Over the last 2 years, the term “Open Banking” has been (over)used as a proxy to describe all sorts of innovations happening in the industry. However, strictly speaking, there is nothing really new in the adoption of a new industry wide standard to open access. In fact, this has happened before in other industries and the benefits created are often taken for granted in our everyday lives. I’m talking about, ship containers, railway tracks and telecommunication protocols.
The standardisation of the dimensions of a ship container improved the global supply chain performance dramatically. The standardisation of the spacing of the rails on a railway track allowed rail operators to share the same infrastructure. More recently, the Telecommunications industry also went through a standardisation process that led to a separation between the network infrastructure and the services that are carried on that network which has had important implications for competitors and customers.
Historically, all regulated sectors reach a maturity point where their market power starts to have, to use the CMA (Competition and Markets Authority) language, adverse effects on competition. Usually, this manifests itself through multiple ways including low price elasticity, lack of innovation, customer apathy, few new entrants and, of course, bad customer service. That’s usually the moment when industry regulators, concerned with the holistic operation and performance of a specific economic system, will define an industry standard and intervene to promote more competition and innovation and, at the same time, empower the customer by removing friction from the switching process thus giving them more choice. For the banking sector this means unbundling industry layers (i.e. service and infrastructure), based on the assumption that this separation unlocks economic value for customers given the larger number of participants in the ecosystem and reduced friction levels.
We need to remember Open Banking marks a historical milestone that other regulated sectors also went through in the past. Now it’s the Banking industry’s turn to navigate through this change, understand what it means, why it is important and what to do about it. Whilst the implementation of Open Banking in the UK was mandated by the CMA order, starting with the 9 largest UK banks a year ago, it does not mean it should be treated as something optional by non-participant banks.
Open Banking basically establishes a standard for data exchange, increasing interoperability and eliminating inefficiencies at industry and bank level. Fundamental definitions like the standard data model for a banking product, now allows customers and third parties to compare products like-for-like and make more informed decisions. At the moment, the scope in the UK is aimed at current accounts and payments initiation (Retail and SME customers), but it will certainly be expanded to accommodate other banking products and payment types.
As with every new digital ecosystem, like PayPal (1998), Facebook (2004) or Ethereum (2015), the number of participants and transactions will grow very slowly initially until they reach a critical mass, a point where the ecosystem ignites and the speed of change and innovation accelerates dramatically. It is clear we are not there yet, but we cannot underestimate the preparation efforts required in order to ensure success or the likelihood this ecosystem may ignite soon through a killer app or a spike in the number of participants.
The Open Banking standard allows regulated third parties to join the ecosystem and use bank’s customer data, based on customer consent, to provide tailored products and services. Given this new market architecture, the question is not whether non-participant banks should implement Open Banking, but rather what role they want to play in this new ecosystem.
The adoption of the Open Banking standard, whilst technically complex, is not the most important part of the journey. This will certainly make your organisation compliant but not necessarily competitive. The key risk for banks is that Open Banking unlocks their most valuable asset, customer data, and makes it available for other participants, including competitors, to consume. It’s hard to overstate the transformative power of this industry standard.
The CMA9 banks spent the last year aiming to be compliant and now are slowly trying to figure out how to be competitive. As a non-participant, Open Banking creates a unique opportunity for your organisation to bypass the “minimum compliant product” and go straight to innovative open banking offerings. Is your organisation leveraging lessons learnt from the first adopters? Are you aware of opportunities created by this new ecosystem? Whatever is your maturity level in the Open Banking journey, the riskiest thing you can do now is to play safe, and the safest thing you can do is to take risks, by harnessing the Open Banking potential and running small proofs of concept to test new ideas that may become your next killer app.
I’d love to hear your thoughts or questions on the open banking journey, so do get in touch or leave a comment.
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I am really interested in finding out what Open Banking is and what it means to the banking industry. This article has explained that. Really good article thanks Marcus. Looking forward to future articles.
Thank you for your comment Wayne. Contact us at firstname.lastname@example.org to arrange follow up on your interest in Open Finance.