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Data is key to unlocking the power of open banking

by Annmarie Mahabir, VP - Principal Industry Consultant at Endava, and member of Project Open Banking

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Open banking is leading the way for open finance and open data where robust open APIs and data management will be the cornerstones of success. To reach its full potential, all participants need to embrace safe and secure data sharing.

The growth of open banking has been relatively slow, but the European Commission (EC) is convinced that it yields more potential than previously seen and it’s one of the focus areas for the PSD3 consultation.

The EC is also setting out the framework for open finance, which would extend open banking principles beyond payments account data to a range of financial data, such as savings, insurance, mortgages, investments, pensions and consumer credit. At the core of the open banking framework is the sharing of data with third-party providers (TPPs) in a safe and secure way to provide innovative products and services.

In the past couple years, the Open Banking Implementation Entity (OBIE) in the UK has seen increased momentum from the CMA9, the nine banks and building society mandated under the CMA Order to implement open banking in the UK.

According to the OBIE, the number of users has grown steadily over the past five years, and there are now:

  • Seven million regular users of open banking-powered technology;
  • One billion application programming interface (API) calls per month; and
  • 7.5 million open banking-powered payments as of December 2022.

Of the UK’s seven million users, 1.2 million are new, so it’s likely that some of this growth is driven by the cost-of-living crisis as banks innovate to help consumers and businesses manage their finances.

Open banking and data

As momentum builds, the European Banking Authority (EBA) is proposing a common API standard across Europe for TPPs to access payment accounts held with banks (ASPSPs), which will also create a foundation for the future development of open finance.

However, open banking is no longer just about robust open APIs, it’s clear that accurate and meaningful data is the key to innovation and optimal product development.

Not just transaction data, but various datasets, including account data, payment transaction data, payee and payer data, payment scheme data, payment context data, dispute data and management information data. Therefore, it is imperative that open banking players – banks, fintechs and other third-party providers – have good data strategies in place with efficient data governance and operational processes.

A shift towards ‘smart data’ across platforms, which has high quality and accurate data with integrated technology and real-time metrics, will be key to unlocking the power of open banking.

The challenges

Despite the progress that has been made, the sharing of data still brings some challenges.

Some consumers and banks are still reluctant to share their data, especially with increased levels of APP fraud. More needs to be done to increase awareness of open banking and data protection. If this is led by government agencies and central bodies, it will increase consumer confidence and usage of open banking.

Potential for open banking and data

Open banking requires consumers to give consent to their banks (ASPSPs) to share their data with TPPs and consent to TPPs to access account information held at their bank and/or to initiate payments from their account. These processes must comply with GDPR and PSD2 regulations.

Open banking data, managed and used appropriately, provides several benefits:

  • Faster onboarding through enhanced know-your-customer capabilities, identity verification and fraud detection;
  • Payment fraud systems could analyse data in real time and generate accurate credit risk predictions without sacrificing the merchant checkout experience;
  • Real-time affordability checks to enable BNPL lenders to make more accurate lending decisions and reduce debt;
  • Support the cost-of-living-crisis with budgeting and money management tools, better affordability checks, help SMEs drive down cost and manage cash flows and is a cheaper payment method than credit cards;
  • Open API infrastructures that could deliver a virtually limitless suite of services via third-party providers; and
  • Increase customer loyalty with personalised offerings that satisfy specific needs.

As Henk Van Hulle, CEO of Open Banking Limited, said: “From access to cost-effective credit, building a regular savings habit or making more informed financial decisions – Open Banking is delivering the means for our citizens to improve their financial wellbeing.”

The road ahead

The Competition and Markets Authority (CMA) estimates that by September 2023, 60% of the UK population will be using open banking payments. If the momentum continues, open banking has the potential to become a major player in payments innovation as it leads the way for innovative products and services across the financial services industry with open finance.

Having the right API framework, data strategy, technology, processes, and analytics tools will be paramount in optimising the benefits of open banking while managing the risks, and integration with artificial intelligence and machine learning will drive differentiation and competitive advantage.

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