In January 2018, the EU's second payments directive (PSD2) was introduced to drive incumbent FS institutions into the world of open banking, opening them up to competition from FinTechs.
Through driving more competition and innovation into the financial services sector, the EU directive is seeking to reduce the longstanding monopoly banks have over customer data. Indeed, the emphasis is on placing customer needs at the heart of financial services.
We're now a year and a bit into the legislation, so is it fair to assume open banking has gone from being a buzzword to a meaningful force of customer-centred financial services?
The answer is yes, and no.
What is Open Banking?
In a nutshell, open banking means banks are obliged to share customers' transactional financial data with authorised third parties via dedicated API's. These financial services range from credit scoring systems, banking apps (like Monzo) and internet payments which have the potential to bring considerable benefits to consumers. This is seen in the capabilities for aggregating financial data, displaying spending patterns, automating parts of the decision process and even offering new ways to pay.
The innovation shown in converging these new technologies and Financial Services means that banking is becoming speedier, simpler and more convenient to individual consumers who are able to tailor their financial information to what works best for them personally.
(For a more comprehensive breakdown on what open banking means for consumers, take a look at this video).
But it is not without its flaws.
While the potential for enhanced competition has certainly caused a massive stir in the FS world, a change which has been heavily reflected in the investment landscape, open banking is a bit of a slow burn from a consumer perspective. Only 22% had heard of it as of November last year, leading it to be hailed as "the revolution that never was" by critics.
And for those that have heard of it, residual concerns over security haven't been entirely dealt with. The introduction of open banking appears not to have increased trust in Financial Services with 26% believing that the concept is merely a means for banks to share customer data. Concerns have been raised that with a potentially complicated chain of providers with access to it, it may not always be clear who is liable for loss of data. Indeed, given recent high-profile data scandals around the amount of data held by our Social Media accounts, it seems more than likely that consumers may not know exactly what they are agreeing to when they give consent.
Moreover, there's a valid discussion to be had around financial exclusion. Open banking has little benefit to less tech savvy people, such as the elderly, who are not native smartphone users. Although the popularity of banking apps is certainly on the rise, only 13% of over-65s use this method to bank. Indeed, over a third of this group still depend on visits to their local branch over digital banking channels – a not inconsequential segment of the population. As open banking increases in popularity, financial infrastructures need to ready themselves to ensure that their innovation doesn't become exclusive. Open banking's customer-centric revolution is limited if it decisively excludes portions of society.
Many are hailing 2019 as the year of open banking, with pWc predicting 64% uptake among the adult population by 2022. While most would be hard-pressed to say that it isn't a major step for the user, I think the industry still needs to do more to raise awareness, and convince consumers that it's definitely their interests which are at the legislation's heart.