Building on solid foundations: Writing the next chapter of the UK’s open banking story

First conceived in the UK, the vision for open banking was an API-based system that would enable the systematic sharing and portability of data and payments uniformity.

The potential for all parties to benefit from open banking is clear, and it’s immense

The founding principle was to foster competition by introducing greater interoperability in a system protected by individual bank silos. The idea has proved popular and taken off all around the world. More than 120 countries, including the US, have now converted the concept of open banking into market-driven initiatives.

The prospect of banks sharing customer data and opening tech stacks to third parties would appear counterintuitive to an industry that has been struggling with how to manage its vast lakes of data. But formalising open banking creates a huge opportunity for banks and other financial institutions – in terms of revenue growth, providing a better customer experience, and sharpening the competitive edge.

The question now being asked across the UK is how we can build on the solid foundations already in place to ensure that the next chapter of open banking is a success for everyone.

Creating a path to economic sustainability

When Labour swept into power following July’s general election, they were quick to signal their support for open banking.

The new government has stated it is fully behind the efforts of the Joint Regulatory Oversight Committee (JROC) to lay out the roadmap for the next phase of open banking and ensure that appropriate consumer protections are in place while establishing an economically sustainable ecosystem.

Open banking has already driven competition in payments, improved access to credit for those with thin files, and given customers more ownership of their data. But there is now a need to build upon these early successes and deliver new use cases.

In recent years, there has been more focus on putting open banking on a more commercial footing because many banks have yet to make any real revenue through their role as account-servicing payment service providers. This isn’t good as it risks deterring innovation within the sector.

We’re now seeing variable recurring payment (VRP) APIs attract greater interest, and they’re fast becoming a valuable test case for a more commercial approach to open banking.

In July 2022, the UK’s nine biggest banks – the CMA9 – were mandated to introduce VRPs for sweeping payments, which enable the movement of money between two accounts belonging to the same person or entity. When the JROC published its recommendations for the next phase of open banking, it established a VRP Working Group (VRPWG), which has subsequently advised that non-sweeping VRPs should be introduced that will move beyond existing limitations to enable recurring payments across different accounts.

The VRPWG identified three low-risk use cases, including payments to regulated financial services firms, payments to regulated utilities, and payments to the government. It also highlighted e-commerce as a “stretch” use case, given the significant market size and potential for end-user benefits.

The extension of VRPs is widely perceived to be the next step in developing new open banking tools and services throughout the UK. Market participants have turned their attention to creating a framework that enables better market coordination and provides clear guidelines for consumers to use the technology. In April 2024, UK Finance published a new study on model clauses that will ultimately help to enable the introduction of VRPs for commercial use.

Importantly, while VRPs can help banks and other financial institutions to monetise open banking, they also offer a range of benefits to consumers. By giving people greater control of their recurring payments, they can eliminate penalties for failed Direct Debits, which millions of people with variable income, such as those working in the burgeoning gig economy, are at risk of incurring. They can be a real success story for all stakeholders.

Realising the many benefits of the API economy

But VRPs are just one example of how APIs can open up new revenue streams for ambitious financial institutions.

Around a third (30%) of the institutions tracked by Curinos’ Digital Banking Analyzer now provide funding via API data linking, which streamlines the process significantly. Users link accounts through a few clicks instead of the more cumbersome manual entry of account and routing numbers. Because the speed of funding increases, it’s a win for the financial institution as well as the customer.

Brands such as Chase and Revolut are taking things a step further by encouraging external account linking for greater insight into customer relationships so that they can offer timely, competitive product recommendations.

Account linking via APIs is natural for small business banking providers in particular because their clients tend to have more than one banking relationship. Besides linking these accounts, open banking enables the primary account provider to offer a range of third-party tools and capabilities – such as payroll, invoicing, and utility management – all from within its own platform.

Because every customer is required to fully verify their identity before opening a bank account, financial institutions have emerged as bastions of data that can be used commercially for permissioned identity sharing.

Open banking vendors are already gearing up for the further commercialisation of identity access, with one prominent example being Plaid’s newly launched Plaid Layer. By signing up to the Plaid Network’s centralised identity platform, all an applicant needs to enter is a device phone number that is then used to speed up applications by pre-filling information and facilitating automatic identity verification.

The journey towards open finance

The potential for all parties to benefit from open banking is clear, and it’s immense. But it will be realised only if the end user is front of mind. As open banking matures, continuing to prioritise competitive, responsive, and pleasing digital experiences will be a prerequisite to its success.

Highlighting the commercial opportunities is also key. As soon as banks can see clear financial benefits is when we will see an uptick in open banking-powered solutions being developed and rolled out. Credit card payments are a prime example of this. Numerous brands, including AmEx, Tesco, and LLoyds Banking Group, allow card customers to settle their bill (or at least part of it) through open banking. Card providers often promote the service over other solutions as it can remove costly debit card payments. The customer also wins as payments are cleared more quickly. It’s these win-win situations for customers and banks that will drive adoption.

The UK is now looking at widening the lens and pushing towards open finance, which can add to the early successes of open banking by expanding the system to consolidate data from mortgages, pensions, insurance, and much more. Again, Labour has recognised the potential for open finance to boost financial inclusion, support household saving and investment, and create a new pipeline of data that will prompt further innovation.

The government now needs to provide a robust framework for the future open finance infrastructure, working with regulators and industry alike to ensure it can prove its value and fulfil its potential to improve individuals’ holistic financial wellbeing while presenting financial institutions with new opportunities for growth.

The framework should be built on existing and future regulation to better encourage financial providers to take part. An example of existing regulation that could be leveraged is the FCA’s Consumer Duty, which means firms must act to deliver good outcomes for retail customers. The promotion of VRPs (for example, through intelligent savings) could help with this.

New legislation could include the Data Protection and Digital Information (DPDI) Bill. This bill was set to help create a suitable framework, but was among those dropped due to a lack of parliamentary time in the approach to the general election.

It’s time to pick it up again.