Open banking is ‘set to become globally ubiquitous’, according to a report focused on open banking’s development in ten European countries.
Open banking aims to boost competition by enabling third parties, such as fintech companies, to use customers’ financial data (with their permission) to develop new apps and services. It is enabled by software intermediaries known as application programming interfaces (APIs).
The report, ‘Open Banking Readiness Index: The Future of Open Banking in Europe’, found the Nordic countries and UK – at present – in pole position because of a relatively high number of open banking APIs, ‘progressive’ regulators and consumer readiness.
Open banking is ‘fast becoming a worldwide phenomenon’, states the report, published by US-headquartered payments company Mastercard. It describes how it empowers consumers and businesses to take control of their financial data and their financial futures while stimulating competition and innovation among financial service providers.
The 79-page report highlights differences in how countries are approaching open banking, describing the picture across Europe as ‘generally promising’ but pointing out that the open banking API landscape is ‘rather fragmented with multiple standards and lots of bespoke APIs’.
Global Government Fintech has revealed a series of developments about how the UK government is starting to incorporate open banking into its own operations. Examples include HM Revenue & Customs’ introduction of a ‘Pay by bank account’ option (powered by a fintech company) for people filing online self-assessment tax returns (since extended to payroll payments, as well as corporation tax and VAT); click here for our analysis of global governments’ explorations of open banking’s potential for delivering citizen services
Carrot or stick?
Momentum towards open banking has been driven by the European Union’s (EU) revised Payment Services Directive, PSD2.
Some countries have taken a regulator-driven route, while others have opted for an industry-led approach.
In the UK a dedicated organisation, the Open Banking Implementation Entity (OBIE), was created by the Competition and Markets Authority, a non-ministerial government department, in 2016 to create security and messaging standards. The nine largest current account providers (known as the CMA9) were required to create and pay for OBIE, and release their customers’ data in a secure, standardised form (subject to customers’ agreement).
About 300 fintech companies and payment service providers have joined the open banking ecosystem in the UK, with more than 100 having offerings live in the market, according to OBIE data. More than three million UK citizens and businesses are now using open banking-enabled products.
The report also highlights Nordic countries, which do not have an OBIE-style entity, as ahead of the pack. In Sweden, Denmark and Norway, banks provide open banking API access in combination with aggregators that provide connectivity between the banks and independent payment initiation service providers (PISPs) / account information service providers (AISPs).
The report refers to the prospects of a potential pan-Nordic open banking API set as part of the region’s P27 project: a developing partnership between several big banks seeking to create a real-time cross-border payments system.
‘The pan-Nordic collaborative models and P27 initiative aid the region’s open banking readiness,’ the report says. ‘Norway also has digital customer identification services such BankIDs and Invidem, which add security by proving an individual is who they claim to be and are strong examples of how the Nordic countries are leading the way.’
‘This advanced approach differs from that of other European countries,’ the report says, pointing out that at present, the UK open banking model does not include, for example, a digital ID authentication scheme.
‘We need greater standardisation’
The report examines countries’ regulatory regimes’ adoption of PSD2, APIs, open banking-enabled account-to-account payment innovation and the ‘readiness’ of citizens in terms of internet access and e-commerce use.
The 27-member EU does not have universal government-standardised APIs, as in the UK, and there is – at present – no single pan-European open banking API standard. ‘In some markets, industry standards have evolved and are commonly used, other markets lack real standardisation,’ the report notes.
“To ensure that all European markets can take advantage of the opportunities that open banking presents, we need greater standardisation,” said Mastercard’s senior vice-president for open banking Jim Wadsworth, in a press release.
The other countries assessed are Germany, which is described as having ‘a collaborative approach, specific to Germany’; as well as France, Italy, Spain, Poland and Hungary.
Although the report is focused Europe, some of its commentary takes a broader view. ‘Elsewhere around the world, we are seeing a mix of approaches that all suggest open banking is set to become globally ubiquitous,’ writes Wadsworth in the report, adding that 36 countries – beyond EU member states – now have open banking initiatives, with PSD2 ‘serving as either a blueprint or inspiration’.
PSD2 review on the way
The challenges and complexity that result from the different APIs being used across Europe have been well vocalised. Companies were described as facing “difficulties at an operational level in the jungle of the APIs that are being proposed by the banks – some are good, some are not good” by the Emerging Payments Association EU’s vice-chairman and general manager, Thibault de Barsy, at an event (virtually) attended by Global Government Fintech last September.
Mastercard’s report highlights the significance of the Berlin Group, an ‘open source’ standards initiative, saying that the Nordic countries have mainly adopted the Berlin Group’s open banking API framework, NextGenPSD2.
At an institutional level, the Euro Retail Payments Board (ERPB) has a working group examining a potential ‘SEPA (Single Euro Payments Area) API Access Scheme’, including the creation of a ‘standardised API interface’. More broadly, as part of its digital finance package, published last September, the Commission undertook to review PSD2 in the final quarter of this year.
The Commission has also pledged to present a proposal on a framework for open finance by mid-2022. Open finance is 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.
The Berlin Group announced in October that it would be developing an API framework for open finance.
The Mastercard report was compiled in partnership with a UK-based publishing and research company, Payment Cards & Mobile.
Global Government Fintech’s dedicated open banking / open finance section
‘Open finance: phased rollout better than “big bang” launch, UK’s FCA told’ – our news story (9 April 2021) on the FCA’s publication of a ‘feedback statement’ summarising 169 responses to a ‘call for input’ on open finance
‘From OBIE to the “Future Entity”: UK consults on open banking governance’ – our news story (8 March 2021) on the CMA’s consultation on open banking’s future governance
‘We’re in the final lap…’ – an interview (14 October 2020) with the Open Banking Implementation Entity (OBIE)’s trustee Imran Gulamhuseinwala
‘Colombia aims to take voluntary approach to open banking‘ – our news story (26 April 2021) on the South American country’s government’s decision to organise workshops with the private sector to advance a regulatory framework
‘Philippines looks to ‘industry-led’ approach to open finance‘ – our news story (2 February 2021) on Bangko Sentral ng Pilipinas’ plans
‘Saudi Arabia to launch open banking in 2022′ – our news story (18 January 2021) on the Saudi Central Bank (SAMA)’s newly published open banking policy
‘Open banking gets off to slow start in Australia‘ – our news story (9 July 2020) on open banking becoming a reality in Australia after the country’s Consumer Data Right (CDR) legislation went live