How does the open banking initiative turn into a revolution?
Revolutions are hard to predict and often come out of nowhere. Years of slow, pedestrian change and then one key event lights a fuse that causes a metaphorical explosion.
The event for digital transformation was the Covid-19 pandemic. Two months after it started, Microsoft CEO Satya Nadella pronounced “we’ve seen two years’ worth of digital transformation in the last two months”.
Why was there an explosion in transformation activity? Because of necessity. The severity of the pandemic’s disruption necessitated a proportional response from companies for whom the pandemic could have been an existential threat.
In the context of open banking, it could be argued that the key event has yet to happen. The pandemic certainly saw a shift towards digital payments with 52% of payments made via card, no doubt driven in part by the increase in maximum transaction value of contactless payments, which has risen from £30 in April 2020 to £100 in October 2021.
The enactment of the initial PSD2 legislations nearly four years ago was expected by many to light the fuse, but since then there’s not really been an explosive effect. Why? And what can be done to increase the impact of the initiative?
To answer those questions, we can start to look at this situation from the perspective of the intended beneficiaries of open banking; the UK consumer.
Recognising the value exchange
Consistent with many contemporary digital services, open banking is based on a value exchange between the customer and the service provider; you share your data with the bank, and the bank will use it to provide you with a valuable service.
Whilst this concept is familiar to many consumers outside of finance, it has yet to sink in with open banking. A recent survey found that only 14% of consumers think they completely understand open banking and its benefits, with nearly 30% explicitly stating they have absolutely no idea what open banking is.
It’s probably not surprising then that only 8% of the “digitally enabled” market is currently using open banking services. And whilst the adoption of services shows significant growth, they are being adopted at a slower rate, with the predicted 9 billion transactions in 2021 representing half the growth of the previous year.
Payment transactions exhibit stronger growth, likely to increase five-fold in 2021 to nearly 25 million. One might expect these to rise to perhaps 200 million over the next five years, which sounds impressive but is relatively insignificant in the context of the 30 billion+ digital payments made in the economy annually.
So, it’s clear that improving consumer awareness could drive significantly greater adoption of open banking services. But consumer awareness isn’t the sole impediment to driving an explosion in the adoption of open banking. Technology also plays a leading part.
Open banking services are enabled by an implied set of data integration and API technology infrastructure, and the support for any explosion of consumer demand for open banking services must be borne by this infrastructure.
This infrastructure will need to scale according to demand, remaining resilient, performant and secure – and all the while being amenable to change over its lifecycle. So, if the consumer awareness aspect of open banking were addressed, and a tidal wave of demand ensued, it is reasonable to question if the infrastructure would be able to support it. The answer to this question is not entirely positive.
There’s an argument to suggest that in addition to poor consumer awareness, technological infrastructure is an additional handbrake on open banking growth. A lack of standardisation and alignment plagued initial implementations and continues to be a source of complexity across the open banking system.
This complexity is the impetus for the creation of a new breed of open banking intermediaries who are building services to simplify the interfaces between banks and third-party providers (TPPs).
However, regardless of how well these intermediary services are implemented, the overall performance and resilience of the open banking system is mostly a function of the ultimate endpoints – the open banking gateways provided by the banks.
Anecdotal reports suggest all is not well. To compound these issues, resolution processes are often problematic with significant delays to respond and supply solutions to support tickets.
The data appears to corroborate these reports. A cursory look at the 2021 performance data from banks’ open banking infrastructure illustrates a wide spectrum of resilience and availability. In September, 1.7% of open banking transactions either failed or were rejected.
Availability is generally good, but significant unplanned downtime is a common issue, with some services experiencing this for over half of a given month. Performance varies markedly. Whilst average API response times have consistently fallen, a closer look at the data reveals substantial variance in services from a specific bank, or a given service across banks.
It’s hard to pinpoint why this is, but it’s an interesting looking glass into aggregate performance of the banks’ infrastructure and the processes that run on it.
Onwards and upwards
We must remember that open banking is still in its infancy and will experience many developmental pains. However, for open banking to really flourish, it must address issues relating to consumer awareness to really deliver on its objectives of improving consumer outcomes and enable UK consumers to exploit the £12 billion of opportunity that open banking services can deliver.
However, none of this will be possible without performant, resilient infrastructure. Accordingly, banks and service providers must invest in data, API and integration technologies to provide the experiences customers demand, and provide a fertile environment for new, compelling open banking services to be created.