Separating hype from reality in open banking

Open banking is seen as a transformative force in financial services, promising to empower consumers, drive innovation, and foster competition across the industry.  By leveraging secure APIs, it enables banks to share financial data with authorised third parties, creating opportunities for personalised services, seamless transactions, and enhanced customer experiences.

Yet, as open banking gains traction, questions remain about whether it is delivering on its full potential. Advocates point to significant adoption milestones and innovative use cases, while critics highlight persistent challenges, from regulatory hurdles to consumer trust concerns.

During the “Open Banking: What is Hype and What is Reality?” panel at FinTech Connect 2024 in London, industry leaders debated these critical issues, shedding light on both the progress and the obstacles that define the current landscape.

The lineup of experts included Joe Lambe, Vice President, Subsidiary Banker, Global Corporate Banking at JP Morgan; Nikhil Batheja, Sr. Director, Head of Open Banking at BNY Mellon; and Oded Salomy, Director of Payment Systems and Settlement at the Bank of Israel, with Sophia Furber, Research Analyst, EMEA Fintech at S&P Global Market Intelligence, moderating the session.

From niche to mainstream

Open banking has seen remarkable growth in adoption, driven by both consumer and merchant use cases. Over the past year, active user numbers have surged by 70%, reaching a notable 15 million, highlighting its growing relevance. Innovative implementations such as Lloyds Banking Group’s LinkPay, which simplifies bill splitting, and open banking-enabled flight payments exemplify the technology’s potential in real-world applications.

This rise in adoption is not limited to individual consumers; businesses are increasingly exploring open banking for operational efficiencies. Payment volumes have grown substantially, showcasing open banking’s viability as an alternative to traditional payment methods like direct debits and card payments.

Despite these gains, the panellists noted that open banking’s success is not just a product of innovative technology. Government support has played a critical role, particularly in positioning the UK as a leader in payments innovation. This high-level endorsement encourages financial institutions to embrace open banking solutions, fostering competition and ultimately benefiting consumers and merchants alike.

Balancing rules with innovation

The regulatory framework for open banking has seen a notable shift, with the Financial Conduct Authority (FCA) recently taking primary oversight responsibility. This consolidation aims to simplify governance and encourage innovation. However, balancing regulatory requirements with the flexibility needed for innovation remains a significant challenge.

A key concern raised during the panel was the gap in consumer protections compared to traditional payment methods such as credit cards, which offer safeguards under the Consumer Credit Act. Open banking transactions currently lack equivalent protections, leading to potential hesitation among consumers and merchants. The issue of fraud, particularly authorised push payment (APP) scams, further underscores the need for stronger frameworks.

Panellists also highlighted the challenges of overlapping regulations, particularly as open banking transactions involve not just money but sensitive data. With entities such as the Information Commissioner’s Office (ICO) overseeing data regulations, ensuring a streamlined approach becomes complex and can stifle progress.

Breaking down the challenges of open banking APIs

Despite the progress in adoption, integrating open banking systems remains a key hurdle. Panellists pointed to the complexity of API integration as a significant challenge for businesses. Variations in API specifications across banks often result in inconsistent implementations, requiring additional translation layers and increasing development costs.

Another barrier is the disconnect between technological possibilities and the actual needs of consumers and merchants. While open banking offers innovative solutions, many of these fail to address real-world pain points, such as simplifying payment processes or enhancing user experiences. As a result, adoption may be hindered by solutions that do not provide clear, tangible benefits.

The panel also discussed the commercial case for open banking. Businesses, particularly smaller ones, may find the costs of integration prohibitive, while larger institutions may struggle with the cultural shift needed to prioritise collaboration over competition. Furthermore, data-sharing concerns—both regulatory and operational—compound these challenges, as stakeholders must align on standards that protect users while fostering innovation.

Making open banking work for businesses

Open banking’s commercial viability is becoming increasingly evident, especially within the corporate sector. While its early use cases focused on individual consumers, businesses are now recognising the potential of open banking to streamline operations and improve efficiency. For example, APIs designed for treasury departments are enabling faster and more accurate financial processes, such as tracking international payments.

The panel highlighted the emergence of variable recurring payments (VRP) as a key area for growth. This innovation offers businesses more control and flexibility over payments compared to traditional methods like direct debits. Early implementations, such as for bill payments and e-commerce transactions, are proving the feasibility of these solutions.

However, the panellists noted that for open banking to unlock its full potential, banks must balance compliance with a clear value proposition for corporate clients. Businesses need to see tangible benefits, such as cost savings or improved cash flow, to justify the investment in integration. Furthermore, the willingness of corporate clients to pay for enhanced APIs could create new revenue streams for banks, incentivising further development.

Increased adoption also depends on trust and education. Corporate clients, much like consumers, require confidence in the security and reliability of these systems.

Winning over consumers

Consumer trust remains a critical factor in the widespread adoption of open banking. While the technology promises greater convenience and tailored financial services, concerns about data security and fraud continue to deter some users. The panellists agreed that addressing these issues is essential for building confidence in open banking systems.

One of the key challenges is the lack of awareness and understanding among consumers about how open banking works. Many users remain unfamiliar with its benefits, such as easier payment processes or better financial management tools. This knowledge gap can create hesitation, particularly when it comes to sharing sensitive financial data with third-party providers.

The issue of authorised push payment (APP) fraud was also highlighted. Without the same consumer protections offered by credit card transactions, users may feel exposed to financial risks. The panellists called for a streamlined approach to consumer protection, ensuring that open banking transactions are as safe and secure as traditional methods.

Building trust requires education and transparent communication. Banks and third-party providers need to articulate the value proposition of open banking in clear, relatable terms. Additionally, regulators and financial institutions must work together to establish consistent standards that prioritise user safety.

Open banking 2.0: APIs, AI, and global inspiration

The panel discussion concluded with a look ahead at the future of open banking, highlighting both its potential and the steps needed to sustain its growth. While adoption is increasing, the next phase will focus on refining the user experience and expanding commercial use cases.

One promising development is the ongoing improvement of API specifications, particularly in addressing pain points like payment failures and transaction diagnostics. Enhanced APIs will provide greater transparency and enable businesses and consumers to better understand and resolve issues, fostering trust and efficiency.

Corporate adoption is expected to accelerate as banks develop APIs tailored to the needs of treasury departments and other business functions. These tools aim to bring the seamlessness of consumer payment systems to corporate operations, creating opportunities for cost savings and enhanced financial control.

Additionally, the integration of artificial intelligence (AI) in fraud detection and risk management is poised to make open banking systems more secure. By identifying patterns of criminal activity, AI can help financial institutions safeguard users and ensure compliance with regulatory standards.

The panellists also noted the importance of global collaboration. While the UK leads in open banking innovation, learning from systems such as India’s UPI and Brazil’s Pix could inspire further advancements, particularly in creating frictionless payment ecosystems.

Looking forward, success will depend on a shared commitment among regulators, banks, and technology providers to prioritise innovation while maintaining a strong focus on consumer protection and trust.

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