Why open finance is the future, Plug and Play

In 2018, the UK made history as the world’s first Open Banking Standard was implemented, establishing the foundations for the nation’s pioneering ecosystem and setting a blueprint for other countries. 

Open banking is a new approach to financial services that enable consumers and businesses to give regulated third-party providers access to their financial data through application programming interfaces, or APIs. When banking customers consent to share their data, they can take advantage of innovative services built by providers which understand their financial situation like never before. Open banking is not just the future of banking but the foundation of a broader transformation. This will enable many - perhaps all - industries to use data-sharing to get to know their customers in unprecedented detail to build products that respond precisely to their needs and financial context.

The future of finance born in the UK

From a standing start in 2018, the UK ecosystem has developed rapidly. The number of open banking users has now soared to seven million, and in May 2022, we reached the milestone of one billion monthly API calls (requests for data) and five million open banking payments. We have also seen the development of some genuinely game-changing use cases, such as HMRC’s “Pay by Bank Account” option for Self Assessment taxpayers, delivered by Ecospend. HMRC has now processed more than £10 billion of Open Banking payments without losing a single penny, Ecospend CEO James Hickman told attendees at an Open Banking Excellence (OBE) Campfire.

There is significant investment taking place in the open banking space. Players like Visa (through its $2 billion acquisition of the open banking aggregator Tink) and Mastercard (which acquired both Finicity and Aiia to provide similar connectivity) are driving early consolidation whilst high-growth TPPs continue to attract VC, Institutional and Private Equity investment. Moneyhub for example, an open data and payments platform, secured £35 million in funding from Legal & General and Lloyds Banking Group, in January 2023 with Shawbrook providing an additional £5 million debt facility.

Open banking is the beginning of a long journey. With the re-introduction of the data protection and digital information bill to parliament, we're now moving towards a paradigm called open finance, which involves sharing other types of financial data ranging from mortgages to insurance. After this, we will move towards open data, in which the secure, consent-driven data-sharing abilities open banking has unlocked will be extended to many other industries. The possibilities for investors and innovators are endless.

Supporting a global ecosystem

Open Banking Excellence, a global center of community and knowledge, driving change in open banking and open finance, has worked at the heart of the UK’s open banking ecosystem throughout its evolution. It produces informative, authoritative content and holds monthly Campfires to allow pioneers worldwide to collaborate and exchange ideas. Before launching OBE, Founder, Helen Child, was the CEO and Founder of the first e-money license issuer in the UK to be awarded licenses by both MasterCard and Visa.

After supporting the growth of the UK ecosystem, OBE’s focus shifted towards countries like Saudi Arabia and Brazil to support their open banking implementations. Brazil is a particularly forward-looking ecosystem, having moved from open banking to open finance in less than two years and processed almost 1.5 billion data-sharing API calls in the same period, according to data shared at an OBE Campfire.

Open banking opportunities

There are many reasons to be excited about the possibilities of open banking. For consumers and businesses, open banking offers the ability to gain greater control of their finances. A survey by the Open Banking Implementation Entity (OBIE) found that 64% of consumers said open banking savings apps increased their total savings and got them into the habit of putting money away for a "rainy day." The OBIE’s third Open Banking Impact Report highlighted how open banking-driven cloud accounting services help “small businesses make better financial decisions, become more efficient, and collaborate more effectively with their accountants.”

Open banking can also reduce the risk of fraud. For instance, every payment uses strong customer authentication, or SCA, and no personal details are shared during payments. This approach to finance will have more far-reaching benefits. According to the World Bank, roughly one in four adults -1.7 billion people - on the planet are unbanked. Unbanked people are locked out of the financial system. They cannot access essential financial services and face a “poverty premium” that forces them to pay more for goods and services.

Open banking and open finance make it much cheaper for banks to deliver services, enabling them to serve people who have been excluded profitably. Data-sharing also lets lenders make more responsible decisions and give loans to a broader variety of people with thin credit records but can prove their creditworthiness in other ways, such as evidence of regular rental payments.

At an OBE Campfire on inclusion in October, host Lord Holmes said, “We can’t consider ourselves a civilized society if we don’t fundamentally, thoroughly, and sustainably deal with financial exclusion and turn that into financial inclusion.”

Open banking and open finance are crucial pieces of this ambition. By unlocking the power of data, they literally open up the financial system and allow people who were once excluded access to personalized products and services. By addressing fraud, improving inclusion and driving better financial outcomes for consumers, open banking is ushering in the future of financial services - which is a rare example of a win/win for both consumers and businesses.

www.plugandplaytechcenter.com