When it first went live in early 2018, Open Banking was treated by the mainstream press with a mixture of well-meaning curiosity and mild suspicion; was it really safe to sign up with a new Third-Party Provider (TPP) to access your existing bank accounts on your behalf? There was also a distinct lack of consumer excitement, perhaps because flexible, secure access to multiple banks through a single app was still an alien concept for UK account holders. And without an obvious public-awareness campaign there was little to engage consumers, let alone excite them about the possibilities.
However, by the end of 2018, there were signs of progress. Figures published by Open Banking Limited (the company set up by the Competition and Markets Authority to deliver Open Banking) in December showed that there were 64 new companies registered as Open Banking Third Party Providers. 12 of these were already operating with live customers, while 32 account providers (mostly banks) had signed up to offer API-access to their services; this was quite eye-opening because only 9 account providers were obliged to open up by the CMA.
In November, The Independent >highlighted a report that said 22% of consumers had heard of Open Banking. This was reported as a sign of sluggishness, but despite the negative sentiment, I’d consider more than one in five to be a remarkable success. The same report also suggests that 9% of citizens had used Open Banking services. If accurate, I think that figure is astonishingly high. Given that neither banking nor government public policy typically make for scintillating dinner party conversation, it’s something of a surprise that Open Banking has made it into the UK’s public consciousness at all.
What can we learn from telecom transformation?
Before declaring Open Banking as the “revolution that never was” (as The Independent titled its report), we need to contrast it against similar market restructuring exercises. Open Banking is not entirely unlike previous public policy revolutions that have reshaped other industries. Thus, it may be worth comparing the progress of ‘Open Banking’ with, say ‘Open Telecoms,’ or ‘Open Energy.’
The UK Telecoms industry commenced its deregulation in the early 1980s, with the privatization of British Telecom, the previous monopoly provider. Incidentally, the term ‘deregulation’ sounds odd today when we consider the growing list of compliance obligations faced by today’s financial services industry, but the term was coined at a time when the government saw the reduction of regulations as a vote winner. ‘Re-regulation’ may be a more accurate term for Open Banking, but the objectives of stimulating competition, increased innovation and better outcomes for UK citizens and businesses still hold true.
The re-regulation of Telecoms in the 1980s preceded innovations that were barely comprehensible at the time – remember the first web browsers didn’t appear until the 1990s, the first mobile phone browsers not until we were almost into the next millennium, and the iPhone didn’t appear until 2007. There was a telecoms revolution, but it wasn’t measured over the course of one year’s worth of deregulation – it’s still evolving four decades later!
The Telecoms sector was characterized by obvious technical changes and innovations in both products and services. Mobile telephony, the availability of broadband and competition for pay TV were all major drivers of investment in alternative telecommunications networks, creating new competitors and encouraging customers to switch between accounts.
Two decades on, what does Open Energy tell us about the trajectory of Open Banking?
Dynamic innovation might be more difficult to spot in Open Energy, which makes it perhaps an even better comparison for the emergence of Open Banking. In the early 1990s, consumers of electricity had no option but to buy energy from their local supplier (one of the Regional Electricity Companies – RECs). The market was opened up so that any REC could compete in another territory, with the idea that customer service as well as pricing would become competitive differentiators.
This re-regulation exercise also coincided with early public policy initiatives aimed at shifting the energy generation market towards sustainable sources (backed by UK government commitments to international agreements on climate change), so that new energy supply companies would be encouraged to start up with so-called “Green” propositions.
The early adopters of this re-regulation were not consumers: larger business users moved quickly to take advantage of lower-priced account switching offers. Apparently one-third of the UK’s largest companies changed their energy provider within the first year. Structural changes to the retail market followed in 1998, but it took until 2009 – a decade later – before half of all consumers had changed their supplier.
One conclusion from this pattern of adoption is that although a lot of interest and commentary is generated by retail market observers, businesses are usually better placed to generate real benefits (in terms of lower costs, better service, innovation, etc.) from this kind of re-regulation.
Some observers may argue today that Open Energy was an unnecessary process, resulting in no sustainable price decreases or genuine customer service improvements. Detractors could also argue that it did not generate more competition; today the UK energy market seems to be dominated by a handful of six big suppliers (of which, incidentally, four are non-UK companies) that control around 80% of the market. Furthermore, 2018 also saw a lot of bad publicity for the national Smart Meter installation scheme, with some estimates saying that the over-budget program would generate an extra GBP 0.5 billion in costs for UK users.
However, the Open Energy process has changed the consumer experience, and it has reshaped the whole energy industry; from creation, through distribution and consumer supply. While a handful of companies might dominate, in 2017 there were 60 suppliers offering electricity and/or gas, which is 16 more than one year earlier. Competition is benefiting those consumers who are able and willing to shop around.
It created the possibility for new companies to offer electricity supply with links to sustainable sources, or for users to be able to generate and sell their own energy through innovations like the Feed-in Tariff scheme, introduced in 2010 to encourage UK users to invest in renewable energy-generation methods such as solar panels. An “Energy Tech” export industry has developed on the back of this, although probably not as well marketed as the corresponding fintech industry.
So, whilst Open Telecoms has had about 40 years, Open Energy has had around 20 years, and the initiative is still a work in progress. Open Banking, by comparison, has had just 1 year – it is very much still in its infancy. Bearing in mind that public awareness of Open Telecoms and Open Energy is still in flux, it may be a little premature to jump to conclusions about Open Banking just yet.
But will Open Banking be equally slow to gather pace?
Open Banking does have advantages that may accelerate the process of change:
- Availability and understanding of price/service comparison sites and apps
- New regulations to reduce the cost/hassle of switching (specifically the principles of personal data retrieval and exchange)
- Behavioral biases and defaults of new customers (digital-first and familiarity with aggregation/intermediary models) provides a higher propensity to adopt new services
- Unprecedented levels of investment into consumer-facing start-ups and “challenger bank” organizations
- The need for smart financial and payment instruments to be integrated into the digital value chains envisaged by the so-called Fourth Industrial Revolution – these may sound like somewhat fanciful innovations, but they sound no less likely than web-based services envisaged by early Open Telecoms activists
- The maturity of collaborative development tools and Application Programming Interface (API) methods
- The financial incentives of using real-time account access and immediate payment methods (like UK Faster Payments)
The UK Open Banking revolution will still not be concluded overnight but, rather like Open Energy, the earliest and biggest steps might be from those businesses taking advantage of new data aggregation and payments handling services, in combination with gradual adoption by consumers.
One of the observations of a recent annual Ofgem (the UK regulator for electricity and gas markets) report warned of the polarization of markets with customers who fail to engage in new propositions being left to overpay for their services and funding the 50% who did take advantage. Unfortunately, many of the customers left with higher prices are those less able to afford them, so more needs to be done regarding education and awareness. The same will hold true in Open Banking too.