How incoming regulations could affect the UK open banking market

With a burgeoning open banking sector, the UK could be on the precipice of a monumental surge ahead of other international markets in the space, according to notable industry experts. But how will incoming regulatory changes affect the country’s ability to smash through the glass ceiling?

According to research from the country’s Open Banking Implementation Entity (OBIE), the ground-breaking sector has recently passed 11.4 million payments in July 2023. This achievement reflects a 9.3% increase in total payments compared with the previous month, reinforcing the space as a development hub as we head into the second half of 2023.

OBIE’s year-to-date (YTD) data for 2023 against 2022 sees this trend continue, indicating an exceptional 102.4% growth. Open banking is growing at a rapid pace is playing a pivotal role to reshape the financial and payments landscape.

Among the key drivers of growth are single domestic payments, which recorded 10.5 million transactions in July, marking an 8% increase from June. At the heart of this growth, was a variety of government payments solutions and the onboarding of leading UK financial institutions and investment platforms.

With data like this on display for the world to see, it is not surprising that industry experts such as Willem Wellinghoff, Chief Compliance Officer at Ecommpay, are purring at the prospect for the sector on British shores. He said, “Over the next 18 months, the UK has the potential to surge ahead of other international markets and continue to lead the open banking/finance and data revolution.

“In April the Joint Regulatory and Oversight Committee (JROC) published a roadmap and timescale for open finance growth in the UK, building on the seven million consumers and businesses that already use open banking. Also, in July 2023, the Payment Systems Regulator (PSR) also outlined its vision for open banking to ensure the continuous evolution and development in a safe, scalable and sustainable way.

“This demonstrates the confidence regulators have towards the future of open banking as part of the payments sector and embedded finance, thereby allowing for a flexible and secure choice for consumers to make payments and share critical information whilst continuously focusing on reducing the impact of fraud. ”

However, not all are convinced currently that the UK open banking sector is flourishing, with some industry insiders believing that the current market has lost momentum, and stalled on the international stage.

Celia Clark, Political Consultant at Grayling, was unenthused by the progress in the sector in recent years, stating, “The 2018 Government mandate requiring nine of the largest consumer and SME account providers to use open APIs set the tone for the UK to be a leader in open banking.

“Since then, we’ve seen momentum dip where performance in banking flows has been inconsistent, protection for consumers and SMEs has been limited, and a competitive fast payments landscape in the UK has dampened the case for open banking.”

A report from UK tech start-up advocate Coadec, prior to the JROC announcement earlier this year, even stated as much, declaring that the industry was at a ‘critical juncture’ and in need of urgent clarity on the future regulatory direction of open banking in the UK.

Last year, Coadec and 17 FinTechs sent a letter to the FCA stating that while the UK’s progress on open banking was once ‘the envy of the world’ its future has now been found to be uncertain due to a lack of direction from the Joint Regulatory Oversight Committee.

However, amidst the launch of the aforementioned JROC road map, and the Data Protection and Digital Information (No. 2) Bill, there are positive signs for the future, as Celia Clark, stated: “Now, with the recently passed Financial Services and Markets Act, incoming JROC plans for the future entity and the Data Protection and Digital Information (No. 2) Bill journeying through Parliament, firms must harness these latest developments as an opportunity to re-energise growth in open banking and overcome remaining challenges.”

Clark affirms that these incoming regulations are pivotal for the future successes or failures of the open banking sector, with the emphasis being placed upon firms to be flexible and proactive as the land of potential opportunity awaits.

But what is the significance of the Data Protection and Digital Information (No. 2) Bill?

Currently in the report stage, the bill is a continuation of its eponymous predecessor which was withdrawn on March 8, 2023 following its first reading in the House of Commons. It currently receives sponsorship from the fledgling department for Science, Innovation and Technology (DSIT), a body formed to ensure that the UK cements itself as a Science and Technology superpower through its innovative, avant-garde economy.

Some key tenets of the bill are the plans to introduce a clear, business-friendly framework that incorporates the key elements and objectives of GDPR but provides more flexibility about how to comply, and also to provide organisations with greater confidence about when they can process personal data without consent.

It is hoped that the regulations will allow UK firms operating in the EU – and the wider international community – greater confidence in the robust nature of UK data protection standards, allowing them to save on compliance costs and boost international trade for domestic businesses.

When posed the question as to what impact wider upcoming regulatory changes may have for the UK open banking market, Tim Hood, vice president, EMEA & APAC at process management software developer Hyland, was very positive. He said, “With the implementation of new regulations, there will likely be increased competition within the banking sector.

“The new regulations could facilitate new entrants into the open banking market, triggering heightened rivalry and ultimately yielding a broader array of choices for consumers. Such an increase in choice could potentially even drive down costs.

“The regulatory overhaul might serve as a catalyst for the emergence of novel products and services grounded in open banking principles. This surge of innovation has the potential to reshape the financial services domain, enhancing both consumer and business financial management.”

According to Ecommpay’s Wellinghoff, Hood’s faith that the sector could boom given the regulatory changes is not misplaced, he stated: “The Data Protection and Digital Information Bill has the opportunity to be a significant catalyst for growth and to expand the concepts of open data sharing beyond banking and into wider financial services but also into wider industry such as retail, energy and healthcare.

“Coupled with the proposal for a Universal Identity programme, which aims to provide a consistent validation source for identity and Know Your Customer (KYC) purposes, there is potential to create rapid, frictionless and well-governed propositions and services that will delight the customer whilst establishing consumer confidence to permit and trust the use of their personal data.

“From a consumer perspective, this initiative not only provides them with greater control over their financial data, but also spurs the development of new, innovative services that can cater to their financial needs.

“The implementation of this Bill and identity programme will lead to a more potent business environment in the UK, ensuring it remains a key innovation hub for open experiences.”

Jack Wilson, Head of Public Policy at leading European open banking payments network TrueLayer, concurred with the optimistic outlook. He said: “After a few years of consultation, discussion and the introduction of new regulation, including a hiatus caused by Brexit, the next 18 months should see a move toward more certainty and the start of a roadmap for change.”

Ultimately, the UK open banking sector has found itself at a pivotal juncture after regulatory quicksand seemingly blunted the space’s momentum in recent years. It has regathered and recomposed itself with the JROC road map being revealed, allowing the sector to rejuvenate and refind its feet.

But now, with the impending approval and implementation of the Data Protection and Digital Information (No. 2) Bill, the UK’s sector could well be poised to reclaim the limelight, and perhaps become one of the hottest commodities in the FinTech space as we head into 2024 and beyond.

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