PSD2 4 years on: why open banking is a success – and how to judge it
The revised Payment Services Directive (PSD2) came into force on 13 January 2018, introducing new rules that would kick off an era of open banking in the UK and Europe.
For the first time, it gave consumers the legal right to access their payment accounts, through third parties (like TrueLayer). With consumer consent, these third party providers could access financial data or initiate payments.
Open banking started gradually, as banks built up the necessary API technology. Four years later there are 500+ open banking providers across the UK and Europe and more than 4 million active open banking users in the UK alone.
In this blog, we’ll evaluate the success of open banking based on what it set out to do:
Provide better and more choices for retail payments
Make consumers better informed and engaged in financial services
Help consumers to shop around
Create an enhanced banking experience
Increase competition and product innovation in financial services
We’ll also zoom in on what happened in 2021 – a great year for open banking, and we’ll examine the practical value of open banking for consumers.
We’ll end with some forecasting on what we think is likely to happen in 2022.
How did it all begin?
To judge the success of open banking, it makes sense to look at the intentions behind the regulatory initiatives, which forced banks to ‘open up’ in the first place.
The main driver for open banking was EU legislation known as PSD2. This introduced new regulated activities of ‘account information’ and ‘payment initiation’ and gave consumers the right to use the services.
According to the EU Commission PSD2’s goal was to:
give consumers more and better choices when it comes to retail payments... [and] consumers would be able to manage their personal finances more efficiently through applications.
There was also a complementary initiative in the UK, to require banks to develop common API standards for account access (which would enable PSD2). The Competition and Markets Authority (CMA) noted that the aim was to:
Increase consumer engagement by making it easier for customers to see where they could get a better deal. It also aims to increase competitive intensity by supporting the growth of technology that can be adopted by banks and non-bank providers to compete to offer new products.
At the time, the UK regulator, the Financial Conduct Authority (FCA) explained how both initiatives would interact:
As a result of these regulatory initiatives, coupled with technological and market developments, we expect to see better informed and engaged customers that find it easier to shop around and have an enhanced banking experience.
We’ll treat these as ‘success criteria’ and refer back to them later. First: let's look at how open banking developed in 2021.
2021 – a great year for open banking
2021 saw big improvements in the adoption of open banking services by consumers – and regulatory interventions to improve adoption further. There are now 4 million users of open banking in the UK – or 9% of digital consumers. We predict that 60% of the UK population will have tried open banking by September 2023.
Nowhere was growth seen more clearly than in the increase in the number of open banking payments made in the UK. This increased from 1.2 million in January 2021, to more than 3 million a month by the end of 2021. Since the available figures exclude banks like Revolut, which are big users of open banking, this number is likely much higher.
Based on our own data and data from other providers, our conservative estimate is that over £10 billion worth of open banking payments were made in the UK in 2021.
Interventions to improve consumer adoption
Whether or not consumers adopt open banking depends on how easy it is to use. 2021 saw measures to improve user journeys:
In June 2020, the PSD2 regulator in Europe, the European Banking Authority (EBA), stepped in. They made it clear there must be parity between the online banking experience that banks provide directly to their customers, and the service they provide through PSD2 APIs.
The EBA followed up by stating if banks didn’t remove obstacles to the open banking experience by April 2021, the national regulators should take further supervisory action, including imposing fines.
As a result, we saw real improvements. For example, all Spanish banks have now enabled app2app biometric authentication, bringing the user experience in line with countries like the UK. This led ‘conversion’ (the number of consumers successfully completing journeys) to jump 10%.
FCA removal of 90-day authentication requirements
In November 2021, the FCA acted to address issues relating to the requirement for consumers to ‘re-authenticate’ their open banking services every 90 days. This requirement had led to customer drop-off rates above 50%. It hugely impacted money management services and affordability tools which relied on ongoing access to account data.
Ongoing access to data will now be managed by account information service providers, without the need for consumers to provide credentials separately to each of their banks.
Adoption by businesses and organisations
2021 also saw more and more businesses and organisations adopting open banking in order to deliver value for consumers.
In January, investment platforms such as Freetrade and Trading 212 pushed huge volumes of payments through open banking, in part due to the GamesStop short squeeze.
This was proof that open banking payments could displace existing payment methods (such as clunky manual bank transfers and expensive card payments). TrueLayer data shows that given the option, 40–70% of investors choose to make a deposit using open banking. They also deposit more in value and more often than those using other payment methods.
March saw the UK tax agency HMRC begin to use open banking payments to collect tax from the public. It has so far taken over £2 billion in this way.
From June, open banking powers a new way to collect Nectar points by connecting to customer account data. This showcases the power of account data to help consumers get better deals on their shopping – and the willingness of big brands to adopt open banking services.
In September, TrueLayer announced its partnership with Cazoo, enabling consumers to buy a car using open banking payments. We also published research into the development of open banking payments, and why they’re quickly becoming a competitive alternative to cards in ecommerce.
Open banking innovations
2021 was all about building new features and functionality on top of open banking infrastructure, to make it even more useful for merchants and consumers.
In January, TrueLayer announced the launch of one such service. PayDirect enables merchants to accept open banking payments and also send payments back out to customers – all using the same API technology. The capability to do instant refunds was previously unavailable with open banking and is key to open banking payments being adopted widely in ecommerce.
In February, TrueLayer launched a first of a kind initiative with Monzo to ensure that consumers using the bank’s tool to block card payments for gambling, would also have any open banking payments for gambling blocked automatically. This was part of our commitment to use technology to protect vulnerable consumers. In 2022 we’ll be following this up with our affordability tool.
In June, TrueLayer launched a tool to enable consumers to verify their account ownership instantly with businesses by connecting their bank account, rather than exchanging documents or making micro-deposits.
