Open finance at the crossroads: What UK institutions do next will be critical

In implementing the PSD2 open banking regulations, the UK’s largest financial institutions took a significant first step towards enabling a more open, customer focused banking ecosystem for their customers.

Customers can now make payments, share account data, and manage consents via non-bank, trusted third-party providers. As a result, open finance is fast gaining ground. In just three years, the number of people using it has increased fivefold. Today, five million people use open finance services for everything from making payments to switching accounts.

An open finance execution gap is emerging

However, while there’s growing customer demand for open finance, not every institution is enthusiastic about meeting it. A new study of over 200 decision-makers by Cognizant, the Open Finance Paradox, shows a gap opening up between leaders and laggards: between institutions that see open finance as a critical foundation for ongoing customer-centric innovation, and those that have historically viewed it as more of a compliance exercise.

On the surface, there’s a good deal of common ground. Most (71 per cent) institutions view open finance as essential or important to their future success, 64 per cent plan to deliver new open finance products and services, and 46 per cent believe institutions will be left behind if they don’t follow future trends.

A deeper dive however reveals key differences, with some institutions surging ahead to embrace the open finance opportunity, and others holding back. These differing attitudes coalesce around four key themes:

Customer-centricity: Attitudes vary strongly between institutions that see open finance as an elegant solution to today’s complex customer needs, and those that believe customers don’t see the benefits. Among the latter, there are signs that some institutions may be using outdated assumptions about customer demand. Two-thirds (67 per cent) of incumbents, for example, say that only a minority of customers want open finance, despite the rapid adoption of the last few years.

Risk perception: Risk is a significant factor in institutions’ readiness to embrace open finance. Many are confident that they have solid technology platforms and partners in place to enable secure open finance services. However, others—particularly challenger banks—have lingering anxieties over opening data to third parties via APIs and feel that an over-reliance on open banking risks limiting their internal capabilities..

Appetite for innovation: Despite 65 per cent of respondents saying they will use open finance to identify new products and services that appeal to customers, not all are doing so at the same pace. Some are forging ahead with developing new open finance products and services, while others are applying open finance capabilities to existing products but reluctant to innovate further.

As might be expected, neo-banks lead the field here, with 74 per cent always considering open finance when developing new products. Elsewhere, despite 46 per cent of institutions saying there’s a risk of being left behind if they don’t follow new trends, this isn’t always translating into product innovation.

Disconnect between strategy and action: Overall, the study shows that institutions of all types are mostly executing in line with their strategic aims. But below the surface, a few mismatches emerge. For the large financial institutions, for example, the key strategic objective is to improve customer advocacy, but the top area of investment is in expanding into new markets. A disconnect is also evident at institutions that have appointed heads of open finance but have struggled to embed the role within their operating model. .

As adoption accelerates, what institutions do next will be crucial

What comes across most strongly in the study is a sense of gathering pace. When Covid-19 prevented people visiting physical branches, it massively accelerated the shift to digital services—not just for banking, but in many areas of our lives. Now, open finance looks set to further transform the way people access, use and think about financial services.

While the study shows that neo-banks are setting the pace of open finance innovation overall, there are significant differences among the attitudes and approaches of more traditional institutions.

What happens next will play a key role in shaping the UK financial services landscape in the decade to come. The institutions that see open finance as an opportunity to innovate in response to changing customer needs and expectations are likely to gain market share. Those that see it as overhyped or irrelevant risk being left behind.

Download the full report here: The Open Finance Paradox