Why has the UK achieved so much more than others on what’s clearly been a hot topic for a while?

Since open banking was made official in the UK, governments in Canada, Singapore, South Korea, Hong Kong and others have attempted to guide their open banking implementation in a similar fashion, though never going quite as far…yet.

In Australia and Mexico, the influence of UK-style Open Banking is more obvious: The UK’s Prosperity Fund has been instrumental in getting Mexico to take the same approach as the UK, and the Australian Government published its first guidance on the subject with no less than 50 references to UK Open Banking, including the key recommendation:

The starting point for the standards for the data transfer mechanism should be the UK’s Open Banking technical specification. The specification should not be adopted without appropriate consideration, but the onus should be on those who wish to make changes.

But is worldwide adoption in spite of our centralised, standardised approach — or because of it?

That there’s a debate to be had at all is surprising. There’s no need for us to contemplate for long whether the UK’s Competition & Markets Authority (CMA) and Open Banking Implementation Entity (OBIE) were required in the process.

The answer is a resounding yes — the regulator has contributed hugely to open banking’s success.

…but this doesn’t have to devalue the progress of market innovation itself. Unfortunately, this is where the confusion lies a lot of the time.

Wording

That there exists a company called ‘Open Banking Ltd’ doesn’t help.

We hesitate before announcing to the world ‘Open Banking is working really well’ because it can be misinterpreted.

No one can, or should, reward a specific organisation like that if they are serious about taking a sensitive, critical, sceptical approach to something new and shiny like open banking. Why take the risk?

No single entity can take responsibility for a new standard in financial technology working or not. It’s chicken and egg. The debate is circular.

Our history has been defined however by a combination of legislative action and market forces that eventually led to the UK’s pole position.

Both (sort of) working in harmony.

So yes Open Banking is working really well however you choose to interpret that statement.

How did this happen?

Going Back

It all starts with the state of market concentration in the UK.

The world had been worried for some time about running the same old risks that led to the financial crash of 2007 — namely, not allowing financial services providers to grow too big and powerful.

The moral hazard of introducing deposit insurance as a consequence — for all its reassurances — had the downside of keeping big players big and challengers small.

The UK was the first country to take a consumer-first approach to data in this area. Prime Minister Gordon Brown was advised by Tim Berners Lee — future lead of the Open Data Institute (ODI) - to make public data available and put user right’s at the heart of the Freedom of Information Act in January 2010. Such approaches were later adopted by the Netherlands, France and Germany.

The ODI had been set up in 2012 to help investigate a government-sponsored approach to public data sharing (triggered in part by the EU’s PSI Directive a year earlier).

Governments realised that there were disproportionate benefits to making centralised datasets freely available to EU markets.

The Payment Services Directive 2 (PSD2) was proposed and agreed in 2013, giving the EU 5 years to make use of its content. When first suggested to EU institutions, the UK didn’t want to wait until 2018 (the live date) to begin work.

Momentum

In 2014, the ODI delivered a report on data sharing over APIs. They showed that such data sharing is both necessary and achievable for any re-attempt at financial democratisation. This was all put into focus later by the UK government in 2015.

Baby steps, but the next move was crucial — either back open banking and APIs, or consign it to Business Schools to discuss for another decade…

In the end, HM Treasury’s Open Banking Working Group (OBWG) was formed in 2015 to make standards and debate the possibility of government intervention, making open banking at last a reality.

By being tech-focused, it added a much needed touch of agnosticism: Political sign off was quick because open banking didn’t seem to have ulterior motives. Hence the technical focus on Open API standards even to this day.

Further narrowing, and thanks to a CMA study in 2016 (that concluded the banking sector was simply too concentrated in the UK), all that was needed now for genuine, sweeping reform was a catalyst…

Thankfully, the issues surrounding cyclical, global money shifts and a financial system vulnerable to incumbents’ collapsing were PSD2’s trigger.

