The uptake of open banking in the UK is being hampered by the shortcomings of the European Union’s (EU) revised Payment Services Directive, aka PSD2, suggests a report commissioned for the Open Banking Implementation Entity (OBIE).

The OBIE was set up in 2016 the UK’s Competition and Markets Authority (CMA) to create software standards and industry guidelines that drive competition and innovation in UK retail banking.

The report, prepared for the OBIE by competition and regulation advisory firm Fingleton Associates, concludes that the requirement for banks to conform to a limited set of rules mandated under PSD2 has resulted in various gaps opening in the implementation of open banking that need to be addressed.

Third part providers (TPPs) interviewed for the study complained of the absence of refund functionality, which is a critical feature for online merchants. Another is the inability for customers to pre-approve payments to a merchant, for example for subscription services or to automate sweeping between accounts. Currently customers have to manually authorise every payment.

Extending the scope

The report suggests that the problem could be solved if open banking were able to mandate “variable recurring payments”. These would be cheaper for merchants and more secure for customers who currently have to hand over their card details to merchants to hold on file.

Other recommendations include the creation of a new set of customer consent rules for the deletion of data upon termination of a service, and TPP-side re-authentication when required to ensure continuity of service. This would allow users to provide TPPs with continued consent to access their data without having to revisit their bank’s website or app. Currently, consumers have the inconvenience of having to re-authenticate with each TPP through their bank every 90 days.

The study calls for the remit of open banking to extend to a wider range of products beyond current accounts, such as cash savings accounts, mortgages, pensions and insurance.

“The narrow focus of the open banking application programming interfaces (APIs) limits their potential to drive wider competition in the financial sector, for example by helping customers shop around for better interest rates on savings accounts or cheaper mortgages,” states the report.

“Extending open banking to these other financial products would drive more competition and better consumer outcomes.”

John Fingleton, CEO of Fingleton Associates, comments: “Open banking is the first attempt by competition authorities to use technology to rebalance complex markets towards consumers. While great progress has been made so far, more is needed to guarantee that it takes off with consumers and business users.

“This matters for more than just banking: making a success of it here gives us a model for similar steps in other markets where customer inactivity or loyalty can leave people worse off.”

In response, the OBIE is planning to create “premium APIs” that sit above the mandatory “regulatory APIs”, providing a commercial incentive for banks to up their game and address some of the gaps in implementation.

OBIE trustee Imran Gulamhuseinwala comments: “This report clearly demonstrates how far the open banking initiative has progressed, and the potential that exists to help create a banking market that better serves consumers and small businesses.

“Nonetheless, PSD2 is not a complete solution and we need to further develop the standards if open banking is to fully meet its objectives. As the report points out, there is a pressing need to address refunds, premium APIs and open finance.”