Six strategic principles for the adoption of open banking in Government

Where current initiatives have focused on reducing payment transaction costs, adopting a holistic approach and focusing on collaboration, innovation, and customer-centricity means departments can transform the way they interact with citizens and conduct operations.

The open banking opportunity

We saw exponential growth of the open banking market in 2022 driven by increased digitalisation during COVID-19 and improvements in availability and performance of the service. This momentum continued into 2023 with around 10 million payments and over one billion transactions made in June and is expected to increase further in 2024.

UK Government adoption was pioneered by HMRC, who introduced open banking for tax payments in 2021. At the beginning of 2023, over 4.5 million tax payments worth around £12 billion were made this way, with HMRC saving a significant portion in interchange fees. The tangible benefits of open banking have been noted by the wider UK Civil Service, with the Government Digital Service now exploring how it can add this payment method to Gov.UK Pay system, which processed around £1.3 billion payments last year.

Open banking is now seen by Government as a key technology enabler to support its objectives around:

• Improving process efficiency: To digitalise and streamline operational processes and reduce costs. For example, agencies can use open banking and confirmation of payee to streamline payments, verify identities, and conduct fraud checks.
• Enhancing digital citizen services: To provide better customer services by having access to real-time financial data. This data can be used to personalise services, identify potential problems, and proactively assist.

There are significant opportunities for several other government departments to benefit from open banking:

• Local councils could enhance the transparency and efficiency of payments made by citizens for local services while reducing the overall cost of processing payments.
• Benefits administration could make it easier for citizens to apply for and manage benefits. For example, agencies could use open banking to verify income and assets, and to make payments directly to citizens’ bank accounts.
• Social services could use real-time financial data available through open banking to identify emerging issues like financial hardship and offer timely, tailored assistance to citizens in need.
• Universities could leverage open banking to revolutionise how students make payments and provide smarter financial support. By gaining access to real-time financial data of students they could offer personalised financial guidance, recommend budgeting strategies, and identify students at risk of financial difficulties and proactively offer assistance or grants based on their financial profiles.

Successful open banking adoption requires a holistic approach

Open banking’s tactical advantages in reducing payment transaction costs are undeniable. However, a strategic approach is essential for long-term success. Here are six key principles to guide this strategy:

Understanding customer needs

Understanding customer behaviour and needs is crucial. Departments should anticipate citizen needs by analysing data at their disposal, leveraging advanced analytics and machine learning, and integrating external sources. A focus on the end-to-end customer journeys and service life cycle, combined with constant feedback measurement, ensures an agile approach to customer centricity and an exceptional user experience.

For example, by looking at the wider opportunities to improve customer experience and leverage financial data to anticipate customers’ needs, departments can deliver long-term benefits beyond the simple delivery of open banking to reduce transaction fees.

Creating service ecosystems

The creation of service ecosystems through collaboration with both banking and non-banking organisations enables the development of innovative services and solutions. As government departments navigate the implementation of open banking, they must acknowledge the diversity of suppliers, each offering unique solutions, and explore how best to integrate them to deliver end-to-end value propositions. Departments that are focusing resources and efforts on partnering and rapidly integrating external capabilities are more likely to succeed. For example, the Crown Commercial Service (CCS) Dynamic Purchase System for open banking is likely to offer a plethora of suppliers with unique characteristics. Selecting, procuring, and rapidly integrating fit-for-purpose suppliers will be paramount.

Identifying impacts on your operating model

Transitioning government departments to use open banking presents some organisational change that extends beyond the technical aspects of the implementation and necessitates careful consideration of the change in operational model.

For example, many organisations are adopting an approach where they architect and operate their open banking capabilities as a service. This shift allows them to harness the economy of scale, promoting standardisation and shared resources across various customer experiences and business departments.

Architecting Open Banking-as-a Service

Centralising the management of citizen consent, the flexibility to integrate various open banking providers, and the amalgamation of open banking data with internal citizen data provide the most commercially efficient way to deliver open banking within an organisation.

This approach also aids in managing vendor relationships and transaction costs effectively, consolidating control within the organisation’s open banking capabilities rather than implementing point-to-point solutions.

Future-proofing the strategy

As the benefits of open banking continue to unfold, it is essential for organisations to prepare for the next evolution of financial innovation – open finance. The UK government’s commitment to deliver Smart Data legislation through the Data Protection and Digital Information (DPDI) Bill marks a significant milestone towards creating a world-leading open data economy.

This regulation builds on open banking standards and principles, and by proactively planning for it government departments will ensure that they stay at the forefront of financial innovation and remain responsive to the evolving needs of citizens.

Transformation at pace

As government departments embark on the transformative journey of open banking adoption, partnering with an organisation that can offer a blend of expertise and capabilities will help deliver value at pace. The following key attributes should guide Government entities in their choice:

• Expertise and capabilities: A deep understanding of both government operations and the financial services industry is essential. Proven technical API knowledge and most importantly, change management proficiency will facilitate the embedding of open banking practices into an organisation.
• Innovation and regulatory compliance: Bringing fresh ideas and an entrepreneurial spirit is necessary for unlocking the full potential of open banking solutions and driving continuous improvement. A strong fintech network can enable the leveraging of existing innovative solutions, while regulatory acumen ensures that open banking solutions remain within established regulatory frameworks.
• Public value commitment: Ensuring that your partner shares a genuine commitment to using open banking to enhance government services and elevate citizen experience is essential for maximising the societal impact of this transformative technology.

Open banking offers significant benefits for government departments. With exponential growth in the market, UK Government adoption has seen success through HMRC’s tax payments, saving interchange fees and improving digital services. Departments must adopt a holistic approach to fully leverage its potential. Future-proofing the strategy by preparing for open finance and partnering with an expert organisation will ensure long-term success.