Open banking is a financial services / financial technology (fintech) term that refers to the use of open application programming interfaces (APIs) to enable developers to build new applications and services. It aims to encourage innovation and boost competition in financial services.
Governments are encouraging open banking at different paces and in different ways. It is also being explored – and, in at least the case of the UK, actually adopted – to improve public service delivery.
The UK is widely seen in leading the way: in respect of the development of an open banking ‘ecosystem’ (an organisation to oversee open banking, the number of open banking service providers, the number of people using services enabled by open banking) and also the government’s own adoption of open banking (during 2021) to receive tax payments.
HM Revenue & Customs (HMRC) ran a procurement for open banking, revealed by Global Government Fintech in September 2020, to engage the services of a fintech company to supply account-to-account payment software (‘Payment Initiation and Account Information Services’) that would enable the collection of tax payments via open banking. HMRC awarded its first open banking contract to Ecospend, a London-based company. Its contract is worth up to £3m ($4.1m).
Global Government Fintech reported that at least £1bn (about $1.32bn) in tax had been paid to HMRC via open banking by September 2021 (via more than 500,000 individual payments in total). The department is looking to further expand its open banking-payment option to tax regimes beyond those already included – HMRC confirmed in January 2022 that it had extended open banking payment option to nine further tax regimes (beyond four it had started with).
The fintech-powered service uses validated and pre-populated payment details, enabling payments directly from a payer’s bank account. This automation should increase speed, reduce human error (for example, if someone were to mistype their tax reference number), and also has the potential to reduce fraud. The public purse should save on the resource associated with tracking down payments that fail to arrive because payers have entered their tax code or other information incorrectly, as well as saving on the interchange fee charged by card-providers.
The UK may be in the vanguard but open banking is ‘set to become globally ubiquitous’, according to a report published in 2021 focused on its development in ten European countries. The report, ‘Open Banking Readiness Index: The Future of Open Banking in Europe’ by Mastercard, found the Nordic countries (as well as the UK) in pole position because of a relatively high number of open banking APIs, ‘progressive’ regulators and consumer readiness.
Globally some countries have taken a regulator-driven route, while others have opted for an industry-led approach.
Canada’s government released a long-anticipated open banking report in August 2021 that proposes January 2023 as an ‘ambitious but achievable’ target date for launching an open banking system; Australia is progressing its Consumer Data Right (CDR) rules, with open banking having got off to a relatively slow start in July 2020 (the early months of the Covid-19 pandemic).
Elsewhere in the world, Brazil’s open banking rollout is progressing over multiple stages; Colombia has been consulting on an open banking regulatory framework; and Russia’s implementation of open banking is picking up pace.
Beyond open banking, governments are also interested in the possibilities of open finance: the extension of open banking data-sharing principles to enable third-party providers to have access, with permission, to customers’ data across a far broader set of financial fields, such as insurance and investments.
Global Government Fintech’s dedicated Open Banking / Open Finance section
‘HMRC reaches milestone as £1bn in UK tax paid through open banking’: our news story (29 September 2021) that a total of at least £1 billion in tax – via more than 500,000 individual payments in total – has been paid to the UK government using open banking technology since it engaged a fintech company, Ecospend, to enable the department to collect tax payments in this way.
‘Slow but sure: exploring open banking’s potential for streamlining citizen services’: our analysis (23 July 2020) of the opportunities and obstacles facing governments as they explore open banking’s uses.