Consumer priorities and Open Banking
It has been 18 months since the Open Banking legislation was launched in the UK. How much has changed or been achieved in that time?
Quick refresher. The goal of the UK's Open Banking legislation is to introduce more competition and transparency to banking for consumers and SMEs. In addition to this, it has the power to transform the financial health of both individuals and businesses. The problem is, although there has been a lot of buzz surrounding Open Banking, most of it is still to be directed to the end-users.
To assess the potential value Open Banking can add, OBIE conducted a study using data from 13,000 respondents, including both individuals and SMEs.
The consumer stands to benefit greatly from this legislation, apparently to the tune of £18bn on an annual basis, according to the study. And yet, only about 25% of the population are aware of the new legislation.
Something isn’t adding up.
The time has definitely come when more consumers should be part of the conversation. The role of Open Banking in transactional banking has been discussed to death within the financial services industry, now it’s time the focus shifted to the areas of consumers everyday lives that can be improved.
Given Open Banking is designed to benefit to consumers, and various institutions have written on how it can revolutionise the financial well being of consumers, OBIE decided to explore a range of scenarios and the ways in which Open Banking can address the pain points or generally add more value to financial well-being.
From theory to practice
Shifting from the theoretical aspect of Open Banking to the practical, OBIE’s three-part study aimed to address what consumers need from the market; what the market needs from Open Banking and what the Open Banking rules need to do next, by exploring real-life situations.
First, let’s discuss the potential value that individuals in the UK stand to gain from Open Banking initiatives – a collective £12bn. That is by no stretch of imagination a small value – and 52 countries would agree, as their 2018 individual GDPs are lower than that. So the burning question is where is this value coming from?
The fact that two very different segments can benefit, evidences that Open Banking based solutions have the power to make a tangible difference
To assess that, OBIE split the market into four segments – On the margin, Overstretched, Aspiring and Asset-rich – and explored the ways in which their financial health can be improved by employing varying Open Banking solutions. The segments are classified by factors such as income, savings and debts, with an average potential value revealed per person.
So who stands to benefit the most?
The outcomes varied per segment; however, the overstretched segment (defined as individuals that are resilient and borrowing) stands to gain the most at £287 per person, equivalent to 2.5% of income, according to the findings. This segment represented only 18% of UK adults that need help in improving financial security and managing debt.
In this instance, some of the existing Open Banking solutions that can be used to address these problems include PFM tools such as Yolt and Emma, which in addition to providing an overview of a person’s finances, assist with budgeting and offer tips on money management based on the insights from the transaction analytics. This segment was also shown to struggle with debt and therefore could benefit from accessing debt management advice from Open Banking platforms such as Tully and Toucan.
What is interesting about the individual consumers is that the highest number (45%) of UK adults surveyed fall into the asset-rich segment, (defined as resilient and not borrowing) Although they were the most-affluent of all segments (£60K in savings vs the £9K in borrowing from the overstretched), they also stood to gain close to the same value as the overstretched segment, at £249 per person.
For this segment the most appropriate existing Open Banking solutions are, unsurprisingly, geared towards maximising savings and investment opportunities. The fact that two very different segments can benefit to similar degrees, evidences that Open Banking based solutions have the power to make a tangible difference, regardless of the individual’s financial health.
There is a lack of variation in the PFM products currently available
As is widely understood, the SME segment remains underserved, but, according to OBIE, it could be benefiting from Open Banking based solutions. This is especially true in the cash flow management area, where the likes of alternative lender Iwoca are already taking advantage of Open Banking APIs to offer working capital to SME owners. More on how some of the players are bringing Open Banking solutions to this sector was covered in this report.
As many as 5.7m SMEs in the UK stand to benefit by a total of £6.0bn a year (0.4% of turnover) as a result of open banking initiatives, according to the OBIE study. Account aggregation and integration with accounting software such as FreeAgent can be used to boost productivity of a business, partly by offering insight into business trends, for example.
The report further discusses how plugging into various financial services offered to consumers can identify gaps where consumers are underserved, and gives examples of the ways in which open banking can offer solutions.
Current Open Banking-based services are lacking differentiation
The second part of the study explored the availability of Open-Banking-enabled products that have been previously identified as likely to be more valuable to consumers.
It is no surprise that PFM platforms are widely available for both individuals and SMEs because aggregation (which these platforms use) is the most common implementation of Open Banking. That is a by-product of account information APIs being the first type of API mandated on the CMA9 banks.
However, there is a lack of variation in the PFM products currently available on the market – with most addressing the same problems. The 11:FS Consulting team has examined PFM offerings through the Jobs To Be Done (JTBD) framework that highlighted how consumers are using, or not using, these services.
It’s fair to say the adoption of Open Banking based services has been underwhelming
For individuals, some of the initiatives that are reportedly lacking include international payments, mortgage comparisons and better deals on household bills. By focusing on these areas, Open Banking ecosystem players can provide services that will truly improve consumers' financial lives.
At the time of the study, wide ranging analysis on household bills was lacking; however, we are starting to see open-banking powered solutions entering the market with fintechs such as Monzo and Bud having integrated utility switching functionality within their apps, for example. This allows consumers to carry out comparisons and select service providers that may be better suited to their needs, and ideally in the process saving them money.
Where next for Open Banking: increasing awareness
Perhaps some perspective is needed here. While 18 months have passed, this is an industry that has, historically, moved slowly with new initiatives. There are still a lot of services that have been discussed and still to hit the market, which is why the players now need to stop talking about the possibilities of Open Banking and actually bring them to life. And to help with adoption, the Open Banking ecosystem as a whole needs to show proof of success, establish trust, and, for true mass market adoption, offer reassurances around data security.
The last part of the study focused on what Open Banking needs to do next.
It’s fair to say the adoption of Open Banking based services has been underwhelming by end users. That's likely partly due to misinformation and confusion surrounding what Open Banking actually is - around 64% of consumers surveyed agreed that open banking means your details will be more at risk of fraud, according to the OBIE survey.
It’s ironic that Open Banking is focused on giving control back to customers, yet 47% of individual consumers and 52% of SMEs think Open Banking will give them less control over their financial data. This demonstrates that a lot more has to be done about informing end users about its benefits.
The focus should be on explaining how Open Banking and associated services are applicable to their everyday lives and showing to what extent various pain points can be resolved using these solutions, as this study attempted. Also, the focus should not be solely on the overstretched or underserved segments of society, but on all demographics, as everyone stands to benefit.
To achieve this, a collaborative effort is required from all players within the ecosystem, ranging from banks to global service providers, fintechs and consumer bodies.
So although there is a lack of customer awareness, there is also a lot of work to be done in actually bringing these valuable propositions to life. The hope is that once these services are widely available, an increase in awareness will follow, and, so long as the services actually benefit customers and are easy to use, that in turn should create demand. That will serve as an incentive for service providers, especially banks, to roll out even more Open Banking based products in a bid to retain or gain new customers.
Ultimately, the biggest win is when customers start using new, digitally-native services that support their individual financial needs. That fact these services are made possible by open banking, will become a secondary consideration.
For an in-depth look at the state of Open Banking in the UK, and further examination of what may come next, take a look at my latest research report on 11:FS Pulse.