Where next for Open Finance?

Open Banking in the UK is nowhere near where it could be and was expected to be by now when it entered the market in 2018. Nick Eatock, CEO of intelliflo, looks at why that is, how financial advice firms have been using Open Banking opportunities, and what the future holds.

When it was implemented six years ago, Open Banking promised to transform UK financial services and give more power to consumers.

Officially known as the EU’s Second Payment Services Directive (PSD2), the launch of Open Banking in January 2018 allowed for greater access to and exchange of the information stored within financial institutions. The expectation was that by allowing consumers and businesses to securely share their data with other organisations, Open Banking would give people much greater control over their finances and stimulate competition and innovation.

Why it matters

The potential benefits are clear, both for consumers and businesses. By allowing consumers to share account data with other companies, electronically, directly and securely via application programme interfaces (APIs), Open Banking widens access to different products, facilitates more effective comparison, improves security and enables more personalisation and convenience. It also provides consumers with more visibility of transactions and greater insight into their income and expenditure.

Meanwhile, financial services businesses have the data with which to develop more tailored services for customers and also benefit from the efficiency of easier data sharing between companies. Advice firms, for example, can access more up-to-date and real-time information on clients’ income and expenditure. This can be used to strengthen the factfind process, create a more detailed picture of the client’s financial position and therefore enhance both service levels and efficiencies. Advisers can also use Open Banking functionality to work with clients in refining their plans, for instance by putting real transaction data into technology such as cashflow planning software, to create more accurate future scenarios. And in doing so, secure deeper client engagement in the planning process.

Where we’ve got to

The data sharing enabled by Open Banking has since 2018 led us to the broader environment of Open Finance, providing consumers with greater control over much more than their banking. Open Finance now encompasses financial services including savings, pensions, mortgages, investments, insurance and other products where third-party providers now have secure, direct access to customer data.

On the face of it, the UK has made good progress in using the legislation to open up financial services. The big six banks – Lloyds, HSBC, Barclays, NatWest, Santander and Nationwide – have all implemented the industry’s Open Banking Roadmap, the Competition and Markets Authority (CMA) said earlier this year.

So far, however, few consumers have directly benefited. The Open Banking Implementation Entity (OBIE) estimates that just 11% of UK consumers and 17% of small businesses are active users of Open Banking [1]. While the total monthly value of open banking payments has risen this year to around £4.5bn, it remains a drop in the wider banking system ocean.

Where next?

In the UK, while Open Banking technology is being used by a growing number of firms outside the scope of Open Banking (such as pensions, investments, mortgage and energy firms), most activity remains within banking and payments.

More needs to be done to push forward Open Finance and help businesses and consumers derive deeper benefits from greater information sharing. From our own experience, we know the appetite for using broader financial data within financial planning is certainly there, both among clients and advisers. The launch of intelliflo’s Open Banking functionality in September 2021 was greeted enthusiastically by advised clients, who used the newly aggregated view of their finances to add some £20 million of ‘held-away’ assets in just three weeks.

The UK was a pioneer in Open Banking, but other countries are moving to introduce new, more wide-ranging regulations on data sharing. Recently the US set out a raft of reforms aimed at making consumers’ financial data easier to share through secure means, while Australia and Europe have taken similar steps. To remain at the forefront of Open Finance and extend deeper into non-banking markets, the UK needs to move faster on building the necessary regulatory infrastructure.

November’s Autumn Statement gives us an indication of the government’s ambitions in this area. It included a pledge to “kickstart a smart data big bang” that would give consumers more access to their data in seven key sectors: energy, banking, finance, homebuying, retail, transport and telecoms. It said the aim was a new regulatory framework that would “require firms beyond the largest banks to participate in a sustainable and equitable commercial model through which the technology and necessary consumer protections will be developed, and with appropriate regulatory backstops” [2].

Change will take time, but the announcement is welcome. While progress hasn’t been as fast as many would like, the benefits of Open Banking are clear. The initiative’s full potential for consumers and businesses will only be realised when regulation catches up with technological innovation, allowing Open Finance to genuinely transform UK financial services.

[1] https://www.openbanking.org.uk/news/category/impact-report/

[2] https://www.gov.uk/government/publications/autumn-statement-2023/autumn-statement-2023-html

This article was first published in Professional Paraplanner on 11th January. Please find a link to the original piece here.