Open Banking is transforming the financial landscape in the UK, providing new opportunities for innovation.
If you’re a fintech developer or a financial institution looking to leverage Open Banking, understanding its intricacies is vital. From navigating regulatory requirements to creating robust APIs, there’s much to consider.
This article provides expert insights into Open Banking's framework, background, and the key steps to succeed in this evolving sector. Our financial services solicitors specialise in helping fintechs and financial institutions meet regulatory obligations while fostering growth and innovation.
Contents:
Open Banking in the UK
Open Banking allows customers of authorised third-party providers (TPPs) to securely access financial data and initiate payments. The overarching goals are to foster competition, drive innovation, and empower consumers to take control of their financial lives.
Two core services underpin Open Banking:
- Payment Initiation Services: These services enable TPP customers to initiate payments directly from their bank account or other payment account to third parties such as merchants, bypassing traditional methods like credit or debit cards.
- Account Information Services: AIS facilitates the aggregation of financial data from multiple accounts, providing consumers with a consolidated view of their finances.
While payment service providers in the UK and Europe have been providing such services for some time, Open Banking has grown significantly since the introduction of the European Union's Second Payment Services Directive (PSD2) and the UK’s Payment Services Regulations 2017 (PSR) (which implemented PSD2 in the UK), which, amongst other objectives, aimed to foster a more competitive market.
Open Banking in the UK has its roots in initiatives designed to increase competition in financial services. Key milestones in its development include:
- 2014: The UK government commissioned a report titled "Data Sharing and Open Data for Banks" to explore how banking data could be opened up to increase competition.
- 2016: The Competition and Markets Authority issued a mandate requiring the largest UK banks to develop an Open Banking standard and implement APIs to share data securely.
- 2018: PSD2 came into effect, and the Open Banking Implementation Entity (“OBIE”) was established to oversee the rollout of Open Banking in the UK.
Currently, Open Banking adoption in the UK is growing steadily. Many fintech companies are developing innovative products using Open Banking APIs, and an increasing number of consumers are using these services to manage their finances more effectively. Major banks are also integrating Open Banking into their services, offering customers new ways to interact with their financial data.
The UK leads globally in Open Banking adoption, with over 10 million monthly users as of July 2024, and an ecosystem of fintech innovators creating dynamic solutions.
Examples of Open Banking innovation
Open Banking is already driving innovation, enabling faster payments and comprehensive financial insights. Here are examples of the applications and the firms offering them in Payment Initiation Services and Account Information Services:
Payment Initiation Services
TrueLayer is a standout example. This platform enables seamless payments directly from customer accounts, eliminating the need for card details. Merchants benefit from quicker payments and lower fees, while customers enjoy a fast, error-free checkout process.
Another example is GoCardless, which specialises in recurring payments using direct debit technology. By leveraging Open Banking, GoCardless offers a simplified way to manage subscription-based services, reducing business operational friction.
Account Information Services
Lumio allows couples to track their shared expenses, bills, balances, and net worth. It connects bank accounts and credit cards and allows users to control what bills, expenses, and accounts couples share with one another.
AIS isn't limited to personal finance; it also supports business applications. For example, Plaid offers tools for lenders to assess creditworthiness, and Armalytix offer tools for financial crime and social responsibility checks, drawing on data aggregated through Open Banking APIs.
Key considerations for service providers
If you’re developing Open Banking products, you’ll face opportunities and challenges. Here’s what you need to focus on:
Regulatory compliance
Navigating the regulatory landscape is crucial. You’ll need authorisation from the Financial Conduct Authority (FCA) as a TPP, which involves meeting requirements under the Payment Services Regulations 2017 and ensuring GDPR compliance.
You cannot offer Open Banking services without obtaining certain regulatory permissions from the FCA. You must ensure you only carry out payment services and, as the case may be, regulated activities you are authorised to do; otherwise, you may be committing a criminal offence. The FCA's Payment Services and E-Money Guidelines are essential resources for guidance.
Technical infrastructure
APIs enable Open Banking by facilitating secure data exchange between banks and third-party providers. To support this, systems should implement strong encryption protocols and undergo regular testing to prevent data breaches. An API-first development strategy is often used to improve scalability and integration with banks and financial institutions.
The Open Banking Implementation Entity provides technical standards, including specifications for security and authentication, which are crucial for developers. At the same time, the PSR and related Regulatory Technical Standards set the underlying regulatory requirements for such systems.
Building consumer trust
TPPs should clearly communicate how customer data is used and ensure an intuitive user experience. User education campaigns, such as explaining the benefits of Open Banking, can also help overcome initial scepticism.
Fintechs like Revolut have succeeded by integrating Open Banking features directly into their apps, offering a one-stop solution for financial management.
Operational challenges
Operational resilience is critical. You’ll need risk management strategies, including regular audits and a robust business continuity plan. Ensuring service uptime and data reliability will help you build long-term customer trust.
Operational challenges like API downtime can lead to poor customer satisfaction and reputational damage for fintech companies. For instance, in 2022, TSB Bank plc faced significant operational disruptions during an IT system migration, making customers unable to access banking services. This incident led to a combined fine of £48.65 million imposed by the FCA and the Prudential Regulation Authority (PRA) for operational risk management and governance failures. Learning from these incidents, firms have strengthened their IT infrastructure, incorporated backup systems and improved their resilience to prevent service disruptions.
Broader benefits and risks
Open Banking offers immense benefits: increased competition, improved financial inclusion, and opportunities for innovation. However, it also comes with risks, including cybersecurity threats and the challenge of consumer trust in data sharing.
By staying ahead of these challenges and aligning with best practices, you can position your products for success.
If you’re ready to develop Open Banking products or navigate the authorisation process, our expert financial services solicitors can guide you through every step.
