Open Banking has truly changed the way we bank, how we control our money, and access financial services. Over the years, the popularity of Open Banking has continued to increase and this trend doesn’t seem to be ending any time soon. Allied Market Research has even announced predictions that the market value of Open Banking will reach over $43 billion by 2026. We know that Open Banking has transformed the way individuals and businesses can access and interact with their finances and benefit from a whole host of new services. However, how did the industry get to where it is today? Here we discuss the history and evolution of Open Banking.
1980- “My bank in the living room”
Let’s start way back in 1980, which is probably not when the majority of people think Open Banking started, as it is still seen as new. However, the theory of Open Banking goes back decades. In 1980 the German Federal Post Office carried out an experiment where people were testing a new online banking service which had the slogan “my bank in the living room”. Around 2000 people took part and were able to make online transfers. The results were positive and would be the start of something huge.
Germany was something of a pioneer when it comes to Open Banking. First, they did the “my bank in the living room” experiment, and the success of this led to the development of the Home Banking Computer Interface (HBCI) which took 4 years to create and was officially launched in 1998. This was an open standard for customer self-service machines and electronic banking. The innovation of HBCI led to a significant development in security protocols when it came to payments.
HBCI was later replaced by FINTs (Financial Transaction Services) in 2002 which allowed the use of signature cards and offered a procedure where customers required a Personal Identification Number (PIN) to access their accounts.
In 2007, the European Commission created the first Payments Services Directive (PSD1) which was to create competition within the banking industry and be able to provide customers with a range of high-quality financial services. The directive set up a regulatory framework to allow non-banks to execute financial transactions and growth within the Fintech (financial technology) sector – allowing them more opportunities to create new products and services and creating a new industry category – payment service providers. These were all major changes to the banking sector and were made to improve transparency and benefit the end consumer.
After the financial crisis in 2007/ 2008, there was a dire need to reform the banking system which had to be saved from collapse by Government intervention. The Midata initiative came into force in 2011 and was created and driven by the Government and helped people in the UK to download their current account transaction data and put it into online tools. This was to help increase bank switching and make the process easier. Midata was eventually rolled out in 2015 with the pledge that it would “change personal banking forever”. However, whilst the intention was good, there were significant problems. The customer experience was poor and the data shared was just a snapshot rather than an ongoing, real-time view. More importantly, data could be altered by the consumer which led to significant issues, especially when it came to credit scores. What Midata did do successfully was to increase competition within the industry and was a predecessor to Open Banking as we know it today.
2013- Open Data Initiated
The Open Data Initiated was introduced as a way of making data more accessible to people, businesses, and organisations. This, in turn, sparked a whole host of subsequent changes which led to the widespread use and growth of Open Banking over the next decade.
The European Union’s Payment Services Directive (PSD2) was created to revolutionise the payments industry, having a direct impact on how people will pay for goods and services online as well as what information people see when making a payment. Whilst there were some inevitably opposed to the changes, PSD2 was great news for consumers who would have more control over their finances and would be able to benefit from new financial services. PSD2 aimed to reduce the monopoly banks currently had over the industry and their user’s data. By allowing other merchants and third parties to gain access to consumers’ data (with their express permission), payments can be made in a more streamlined manner without the need to go via PayPal or visa.
There are two types of payment service providers under the PSD2 directive
AISP- Account information service providers. These are companies who are authorised to access the account data of an individual user from their banks (as long as they have their consent)
PISP- Payment Initiation Service Providers. These are companies that are authorised to access data on behalf of an individual (same as AISP) but also can initiate payments on behalf of the customer.
PSD2 was not a requirement across the world, however, this legislation change sparked a revolution of open banking which changed the world of financial services. Increased competition led to a significant increase in different financial products offered to consumers. Whilst PSD2 was passed in 2015, EU members have until 2018 to implement everything.
2018- Open Banking launched in the UK
Open Banking officially launched in the UK after the PSD2 regulatory change made the power of finances back into the hands of the customers. Banks were now required to open up access to their data with official and approved third parties.
By allowing these trusted third parties access to consumers’ financial information, consumers now have more control over their spending, with apps being able to easily track their spending and analyse previous purchases. Monitoring spending habits is extremely useful and now has never been easier. At this stage, according to a report by the Open Banking Market by Financial Services, By Distribution Channel: Global Opportunity Analysis and Industry Forecast, 2020-2031 report, the global open banking market was valued at USD 7 billion in 2018. Whilst this number was still impressive, the next few years would still this number look tiny in comparison.
2020- The Pandemic
A year we will never forget, 2020 brought the COVID-19 pandemic and whilst this brought a lot of turmoil, it also led to more innovation, especially when it came to the banking sector and making payments. People had to turn to online shopping, even those who had rarely bought stuff online previously, and therefore, the retail industry needed to ensure their checkouts and payment processes were as seamless as possible. In the past, checkouts using traditional methods could cause friction in the buying journey and lead to customers getting confused, frustrated, and in some cases abandoning their cart, resulting in a loss of sales for the company. Open Banking allows a simpler payment process, making the checkout only a few simple steps without the need for customers to enter loads of details whilst their data still being secure whilst making a payment.
QR codes exploded onto the scene as a contactless payment method during the pandemic. Customers can easily and instantly scan a QR code at checkout with their smartphone camera to pay for their purchase in the blink of an eye. This provided an incredibly smooth experience without the need to fumble for a physical card or cash, reducing contact.
The use of QR codes for payments has continued to skyrocket even after the pandemic, as both retailers and consumers get a taste for the lightning-fast, cutting-edge convenience they provide. QR codes have become an essential part of the future of payments.
2021- The effect of the pandemic continues
A study from Experian found that 3x as many people were sharing data through Open Banking since the start of the pandemic.
May 2022- A significant milestone hit
The UK reached a staggering 6 million Open Banking users in May 2022 and an impressive 6.5 million successful Open Banking payments were made by August of the same year.
2023- Financial Freedom
As Open Banking continues to be used by more and more people, the use of APIs has meant there is less friction between banks, merchants, and customers than ever before. Not only can customers gain a better online experience whilst knowing their data is safe, but companies can also make faster payments and not incur additional chargeback costs which previously could cause significant headaches. Open Banking also has the potential to significantly reduce the risk of cyber-attacks and streamlined the overall payment system.
The Future of Open Banking
The banking sector has seen one of the largest shifts of all time over the past few years. Changes in legislation and regulations along with a global pandemic have driven significant change at an unprecedented rate. What would have normally taken years happened almost overnight due to the pandemic. As online shopping became the norm and the need for more flexible online banking became heightened, people were able to access their financial information in more ways than ever before thanks to Open Banking.
Whilst Open Banking has been around for years, as discussed in this article, it is only during the last few years that we are starting to see its full potential.