24 February 2017
What does Open Banking mean to you?
The Competition and Market Authority's final report on the UK Retail Banking market drove a myriad of news stories regarding the launch of "open banking" in the UK. Ahead of the March 2017 delivery of the first Open Banking APIs, this article briefly explores the implications of open banking for UK market participants.
After the CMA's final report on the Retail Banking Market last August - which now feels a long time ago! - the UK's Open Banking initiative was portrayed in some quarters as a massive, disruptive move likely to split the market wide open and turn banks into 'service providers', with little customer interaction and a reduced role in the value chain. Others focussed on the opportunities for banks to gain insight on what products their customers might hold elsewhere - always an elusive goal for retail bankers. Ahead of the March 2017 delivery of the first set of Open Banking APIs, the time seems right to take a step back and look at what Open Banking might actually mean for the UK.
Placed in context, Open Banking is the latest in a line of policy ideas designed to improve the UK's current account market. These can be traced from the foundation of the Girobank in 1968, the Building Societies Act of 1986, through to the more familiar market studies of the 2000s from the Cruickshank report onwards. Open Banking is part of the broader UK government initiative to give consumers - not just banking customers - access to data to enable them to manage their finances and find better alternatives to their current services more easily. In the future, the aim is that customers can obtain a range of quotes for services such as banking or home energy based on past usage data - just as they can now for car or home insurance. Strong, centralised direction via Open Banking makes it far easier to achieve these aims, and builds a platform for future innovation intended to help consumers secure a better deal.
As such, Open Banking perhaps marks the most tangible signal yet of how policy makers and regulators plan to use information as a means of empowering customers. This correlates with the market insights found in our research into Millennials - for example, 75% of UK millennials like technology that allows them to tailor things to their needs, indicating considerable potential for account aggregation services. Market research, including our own, also indicates that despite nervousness over privacy and data, customers are becoming more willing to use comparison and aggregation services from trusted providers, including over half of 18-25s. This is a hugely positive sign and shows consumers are willing to engage increasingly more with the banking and payments ecosystem to get the services they need.
However, another key takeaway from various market studies is that customer inertia can be a powerful force. Customers may well say 'yes' to a pollster, but decide not to follow through in reality. Banks, app providers and fintechs all therefore need to ask themselves the same question - how do we convince customers to try something different, and then ensure they carry out the switch to a more beneficial service? Firms need to reach customers who genuinely can save money or benefit in some other way. For example, the UK's current account switching service is a vital piece of central infrastructure affording customers an incredibly powerful tool to help move to another bank - but customers first have to want to change, which is then followed by being provided with enough information on the alternative options in order to make an informed decision.
As a longstanding provider of leading-edge payments infrastructure solutions in the UK and throughout the world, we know technology for the sake of technology is not sufficient. Services need to be focussed on what the end user needs - and not just on what can be delivered. If a service or system doesn't meet a genuine consumer (or corporate) requirement, it won't matter how much it costs - it won't deliver the benefits intended. Likewise, app makers and aggregators can create the best user experience around, but must ensure future customers know about it and that it is right for their needs. Similarly, banks or other providers offering lower cost or value-added products, need to make customers are aware and how they can fully benefit.
With the right insight, understanding and marketing, firms of all types will be able to capitalise on the opportunity offered by Open Banking. Showing customers a tangible benefit - through easier money management, lower fees, or a more suitable product - is the way to make the most of these developments. The launch of the first Open Banking APIs is only the start - but realising the full benefits will require the regulators, the government and market participants all to focus on delivering what consumers need, and not just technology for technology's sake.