Three years since its introduction and the future of Open Banking is the topic of conversation for European regulators. And globally, regulators are trying to replicate the EU’s PSD2 and follow in the footsteps of the UK in paving the way for Open Finance. Undoubtedly, Open Banking is the first step on the road to Open Finance. The question remains as to what Europe’s regulators’ next move is in this marathon race. And how will it be achieved through the ‘Future Entity’?
In our previous article we explored the inception and development of the UK’s Open Banking Implementation Entity (OBIE) - an entity that looked into successfully implementing Open Banking standards in the UK. We acknowledged the impact the formation has had on the ecosystem, with more than 3 million users now actively engaged with open banking solutions. The OBIE has positioned the UK as a global leader in this area and many countries around the world are looking to imitate the UK model.
The Competition and Markets Authority (CMA) has recently launched a consultation on the future of this entity. This is a reasonable and welcomed development in light of the enormous developments in the industry and changes in competitive dynamics. The proposals made by the CMA reflect a number of lessons taken from the first implementation phase and recognise the dynamic changes we have experienced in the past 5 years.
The principles set by the CMA for the future entity are clearly forward looking and reflect the elements that have supported the success of the initial OBIE (independence, funded by participants, monitoring undertaken by a separate body). These elements ensure industry buy-in and bring everyone together to collaborate and develop technical standards and security requirements to ensure smooth connectivity and consistent consumer journeys.
The mission of the future entity
After five years of open banking experience, the proposed mission for the future entity is informed by the state of the Open Banking ecosystem. It prioritises end-user outcomes while positioning itself at the heart of the Open Data and Payments market. Open Finance is at the forefront of the regulator’s focus, making it imperative for the interplay between Open Banking and Open Finance to be well planned and understood.
Compared to 2016, the user experience has significantly improved and - with the global impact of COVID-19 - has encouraged user journeys to become frictionless. There is, however, still some way to go for the consumer experience to be optimised. The mission proposed by the CMA for the OBIE is a clear nod from the regulator that it appreciates and acknowledges the importance of these two elements in maintaining the UK’s leadership position in this area.
To achieve its mission, the future OBIE becomes equipped with a set of well defined requirements: hold and maintain technical standards, provide the core services required, enable regulatory compliance for the industry and be an effective escalation and resolution mechanism. From an industry perspective, achieving the latter two objectives will be key in supporting the ecosystem’s proper functioning going forward.
Monitoring and surveillance was understandably more laxed at the initial phases of the OBIE. The industry needed time to adopt and implement the open banking standards. Some players were more agile in adopting these standards quicker than others with more inflexible IT infrastructure. Going forward, to maintain trust in the ecosystem and ensure that there is a level playing field for everyone, stricter surveillance and monitoring will become critical.
The funding model of Open Banking
Underpinning the sustainability of the OBIE is its funding model. In its initial phase, the CMA asked the nine largest banks in the UK to fund the creation of this entity. This was an effective decision in ensuring that smaller players in the ecosystem were not unduly penalised for the implementation of a remedy on the incumbents. The CMA is now considering whether the time has arrived for TPPs to start bearing part of the cost of the OBIE.
In principle, this is reasonable and should be considered within the right parameters such as the services that TPPs will receive and the future types of APIs e.g premium APIs. Is now the right time? Given the imminent implementation of Open Finance and that Open Banking is still a relatively new and fragile ecosystem, a more opportune timing for reviewing the funding structure of the OBIE could be following the implementation of Open Finance.
There is no doubt that the future of the OBIE is bright and will enable competition and innovation in financial markets. Both industry and regulators have learned a great deal from the set-up phase and are looking to develop a sustainable and effective framework for the future of this entity. Together with Open Finance, we can all expect a major revolution in the world of financial services.