A Far Reach

Despite the best efforts of innovators and regulators, ubiquitous open banking might still be a ways off. Can the Covid crisis help to jump-start it?

Advances in open banking in the UK and Europe have made headlines in recent years. Regulators elsewhere have been doing their best to keep up, including those in Brazil, India, Hong Kong and Singapore. Where regulators sit back, as in the US, consumer demand has sometimes led the way.

Until this year, that is. The Covid-19 pandemic and associated lockdowns have placed a drag on the growth of open banking. Things had been looking good: Precrisis customer numbers doubled in six months in the UK to pass  the one million mark in January, according to the Open Banking Implementation Entity (OBIE), which is governed by the UK’s Competition and Markets Authority and funded by the country’s nine largest banks and building societies.

But more-recent figures are not yet available, and many expect a pandemic-related impact. Imran Gulamhuseinwala, implementation trustee at the OBIE, acknowledges tht “the rate of growth has slowed.”

Some experts downplay current concerns about single immediate payment systems, refund functionality and the performance of the all-important application programming interfaces (APIs), which allow customer data to be shared across platforms. After all glitches are to be expected in any tech development project.

“There was a bit of naïveté about how easy it would be,” says Gulamhuseinwala, noting that the “genuinely pioneering” OBIE initiative had to be built from scratch. “There was no model anywhere that we could copy,” he says. “You can start with a blueprint, but you have to adjust as you come across challenges.”

Open banking and its corollary, open finance, appear to be straightforward concepts on paper. Open banking means taking the monopoly on account information from big financial institutions and giving consumers access via networking of data. A central aim is to facilitate payments; but in principle, it could also encourage competition and help individuals and firms make more-informed decisions. The next logical step, open finance, would allow customers to shop online for financial services, including credit, mortgages, insurance and pension fund management.

Evidence of a slowdown in open banking implementation had already appeared prior to the coronavirus crisis, however. Last year, the European Banking Authority extended its September 2019 deadline for full compliance with its Revised Payment Services Directive to December 31, 2020.

In the UK, where regulators pushed leading financial institutions to build the necessary infrastructure and encouraged the development of fintechs, business payments company Bottomline Technologies’ annual Business Payments Barometer, a survey of financial decision-makers, found that fewer respondents felt they were ready for open banking in early 2020 than a year earlier: down 8% to 59%.

“People are probably experiencing a bit of a tsunami of initiatives that are happening right now,” says Ed Adshead-Grant, general manager and director of payments at Bottomline. It’s just too much at the same time.

The big question “is the speed of customer adherence to open banking systems,” says Roberto Teixeira da Costa, former chair of the Brazilian Securities Commission. “In countries where open banking has already been implemented, membership has generally been lower than expected.”

Enter the Fintechs

Open banking depends in large part on fintechs to develop and deploy APIs; and despite the pandemic, there has been progress on that front. Amsterdam-based API provider Yolt Technology Services (YTS), a venture of ING Bank, recently announced coverage increases for banks in Europe. In addition to 95% of institutions in the UK, it now covers 90% in the Netherlands and over 80% in Italy, France and Spain. API usage volumes remained stable in April and May after a period of growth, says Leon Muis, YTS chief business officer.

Indeed, the crisis may help speed up the adoption of open banking in the long term. For example, quarantined old-school clients have been forced to abandon cash, branches and ATMs in favor of digital banking, possibly expanding the open banking market permanently. Once allowed to roam, many account holders may embrace contactless payments on health grounds.

“With Covid, everyone is talking about digitization,” says Augusto Lins, president of Stone Payments, one of the largest payment providers in Brazil.

Gulamhuseinwala offers a word of caution: “More users online increase the addressable market, but that doesn’t mean they will necessarily adopt open banking in a couple of weeks.”

Other observers, however, point to generational differences driving the practice, suggesting that younger people might even be willing to use a banking app on TikTok. At the other end of the spectrum, 99-year-old UK war veteran Captain Tom Moore used open banking tools in his successful effort to raise funds for the National Health Service during the pandemic.

The Central Bank of Brazil’s efforts to pursue open banking have continued apace despite the country’s serious difficulties addressing the pandemic. The current drive emerged from an effort launched several years ago to encourage financial and social inclusion. Phase one of the initiative, centered on sharing of basic financial data, is scheduled to take effect in November. The program is slated to be implemented gradually, with full open banking available in late 2021.

Among other things, the Brazilian program aims to encourage the provision of better payment systems for small and medium-size enterprises (SMEs). The options currently available to them from large financial institutions, including major-brand credit cards, are expensive and lack transparency, says Lins. A cheaper, more efficient system would “help them do three things: sell more, better manage their businesses and grow.”

In many, if not most parts of the world, the pandemic and lockdowns have hit SMEs particularly hard. If the Brazilian program is successful, open banking could help them weather the storm.

Emerging technology’s potential to energize open banking helps explain why two years ago RBS acquired FreeAgent, an Edinburgh-based cloud accounting software company, points out Naresh Aggarwal, associate policy and technical director of the Association of Corporate Treasurers (ACT), an international organization. Taking a different tack to address the same market segment, the Dutch accounting software provider Jortt announced in June that it would create a partnership with YTS to provide API technology to help its SME clients access their financial data.

“If you are running a small company, you are responsible for a lot of things,” says Aggarwal. Some administrative tasks take up the same resources at businesses with five to 10 employees as they do at businesses with 100, putting the former at a disadvantage. Open banking technologies allow people to do administrative tasks more efficiently, Aggarwal contends. Yet adoption has been mixed. “I don’t think the market buys open banking,” says Adshead-Grant.

To get over these hurdles, some experts say, open banking needs “a killer app” that will open participation. Both Lins and Aggarwal mention the widespread adoption of Uber. “One of the biggest challenges is a mind-set change in the consumer world,” says Aggarwal. Most people do not understand how Uber works, he observes; they just care that it does.

Others suggest that open banking may not truly succeed until the offering moves to the next step. “Open banking as a standalone has the potential to transform retail banking,” says Gulamhuseinwala. “But when it comes to expectations for consumers to be able to see all their data in one place and make better financial, life and business decisions, open finance is a must. I hope it is inevitable.”