking – both immediate and long-term. If the UK wants to push through the headwinds created by Brexit and keep its place as a global fintech leader, the regulatory mandate should remain and the Open Banking journey must continue.

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