As 2018 approached, Open Banking in the UK was no longer just an exercise for Think Tanks and Civil Servants, nor whispered in the back pages of fintech magazines.

Now there was market engagement: PSD2 was a topic simply unavoidable for board meetings, and soon momentum was building.

By being tech-focused, it added a much needed touch of agnosticism: Political sign off was quick because open banking didn’t seem to have ulterior motives. Hence the technical focus on Open API standards even to this day.

The correct balance was found in regulation wrapped in the warmth of market-led interpretation: The Open Banking Implementation Entity was established in 2016.

Staying focused

By launching as a private company (Open Banking Ltd), financed both publicly and privately and with sole focus on the top 9 (out of 300) UK banks, the right balance was achieved.

OBIE added a framework and a set of standards that went beyond PSD2, to guarantee open banking in the way that most people imagined it (rather than leaving it to be defined by lawyers for decades to come.)

A focused approach meant open banking could be gently incubated from a technical perspective but expressly mandated from a legal one.

APIs soon became legally-binding.

Why? OBIE’s ‘Open Banking APIs’ have been mandated as the only channels through which regulated Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) can consume open banking data. Specifications have developed for Read/Write to accelerate clarity over consumption and the banks’ ability to process API calls.

On the identity side of things, a Directory was established to allow transparent and centralised management of Third Party access without being overly cumbersome.

Even without a technical understanding of the open banking ecosystem, it’s easy to see the simplification that a checkpoint system like this provides, and how it can accelerate adoption at scale.

Additionally — by filling the OBIE with full time, dedicated industry and public sector experts that really do eat, sleep and drink open banking is unrivalled globally and something of which the UK fintech ecosystem should be proud.

Engagement abroad

Other European initiatives have resisted going this far.

The Berlin Group has yet to produce open banking output at the same speed, owing to its treatment as theoretical and severely bank-led. Their standards are all-bank encompassing (rather than the select CMA9) and the user flow is up to the banks (unlike strict OBIE guidelines for a dedicated, effortless open banking interface.)

Multiple standardisation initiatives, such as the Berlin Group’s NextGenPSD2 and ERPB’s API Evaluation Working Group on PIS were created, but they are not legally binding.

By taking the approach of a ‘binding working group’ you’re able to hear the demands of third parties loud and clear whilst managing expectations of core bank infrastructure.

Between what’s possible with the status quo and some form of Shock Therapy treatment, it’s a no brainer.

Intelligently addressing the problem in this way has been an approach borrowed from Mexico and Australia, upon witnessing the dashed hopes of pot-luck, ‘organic’ take up around Asia.

Even Monetary Authorities in Singapore and Hong Kong couldn’t resist issuing clear Open API guidance (despite their otherwise hands-free approach.)

Yes, banks want to hold on to hard-earned power. But are we really saying that — if Tencent went on a marketing drive in Europe next year — the UK challenger bank community would be behaving as nonchalantly about users leaving them as they are now? Can any bank really be expected to keep the taps on full blast forever?

It’s easy to see Open APIs as the obvious answer to the world’s problems…if you have something to gain. Standards apply in both directions.

Early Adoption

What’s an idea without a product?

Luckily, Open Banking has entered the UK’s conversation at the right time.

The UK ranked number 1 for places to do business by Forbes last year, on the back of a huge lorry load of investment into London’s fintech scene (the biggest globally, in fact.). Not only that, the big winners in the investment rounds were firms with obvious open banking applications for their core products… for example, Revolut raised £250m, WorldPay was acquired for £8bn and Transferwise’s Series E funding came to £250m.

All this money trickles down, meaning you can start an open banking app and immediately take advantage of technical, intellectual and commercial expertise ready and waiting in the Fintech Capital of the World.

This ripe ecosystem — getting inflows at exactly the right time — has validated our worldwide status as leaders.

So how do you plug into open banking data, and take advantage of this prime opportunity? Visit www.yapily.com or join our Yapily Slack channel for more information 🧐