What Can the Re-Regulation of Other Industries Tell Us About Open Banking One Year On?
UK Open Banking just reached its first birthday milestone (on January 13 to be precise) and given my own commentary – including in the ACI blog – on this topic, the first anniversary of Open Banking in the UK certainly won’t pass without a debrief on the progress that’s been made and what challenges lie ahead.
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.
Related Blog Posts
Hitting Back Against Telco Fraud with Positive Profiling
Fraudulent activity costs telecommunications companies billions of dollars every year – and it hits these telcos in many different forms. According to reports from CFCA (Communications Fraud Control Association), over USD $12 billion is lost annually purely to consumer-based fraud attacks such as subscription fraud and account takeover. These are fast becoming the biggest growth areas for fraudsters in the telco industry.
How Fresh, First-Hand Research Leads to Interfaces That Make Users Feel Understood
In 1890, my great-great-grandfather fled Czarist Ukraine for a new home in London. Amongst the few possessions that he brought with him was a book that had been given to him in 1860 by his grandfather.
Cybersecurity: Risks, Controls and What to Expect in 2019
The world of Cybersecurity has brought about several subtle changes in 2018. For example, malware and targeted 'Spear Phishing' were on the rise, while the focus on protecting the perimeter has begun to take a back seat to hardening internal controls. As we enter 2019, the changing threat landscape is certain to result in a barrage of additional considerations in how we protect data and systems.
‘Soup To Nuts’ – A Multi-Layered Fraud Menu for the Holiday Season
The holiday shopping season is well underway, with Black Friday now behind us and many retailers around the world braced for higher levels of eCommerce fraud, from Cyber Monday all the way though until Christmas.
How Merchants and Consumers Can Fight Fraud This 2018 Holiday Shopping Season
For International Fraud Awareness Week, I want to bring special focus to the upcoming holiday season around the world. Here in the U.S., the holiday season kicks off with Thanksgiving, which is now only a week away. But as consumers and merchants around the world gear up for peak holiday shopping season, fraudsters are also preparing to triumph.
Preparing for Peak: Tactical Recommendations for Stopping Holiday Season Fraud
Business might be booming for eCommerce merchants, who see increases in holiday spending climbing steadily upwards each year, but with fraud growing nearly twice as fast as sales, merchants need to have their fraud strategy fine-tuned to ensure that peak retail season is a success. I spoke to Erika Dietrich, ACI’s Leader of Risk Services, to find out how merchants can best prepare their fraud management strategies for the holiday season, ensuring risk strategies are effective – with low friction for genuine customers and high accuracy in detecting fraud.
Combating Fraud in the World of Open Banking and Immediate Payments: Lessons From Australia
Australia has a problem with online card fraud and scams, not unlike any other advanced economy around the world. In 2017, card-not-present fraud made up 85% of all fraud on Australian cards. What is different now though is the early procurement of risk mitigation advice, industry body engagement and public education campaigns in preparation for the launch of the New Payments Platform (NPP).
So, here in the northern hemisphere, we’re still basking in waning remnants of sunny days and lingering high temperatures. Though we’re not wishing the sunshine away, us northerners here at ACI also can’t help but let our minds turn to the chillier times ahead with fall and winter approaching.
And we all know what fall and winter bring: shopping. Lots of shopping.
Positive Profiling Makes Everyone a Winner in Gaming
Online gaming is one of the fastest-growing segments within the broader entertainment industry. With 2 billion active gamers worldwide and 200 million people playing games on social networking sites at least once a day, it is no surprise that the market is now worth well over USD $100 billion per year.
Top Tips to Battle Payments Fraud in Gaming—From a Millennial Gamer
The gaming industry, from a consumer point of view, has evolved dramatically over the last 5-10 years. The buying process has rapidly changed from a one-time, final payment – often at a physical store for a physical product – to a series of never ending bundles, boosters, skins, downloadable content and in-game currency sales!