PSD2 4 years on: why open banking is a success – and how to judge it
Open banking is four years old, but who's using it, how is it benefitting consumers and what's next?
- 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
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.
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.
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.
2021 – a great year for open bankingConsumer adoption 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.Upward growth 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.
Bank obstacles 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 organisations2021 also saw more and more businesses and organisations adopting open banking in order to deliver value for consumers. Investment platforms 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. Government adoption 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. Nectar points 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. Ecommerce 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 innovations2021 was all about building new features and functionality on top of open banking infrastructure, to make it even more useful for merchants and consumers.Refunds 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. Gambling block 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. Account verification 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 consumersThe 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.
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.