Are Britain’s banks close-minded to Open Banking?
Lauded as the start of a new revolution in banking, Open Banking was expected to take the financial world by storm when it was introduced almost a year ago to the day.
The set of new rules require that the big banks allow their customers to share their own transaction data with third parties.
Specifically designed to open up the market, the regulation is expected to drive innovation and competition by making it easier for financial and non-financial organisations to share and access customer data, or to make payments directly.
The idea is that this will ultimately lead to better, more targeted products that provide a simpler user experience.
However, last year, a survey by Which? revealed that 92 per cent of consumers had never even heard of it.
In contrast to this, businesses are increasingly more aware of the benefits of Open Banking, and keen to use banking products that take advantage of the regulation.
In recent research targeted at SMEs, it was discovered that that 87 per cent have heard of the new regulation – so the question remains, why has the development of Open Banking products for business accounts been so low?
Barriers to entry
The additional cost and complexity of financial regulation has often been cited as one of the reasons that innovation in financial services has lagged when compared to other industries.
Meanwhile, regulation increases the costs and operational risks of launching new propositions, and a historic focus on price by incumbent banks and customer inertia also contribute to a slow uptake of new services.
We found that SMEs who were aware of Open Banking are 3.6 times more likely to switch than those who hadn’t heard of it
The low implementation of Open Banking can be attributed to the vast drivers of change currently at play in the financial services, including technological advancements, customer expectations, cyber security, and the emergence of AI and bots, which are all shaping the future of the sector. But it is simply too early for truly disruptive business models to become clear.
Awareness will also enable both consumers and SMEs to understand the regulations, allowing them to demand more of their providers.
In fact, we found that SMEs who were aware of Open Banking are 3.6 times more likely to switch than those who hadn’t heard of it, which shows there is a clear value in getting the message out there.
Timing hasn’t helped
The implementation of Open Banking has come in tandem with GDPR. The latter provides important protections of our data, but also poses huge reputational and financial risk to institutions that fall foul of the regulations.
This means, alongside looking at ways to leverage customer data, banks are also focusing even more on security, and this takes time.
The focus for many banks to date has been to make their customer data and payment services available in a prescribed format, to enable third party developers to build applications and services around the financial institution – however, full market coverage is not expected until later in 2019.
Specific regulation and related guidance have been evolving since Open Banking was announced, and each individual organisation has had its own timetable and approach to publishing their APIs.
So, any new organisation wishing to take advantage of the new opportunities would be forced to navigate an uncertain environment, which makes detailed design difficult and can materially increase costs.
Rome wasn’t built in a day
Building confidence takes time. Moving away from an existing model is bold and high risk for existing organisations, particularly where shareholders demand continued returns. And new providers would need to secure financing for what is essentially an un-proven idea.
There will be investors out there who are attracted by such opportunities, but this will be a subset of the overall investor market, and it will take time for investment to find its way to the right propositions.
Ultimately, innovation takes time to propagate, and even more so with financial services. For instance, contactless payments were possible back in 2007, but it took until 2014/15 before we saw widespread adoption.
So, it may be reasonable to assume that it will be a few years before we see the real power of Open Banking.
Whilst adoption may be low for now, financial organisations would do well to take advantage of the opportunities presented by Open Banking, and the SME market could prove to be particularly lucrative to the players involved.