Variable Recurring Payments
In July, the Competition and Markets Authority signalled its intention to require banks to build additional APIs that enable third party providers to initiate recurring payments of variable amounts. This was a big development as, under PSD2, only single immediate payments can be initiated with open banking.
VRPs have the potential to go beyond so-called ‘me-to-me’ money transfers, to become a more convenient and secure way for people to pay for all sorts of things.
In December, TrueLayer initiated the industry’s first Variable Recurring Payment outside sandbox conditions, in partnership with NatWest.
Practical value for consumers
The developments of 2021 show the huge promise open banking holds to make consumers’ financial lives easier.
Bringing an end to manual bank transfers
Using manual bank transfers to send money is clunky and insecure. It involves noting down sort code and account numbers and a long payment reference, then logging onto online banking and having to wait nervously for the payment to arrive. Payments can also be sent to the wrong place if details are entered incorrectly. Or worse – a fraudster could trick you into paying them instead of the intended recipient. Scams like these totalled £479 million in the UK in 2020.
Open banking payments keep the benefit of bank transfers (cheap for the merchant and money settles instantly) – but they make them:
quick and easy: the consumer doesn’t have to leave the app or website to make the transfer. Payment details are exchanged in the background through secure APIs and authentication with the bank happens through automatic redirection.
secure: the consumer isn't responsible for getting the payee details right. Instead, the open banking provider has a contract with the payee (the merchant) and populates the payee details, preventing misdirected payments and scams.
Reducing unauthorised payments
Card payments involve sharing long card details which can be stolen by fraudsters and used to make unauthorised payments. The value of unauthorised payments in 2020 totalled £574.2 million in the UK. When making open banking payments, consumers don’t share any details that could be used for fraud. Banking credentials are shared directly with the bank and all payments are authenticated with at least two factors (strong customer authentication).
Putting bank data to use for the consumer
With open banking, a consumer’s transaction data is no longer locked away with their bank. If they wish to, they can use a third party to put this data to use in different ways. Sharing transaction data can be used to generate loyalty points (as with Nectar). It can also replace the need to manually share documents, for example, in order to verify account ownership or make an affordability assessment. With the changes to 90-day authentication, sharing bank data will become even more convenient for consumers.
So, is open banking a success?
Let’s look again at those success criteria we discussed earlier.
Are there more and better choices when it comes to retail payments?
Undoubtedly. 2021 has demonstrated the potential of open banking payments. Businesses that rely on the transfer of funds (such as banks, investment providers or igaming operators) have made the switch to open banking. We predict 2022 will see these benefits applied more widely to ecommerce.
Are consumers better informed and engaged?
Yes. The take-up of open banking by 4 million UK users shows that there is a willingness to use open banking services to engage in new ways with financial services – from paying tax to buying a car. Third party providers have put transaction data at the fingertips of consumers, ready to be used in different ways that can help and inform consumers, from loyalty points to affordability checks.
Are consumers better able to shop around?
More research needs to be done on whether open banking has increased consumers and SMEs willingness to shop around and switch financial service accounts (as was one intention of the CMA). But according to McKinsey “nearly a third [of SMEs] said they found open banking propositions appealing and would be likely to switch their main bank in the next 12 months, the main reason being that open banking APIs made the process easy”.
Do consumers have an enhanced banking experience?
Yes. Clunky bank processes like manual transfers have been replaced with streamlined, secure open banking integrations. Bank accounts with different providers can be viewed conveniently in a single app. Weaknesses in cards and bank transfers that led to over £1 billion of fraud in the UK in 2020 are addressed by open banking payments that have been built with online security in mind.
What can be said for increasing competition and product innovation in financial services?
In the last 4 years, more than 300 open banking firms have been registered in the UK and more than 400 in the EU. This is testament to the market opportunity of open banking. 2021 showed what is possible with open banking – particularly the potential for new non-banks to compete in retail payment services. But it is only the beginning. Developments in 2022 look set to turbo-charge growth and product development in open banking, which will ultimately increase choice for consumers.
What’s next in 2022?
An exciting blend of regulatory development and industry collaboration will enhance open banking services in 2022.
Variable recurring payments: beyond sweeping
UK banks are required by the Competition and Markets Authority to build variable recurring payments by July 2022, for use in sweeping use cases. This will unlock new ways for consumers to manage their money – saving more smartly and staying out of costly overdrafts.
Where there are no specific regulatory mandates beyond sweeping, banks will have flexibility to commercialise the use of their APIs. This will lead to a new frontier of collaboration between banks and TPPs, where banks can also gain commercially. For example, banks will be able to monetise use of their VRP APIs to power ecommerce payments such as subscriptions and online purchases.
90-day authentication changes
The long-discussed changes to how access to data is managed will come into effect. Consumers have been put off open banking by the inconvenience of having to provide credentials to their bank every 90-days. This will be replaced by a simple consent confirmation managed by third party providers.
As we discussed in December – in the EU, 2022 will be key for the development of open banking beyond PSD2:
Instant Payments – in 2022 authorities will take steps to ensure SEPA instant has full coverage in the EU. This is key, as open banking providers prefer to initiate instant payments for convenience for consumers, rather than SEPA Credit Transfers (which can take 2 days to arrive).
IBAN discrimination – this issue, where EU consumers find it harder to make cross border SEPA payments than they find it to pay domestically, will come into focus. This is not just a problem for customers trying to pay bills across borders, but also impacts open banking journeys.
Open finance – there are a range of initiatives to encourage open finance in the EU. We’re excited to be part of the development of a new European Payment Council scheme to govern enhanced payments functionalities that go beyond the scope of PSD2. This is an example of banks and third party providers working together to develop a commercial framework for open finance.