Open banking in the UK: An in-depth analysis of its evolution, impact, and future directions

by Lasma Kuhtarska, co-founder & chief strategy officer, Noda

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The United Kingdom stands at the forefront of the open banking revolution, reshaping the financial sector with innovative regulatory frameworks and empowering businesses and consumers with unprecedented financial transparency and control. 

The genesis and evolution of open banking in the UK 

Open banking in the UK was spurred by a broader European initiative to increase financial transparency and consumer empowerment. This movement gained formal traction in 2017 by enacting the Payment Services Regulations (PSRs), which incorporated the revised Payment Services Directive (PSD2) into UK law. This legislation marked the commencement of open banking by mandating the nine largest banks in the UK, known collectively as the ‘CMA9,’ along with other financial institutions, to adopt open APIs. This was aimed at fostering a competitive environment and facilitating secure data access to authorized third-party providers (TPPs). 

These institutions established the Open Banking Implementation Entity (OBIE) to create and promote a standardized framework for easy and secure account access, enhancing competition and innovation within the financial services sector. 

Regulatory framework and standards 

The Financial Conduct Authority (FCA) oversees the UK’s open banking framework, ensuring compliance among banks, building societies, and TPPs. The OBIE has set forth the Open Banking Standard, which encompasses: 

  • Technical specifications: Including detailed documentation for read/write API, open data API, and others. 
  • Security profiles: Developed with the Open ID Foundation to ensure secure data exchanges. 
  • Customer experience guidelines: Based on regulatory requirements and customer feedback to enhance user interactions. 
  • Operational guidelines: Assisting providers in maintaining high-performance interfaces and regulatory compliance. 
  • Certification service: Allowing providers to demonstrate adherence to standards, facilitating exemptions from certain regulatory requirements. 

Current trends and adoption 

As of mid-2022, open banking has seen a dramatic increase in adoption across the UK. Over 3 million individuals and businesses now use services enabled by open banking—a significant rise from just 1 million in early 2020. The services under open banking have also expanded, ranging from consolidated financial views (AIS) to streamlined payment solutions (PIS). 

The impact on small businesses has been particularly notable: 

  • 75% report improved decision-making capabilities. 
  • 82% have seen enhanced business efficiency. 
  • Nearly half have experienced reduced internal and external costs. 
  • 70% have effectively managed late payments and pursued unpaid invoices. 

Consumer adoption is also on the rise, with active use among digitally-enabled consumers growing steadily. 

The road ahead for open banking in the UK 

Lasma Kuhtarska, co-founder & chief strategy officer at Noda

The future of open banking in the UK is promising, filled with opportunities to revolutionise financial services further. The Strategic Working Group’s report on open banking underscores the importance of evolving standards to align with market trends and user needs, emphasizing the prevention of market fragmentation. 

Broad adoption across all UK banks and consistent application of the standards are seen as crucial for sustaining the ecosystem’s health and fostering global competitiveness. Projections indicate that open banking transactions will witness substantial growth, potentially increasing from $57 billion in 2023 to $330 billion by 2027. 

Reflecting on the journey and future of open banking, a Noda representative highlights: “Open banking has set the stage for a financial services renaissance in the UK. At Noda, we leverage this framework to deliver seamless, secure financial transactions and analytics across platforms. As the market evolves, our commitment is to stay at the forefront, enabling businesses and consumers to maximise the benefits of open banking.”  

Open banking has transformed the UK’s financial landscape, providing greater control over financial data and catalysing fintech innovation. The journey is ongoing, and as the ecosystem matures, it will be essential to maintain alignment with global standards, ensure the security and reliability of platforms, and deliver consistent value to all societal sectors, including the most vulnerable. The future of open banking in the UK, characterized by robust growth and innovative potential, looks unequivocally bright. 

 

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Article by Noda

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