Open banking has been around for years in various forms, but only now is its full potential being realized.
Image source: OC Gonzalez on Unsplash.
This is an excerpt from AltFi’s 2022 State of the Open Banking Market Report, which is available for free here.
Ask a banking executive when they first encountered open banking, and they’ll probably struggle to put an exact date. Unlike the moon landing, the arrival of open banking (or its key principles: the use of open source technology to bring greater financial transparency, improve services and increase banking competition) has not was an isolated event but has crept into the banking firmament over the years. years in different forms. Yes, there have been landmark events – the two EU Payment Services Directives in 2007 and 2016, and the CMA ordering the UK’s biggest banks to launch open banking in 2018 – but the seeds of open banking were germinating before these events.
Have you heard of open banking?
“To me [I first heard] the term open banking, or trying to create better outcomes for consumers, probably in 2012 or 2013,” said Michael Donald, founder and CEO of ImageNPay, the digital payments company.
However, it was a little later for another financial executive. Brendan Jones, COO and co-founder of Konsentus, an open banking SaaS company, said, “The term open banking is something that’s been around for three or four years. Initially, it was called Account Access, which was the more technical term. And then it sort of morphed into this term open banking.
Some might date the origin of open banking, in Europe at least, further back to 1980, when the Deutsche Bundespost (Germany’s Federal Post Office) conducted an experiment with five computers and 2,000 participants, which saw a few participants be able to process their banking transactions via text screen. The experiment, considered a success, was considered the first appearance of an ATM.
Germany, in fact, was something of a pioneer of open banking and also developed the Home Banking Computer Interface (HBCI), an open standard for customer self-service machines and electronic banking, which was launched in 1998. HBCI was later combined with screen scraping technology. to form what became Sofort, the German online payments company acquired by Klarna in 2013 for around $150 million. Fast forward to 2007 in Europe and the arrival of a landmark event, PSD1, designed by the European Commission to harmonize the regulation of payment services in the EU and also increase competition between financial services.
Midata and the early incarnations of Open Banking in the UK
In the UK, meanwhile, the devastation wrought by the 2007 financial crisis not only led to the deepest recession ever in the UK, but was also a spark to reform the banking system, which had been saved from collapse by billions of taxpayer pounds. ‘ money. Many believe the government has not forgotten the billions spent to save Lloyds Banking Group and the Royal Bank of Scotland from impending collapse when a new law challenging the dominance of big banks was subsequently introduced. Before that, however, came the Midata initiative, first announced in 2011, a government-orchestrated program helping Britons download transaction data from their current account and put it into online tools to increase the change of bank.
Voluntarily backed by RBS and Visa, Midata was finally rolled out in 2015 with the grandiose promise that it would “change personal banking forever.” Anthony Browne, then Chief Executive of the British Banker’s Association: exclaimed: “This is an exciting innovation that will further help customers find the best current account for them from over 200 in the UK market. But the initiative rolled out ran into problems: the customer experience was poor; it offered only a snapshot of data rather than a continuous stream; and customers could also modify the data, compromising its use in areas such as credit reporting. However, experts have noticed that the Open Banking Implementation Entity (OBIE), created in 2016 to increase competition in the banking sector, clearly refers to the lessons of Midata in the creation of open banking, as it is called. today. Meanwhile, other open banking-focused business initiatives were underway, but largely testing the waters.
Struggles of the first incarnations
Experts believe that these precursors to open banking did not fail in that they struggled to scale. Adam Moulson, commercial director at Griffin, the banking-as-a-service provider, said: “They didn’t really fail, it was just very difficult to scale effectively. Think small business accounting systems from Sage, Xero, etc. They all needed easy, safe and reliable access to their customers’ banking data. At the time, they had to collect each customer’s account login data in a non-standard way and enter that information into bilateral agreements with all major banks, while simultaneously integrating with each bank. No matter how much maintenance it requires. Helen Child, the founder of Open Banking Excellence (OBE), the open banking community made up of fintechs, banks and regulators, cites the lack of “interoperability” in its early days. She said: “Before open banking, there was no interoperability between different vendors. Without standards, we risk seeing the creation of walled gardens that prevent customers from accessing competitors’ products…”
Do you want to continue? Read the full feature in AltFi’s 2022 Open Banking Market Report, available now!