Following its introduction in January 2018, the Open Banking regulation mandates UK banks to provide their data in a standardized format, facilitating third-party developers to create financial service applications and allowing for fast bank payments and settlements without intermediaries. The number of Open Banking users reached 1 million by November 2019, but despite the slower-than-anticipated growth of this new technology, recent usage figures and government commitment indicate that Open Banking may soon become more widely adopted.
Continued government focus
The UK has shown sustained government interest in Open Banking, with collaboration between the fintech sector and financial markets resulting in progress beyond Europe's 2nd Payment Services Directive (PSD2) following Brexit.
Marion King's appointment as Chair and Trustee of the Open Banking Implementation Entity (OBIE) signals the UK government's continued dedication to utilizing the advantages of Open Banking beyond 2023. The OBIE has finished its roadmap, and six major UK banks have implemented the necessary standards to enable Open Banking, indicating a new phase for the technology.
The adoption of Open Banking is increasing
Although the first few years have shown slow growth, the number of users for Open Banking is showing positive growth each year.
At the start of 2020, there were about 1 million end-users of open banking. By mid-2022, this number had increased rapidly, reaching over 6 million, or roughly 10% of the UK population. The UK Government's implementation of an open banking service for HMRC tax payments likely played a part in this.
Last year, Open Banking became the new 'it' technology at fintech events, with a surge in both users and volume. Customers and small-to-medium enterprises using OB-powered services in the UK have reached 7 million at the beginning of 2023. The UK Competition and Markets Authority predicts that by the end of 2023, 60% of the UK population will use open banking.
The potential of Open Banking has yet to be fully realized.
Open Banking is a technology that is yet to be widely adopted and accepted by consumers and business owners. Despite its potential value, it has taken a slow and steady path since its inception. The recent economic climate and ongoing debates around other fintech sectors have also contributed to its lack of prominence.
Could an economic recession serve as a trigger?
The implementation of Open Banking is increasingly attractive to businesses seeking to streamline payment processes and expand into new markets, particularly as economic difficulties impede payment volumes in some sectors. Additionally, a single Open Banking solution can accommodate all major banks in the UK and EU.
With the increase in costs and decrease in margins, merchants may seek to have greater control over their checkout processes to either reduce costs or enhance customer experience. Open Banking can address both of these concerns.
An increase in payment fraud can be caused by a difficult economic environment. Biometric authentication, which is commonly used for Open Banking transactions on mobile devices, provides an extra level of security and meets the requirements of Strong Customer Authentication (SCA) for Open Banking.
Protecting Open Banking apps
For Open Banking to be a success, banks and other financial institutions must ensure that their mobile apps are secure and meet all necessary regulations.
Mobile banking apps are particularly vulnerable to cyberattacks due to their accessibility, ubiquity and the sensitive user information they hold. As such, it is essential that Open Banking app developers pay special attention to security when developing their products.
Open Banking apps must adhere to the Payment Service Directive 2 (PSD2) regulations and implement strong customer identification measures, including two-factor authentication. According to the Financial Conduct Authority (FCA), this includes using “biometrics, such as fingerprint or facial recognition, to verify the identity of a customer”.
In addition to Open Banking and PSD2 compliance, app security should be bolstered through the use of encryption and secure coding practices. Encryption can help protect user data from malicious actors and secure coding helps ensure that applications do not contain any vulnerabilities that could be exploited by hackers.
It is anticipated that Open Banking may become a widely adopted consumer payment method in 2023. In order for EU/UK Open Banking to increase its usage even further, app developers should prioritize practical applications and its advantages for merchants and consumers. Open Banking has the potential to enhance financial products and services for both customers and businesses, so the forthcoming developments in this area are worth monitoring.
Moreover , app developers must implement strong customer identification measures, such as two-factor authentication, and secure coding practices. By meeting these standards and providing users with a secure and user-friendly platform, Open Banking in the UK will be well on its way to becoming mainstream in 2023.
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