UK’s Open Banking Headwinds Point to Pitfalls of Innovation Through Regulation

Open banking is set to change the world.

But viewed through the lens of what’s happened so far, and through the lens of the United Kingdom’s experience, the road to transformation in payments and financial services appears long and bumpy.

Differing Approaches

And, as ever, the debate continues over the best way to implement open banking — whether the private sector, market-driven approach to innovation wins out over what might be thought of as the top-down, regulatory approach.

And as research done jointly by PYMNTS Intelligence and Trustly has shown, there’s growing recognition of open banking and 50% of millennials stated that their choice of merchant or provider would be “very or extremely” influenced by open banking connectivity. Overall, more than third of consumers — across all demographics — said the same about open banking.

In the United States, PYMNTS Intelligence data detail that more than three-quarters of banks see importance in linking with FinTechs to collaborate on new financial offerings as faster payments and other digital shifts find increased use by individual consumers and by corporates too.

As to how innovation might be fostered, the question is germane in the states, given the recent news that the Consumer Financial Protection Bureau (CFPB) has a proposed rule — though nothing’s final at the moment — in place that would help determine how companies operate, and co-operate, in the nascent open banking arena. The proposed rule would require depository and non-depository entities to make available to consumers and authorized third parties certain data relating to consumers’ transactions and accounts … and “provide basic standards for data access.”

At a high level, standardizing data access — and how the data can be shared among providers — should streamline innovation. But along with the data, with the permissioning by consumers, come the ever-present concerns about fighting fraud, and the liability that shifts to the banks and the third-party providers. As detailed here, neobanks and traditional players alike have been confronting rising waves of fraud and financial crimes, where payments and account level information are compromised by authorized push payments fraud and by stolen credentials. As many as 43% of financial institutions (FIs) have experienced increased fraud in the past year.

UK as Prologue?

In the United Kingdom, as instant payments have found some embrace, authorized push payment fraud remains a significant threat, equal to 239 million GBP through the first half of last year.

And the growth rate of open banking, in the U.K., as of the middle of last year, Open Banking Limited, the implementation entity, said that there were more than 150 regulated firms with large live to market open banking products and services in place. The stats also show that the actual number of third-party providers has been waning.

The growth rates in the roster of those providers slowed from 131% in 2020, to 1% in 2022, and actually declined 6% through the midpoint of 2023. Open Banking Limited also noted here that 1 in 9,or 11% of British consumers are active users of open banking, alongside 17% of small businesses. One might argue that since open banking was initiated as far back as 2017, more traction might be evident — so the same hurdles might be extant here with their American cousins.

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