The rise of open banking

Ever since PSD2 which set the wheels in motion in 2018, open banking has been growing at a rapid rate. In fact, by February 2023, over 7 million people in the UK had used open banking, representing over 10% of digitally-enabled consumers. The growth trajectory of open banking has continued in the UK, driven by a wider availability of a wider range of consumer propositions, including payments with predictions of monthly open banking payments reaching 10 million by mid-2023.

According to Open Banking Expo, 8 out of 10 financial firms in the UK are planning to adopt open banking. And although banks and financial services are recognising the benefits of open banking, it is evident there have been some significant barriers to driving consumer adoption.

So, what are these barriers to adoption and how can we overcome them?

The benefits of open banking

Open banking is a safer and more secure way to enable consumers manage their financial data, to help them understand and manage their finances far more effectively. From borrowing to purchasing to credit scores, open banking provides consumers and businesses with the opportunity to make more informed decisions more quickly but still securely.

Open banking was developed with the aim of providing consumers with greater control over their financial data while preserving their privacy. For example, open banking provides consumers with the ability to purchase items and services without sharing their bank details. Using open banking as an alternative payment method and removing the need to share bank details significantly reduces the risk of fraud, as detailed in a recent report by Ecommpay. This is a huge benefit for consumers and businesses alike, especially when making high-value transactions.

Moreover, when making purchases, the open banking user journey requires consumers to go via their banking app, allowing them to see their balance prior to making payment. Through this process, it allows consumers to analyse their financial position before making a purchase, promoting more informed purchases.

Open banking enables customers to control who can access their banking data, as well as to control both the level and duration of access by individual third parties. There are many use-cases where open banking has created a far simpler, but still secure, way of sharing financial information than was previously the case.

For example, open banking allows financial data to be shared quickly and accurately in mortgage application processes. It removes the need for consumers to find and send physical or non-secure PDF bank statements and payslips to estate agents or letting agents. It also means that those agent businesses can be sure they are getting a full, accurate, direct view of the data they require, in a format that can be used to drive automated decisions more easily. From a security perspective, it means data is only accessed securely by the agents, and that consumers do not need to share their card and bank account numbers directly with those agents.

Transparency over personal finances is another benefit from open banking. It allows consumers to view multiple financial accounts in one application, providing greater visibility for the consumer to make more informed decisions or purchases. When a consumer has multiple bank accounts there can often be unforeseen expenses, loan rejections, and even unexpected maintenance fees, which open banking can therefore help individuals monitor and then mitigate.

Security and consumer awareness as the primary barriers to adoption

Despite these benefits, consumer adoption still presents itself as a challenge for open banking. Although there has been recognition of the benefits of open banking for some businesses and among banks, consumer recognition remains low. In fact, Open Banking Expo found that 1 in 4 consumers state that they still have not heard of open banking, demonstrating the need to drive general awareness.

Alongside low customer awareness, trust in the security of open banking presents itself as the other primary barrier to adoption. Stories of data breaches are commonplace today, and unsurprisingly consumers may feel uncertain and worried about providing access to their financial information to third parties. OB Expo reported that 82% of consumers state that fears of data breaches discourage them from using open banking. Trust in security remains an issue when looking to drive adoption and demonstrates that the requirement for businesses to treat consumer data responsibly has never been greater.

Despite these concerns, Open Banking Expo’s research has shown that 88% of consumers are willing (to varying degrees) to share their details with banks and 80% are willing to share with mortgage brokers. However, 59% of consumers are unwilling to provide access to bank details and transactions to payday lenders and 46% to fintech. When asked to provide financial data and information, consumers tend to trust larger, traditional services and companies more.

This demonstrates that there is potential for widespread adoption across various sectors and use-cases. However, broader consumer awareness, especially around the in-built security of open banking, is necessary to increase consumer trust which will lead to increased adoption.

Driving open banking's TfL moment and widespread consumer adoption

The financial services industry has a clear understanding of and willingness to adopt open banking. Open banking has been adopted and is offered by businesses in various sectors such as real estate and bill payments. However, it still awaits the tipping point where it becomes a standard payment option for all businesses across the UK which in turn will drive more rapid consumer adoption.

Contactless payments experienced a dramatic and widespread adoption when TfL integrated contactless payments with Oyster in London in September 2012 . This propelled contactless payments to become the standard method for purchases and travel. In fact, by December 2015, TfL recorded its busiest single day for contactless payments – 1.24 million journeys were taken by 500,000 unique contactless cards.

TfL’s integration of contactless payments facilitated a huge increase in exposure to consumers driving customer awareness, familiarity, trust and hence adoption. Open banking’s TfL moment may be driven by a single use case like the recent HMRC adoption, or it may be a slower burn with incremental growth resulting in eventual ubiquity.

Looking ahead

Consumers and businesses are ultimately looking for a safe, secure and successful value exchange. When sharing personal and financial data, each must fully understand the benefits, such as the greater security, transparency, and control.  Currently, consumers are not sharing their data freely because there is a lack of understanding about what open banking can do for them and because too few businesses are offering it. Conversely, businesses are not offering it because too few consumers are familiar and comfortable with using it.

Through better awareness and understanding, consumers can feel a greater sense of confidence in the methods used to verify their banking information for mortgage or loan applications or everyday payments. Tackling the lack of understanding of open banking technology and clearly demonstrating the value exchange to the consumer will unlock the huge potential for customer adoption of open banking and open banking payments.