Open Banking: End of the Road(map)
It’s The Final Countdown
Banks are coming to a decision point – do they want their Open Banking implementations to cost them money, or to make them money? By the end of 2021, the CMA9 (the nine largest banks in the UK) will have closed out the final stages of the CMA Roadmap1 and will have met their regulatory obligations. But any banks viewing the end of the Roadmap as “box ticked, job done” will have missed a trick.
Regulatory projects are often viewed as an exercise in compliance. Or put another way, banks do what they need to in order to keep the regulators happy – but don’t go any further.
Arguably, this makes sense for Open Banking as well. Banks have already spent vast sums of time and money implementing these changes – why would they want to go further if they don’t have to? Tying up in-demand resource and justifying spending yet more money in the current economic climate, could be a challenging sell.
BCS would suggest that banks look at Open Banking from a different perspective. Think of it as a supermarket. At the moment, banks have built the supermarket (the Open Banking infrastructure), but the shelves are empty. The only way that a supermarket recovers its sunk construction costs, is if customers actually buy something from the shop. To that end, banks should be thinking about the end of the CMA Roadmap as the end of the construction phase – now it’s time to make some money.
The most common Open Banking use-cases today relate to Personal Financial Management, which utilise Account Information Services (AIS) functionality (accounting for over 98% of API traffic today)2. Arguably, the long-term appeal of these apps may be limited. Once a user has used Open Banking to connect their bank accounts to an app and have gained some insights (“you’re spending too much on electricity” and “have you thought about cancelling Netflix?”), then there’s little to keep them coming back to these apps week after week. Most people’s spending habits are relatively consistent, or they have one-off expenses that an app would be unable to predict.
The number of Open Banking users within the UK has doubled since January 2020, and now stands at over 2 million users.3 An impressive growth-rate, combined with a large number of active users, means that banks would be remiss not to look at other ways they can commercialise Open Banking and build upon existing use-cases.
In BCS’s experience, around 90% of our clients’ Open Banking work so far has been regulatory. Some banks have looked at discretionary initiatives, but these have often been cancelled or put on the back-burner due to regulatory deliveries taking priority. 2021 should see the UK regulatory burden lighten, giving banks the opportunity to explore more commercial opportunities.
Rather than Open Banking being a cost-centre (cost of running cloud services, maintaining infrastructure, staffing, etc) banks should look to leverage Account Information Services (AIS) and Payment Initiation Services (PIS) functionality to create new revenue streams and world-class user experiences for their customers. A few examples of what this could look like are detailed below…
In addition to BCS’s extensive experience delivering Open Banking regulatory change, we have also worked with clients on a number of AIS ‘proof of concepts’ covering loans and mortgages. AIS is a good starting point for banks looking to commercialise Open Banking. AIS use-cases tend to be simpler to develop, and yet can still deliver huge value to both bank and customer.
Open Banking supports fast and accurate Credit Decisioning, as a customer’s income and spending habits can be quickly analysed, and their creditworthiness determined. This is particularly relevant with Covid increasing consumer and SME credit risk. When making an online purchase at selected partner merchants, customers could be offered a revolving credit facility or low interest loan from their bank. Open Banking enables rapid and robust credit decisioning, without the need for human intervention. The same principles could also be applied to products such as mortgages. Rather than printing out 6 months of bank statements and sending them for review, customers could share their statement information instantly via Open Banking – enabling a quicker, more convenient application.
Additionally, over the past decade, banks have invested considerable resources to strengthen their Know Your Customer (KYC) checks. Recent surveys suggest that the public have a high degree of trust when it comes to banks protecting their money, their deposits and their identity – and this is particularly true for traditional banks. Again, this offers a potential revenue stream as banks could partner with selected 3rd parties to offer Digital Identity services. This would allow customers to use secure Open Banking rails to sign-in to 3rd party accounts, using their existing banking credentials. From a customer perspective, this is considerably more convenient than having to re-enter your information from scratch, and then having to wait for it to be verified. The 3rd party also reduces its costs (despite paying a fee to the bank), as it does not have to carry out its own KYC and compliance checks.
Banks could partner with selected merchants to integrate Pay By Bank functionality into their online checkout. Instead of paying via credit or debit cards, customers would be able to pay directly from their current account using Open Banking rails. From a merchant’s perspective, the costs are lower than those associated with card payments as, interchange fees are avoided. From a bank’s perspective, revenue can be obtained from these strategic partnerships. Pay By Bank also supports a seamless and secure customer experience – a merchant’s mobile app could utilise app-to-app redirection to open your bank’s mobile app – at which point the customer confirms which account they wish to debit the money from, and verifies the transaction using their banking app’s biometrics functionality.
In 2021, the CMA9 are expected to deliver Variable Recurring Payments and Sweeps. This potentially unlocks several exciting new PIS use-cases. For example, customers could connect their bank account to an instant messaging service, so that they can safely and easily make payments to their friends. Personal Financial Management apps could become truly useful. For example, automatically moving a customer’s money from one bank’s current account to another bank’s (higher interest) savings account on payday, before automatically moving funds back to their current account, just before their mortgage payment is due. Automated sweeps could even help financially vulnerable customers minimise overdraft charges across their providers. The banks which offer novel, and genuinely useful, Open Banking features can differentiate themselves from the crowd and grow their existing customer base. They could even build these features directly into their existing mobile apps, which already have millions of users.
The Roadmap is the foundation on which banks should aspire to build world-class Open Banking customer experiences. Rising to this challenge and developing exciting, innovative products will open up a world of new revenue streams.
Banks should not view the end of the CMA Roadmap as the conclusion of their Open Banking journey – it should be the beginning. They have spent millions building the Open Banking supermarket – so why let other banks or 3rd parties fill the shelves and reap the benefits?
1 – https://www.openbanking.org.uk/about-us/latest-news/cma-publishes-approved-roadmap-for-the-final-stages-of-open-banking-implementation/
2 – https://www.openbanking.org.uk/providers/account-providers/api-performance/
3 – https://www.openbanking.org.uk/about-us/latest-news/real-demand-for-open-banking-as-user-numbers-grow-to-more-than-two-million/