Open banking proposal was originated by the Competition and Markets Authority (CMA) in 2017. It came after the Payments Services Directive (PSD) and the findings of the open banking CMA Retail Banking Market report. This initiative enabled consumers and Small and medium-sized enterprises (SMEs) to share their banking data securely with Third-Party Providers (TPPs). TPPs used this data to offer new services and advance money management processes together with finding alternative products to use for better prices.
Since the founding of open banking CMA, it has acquired more than 3 million engaged users. Even more, some research from Open Banking Implementation Entity (OBIE) suggests that it is expected that more than half of SMEs will employ tools related to open banking and its increased capabilities.
OBIE has launched a roadmap that contains methods to conclude the implementation of open banking. Meanwhile, the CMA together with essential stakeholders from the industry is trying to create a scheme for the future administration of open banking processes.
Open Banking Implementation Entity had given a jump start for open banking to succeed. Therefore, the United Kingdom had a chance to become a path starter for open banking within Europe and a role model for banking industries across the world. However, the current success of open banking CMA is not quite the finish line. Currently, open banking has structural regulations for its implementation, yet, it still has to migrate from temporary to permanent structures of administration and frameworks.
The transition between the two types of regulations can take a while bringing disadvantages to the financial market. Nevertheless, if implemented in a rush without proper preparation and relative infrastructure, the speedy transition could bring more harm than good. Consequently, the ecosystem of open banking has taken a longer approach to the permanent changes. This brings additional advantages like innovation mobility and vibrant competition.
Open banking CMA aims to guarantee customer protection and ensure that legacy banks work towards the improvement of customer service. Hence, CMA has imposed a package of standards that will force legacy banks to fully utilise the new technology and industry advancements.
The CMA open banking report that analysed the United Kingdom’s retail banking market was published in 2016. It discovered that legacy banks that are bigger and older obtain customers without putting in any effort while smaller and newer banks struggle to attract customers and gain their trust. Therefore, the market was stagnant and the competition was crushed by the already established monopoly. The CMA open banking report provided guidelines and proposals on how to tackle the difficulties, increase levels of competition and encourage innovation. Open banking was the answer.
This proposal resulted in the appearance of open banking and related regulations like The Second Payments Services Directive (PSD2). PSD2 enabled the financial ecosystem to open up their banking data and the information obtained by legacy banks were now available to TPPs. That way SMEs and individuals had a chance to obtain better services and personalised products that matched their financial needs and expectations.
After the implementation of PSD2 and open banking, some issues and questions arose within the banking industry. It required more tools and methods to succeed and smoothly provide innovative services which could lead to a more effective and secure payments market. From this necessity, the term Sweeping surfaced and became the centre of attention.
Sweeping is a term that means automatic money movement among users' banking accounts. For instance, a person can set certain limits for their main account and have their excess money automatically moved to a different one. So if a person wants to have no more than 500€ in their main account, everything that amounts to +500 is then transferred to another account. The additional transfer can be used for repaying loans or adding funds to savings accounts.
Sweeping has been talked about for a long time and the banking ecosystem supported this idea. Therefore, the CMA has validated the OBIE’s proposal to authorise Variable Recurring Payments (VRPs) as means to execute Sweeping. This led to more vibrant competition in the financial market and increased chances to gain customers for new TPPs.
This decision made by CMA determines that the CMA9 (nine largest banks in the UK, based on their account volumes: Lloyds, Barclays, Nationwide, RBS, Santander, Danske Bank, HSBC, Allied Irish Banks and Bank of Ireland.) that are account providers will have to fulfil VRPs requirements within upcoming half a year which is a relatively short period of time. With the implementation of VRPs CMA9 has to enable free data access to TPPs that utilise VRPs to facilitate their customers' need to transfer funds among existing accounts.
CMA commented on the Sweeping as “Making effective provision for sweeping is an important element of the Open Banking remedy and it is important that sweeping provisions include the ability to move funds out of current accounts into accounts earning a higher rate of interest, and conversely enables customers to access alternative and cheaper sources of short-term credit.”
The verdict on Sweeping and VRPs were indirectly caused by the initial CMA open banking report and can be seen as the last piece of key features for the final implementation of open banking CMA. This ruling will liberate the competition and increase levels of innovation which in turn will supply meaningful advantages to SMEs and individual users.
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