A scenario-based roadmap for Open Banking

By Peter Hewlett, partner, AT Kearney

Nine months since the introduction of Open Banking in the UK, some critics argue that it has yet to have a serious impact on the UK banking and payments sector. However, changing the longstanding models of the UK banking sector was always going to be a gradual process, and nine months is not a sufficient timeframe to achieve this.

The larger banks have only recently built the infrastructure required for PSD2, and current offerings are relatively straightforward, such as providing customers with an aggregated view of their bank accounts. Barclays recently integrated Open Banking features into its core banking app, the second big bank to do so.

But progress is being made on Open Banking. Research conducted by AT Kearney suggests that Open Banking is a top three priority at most UK banks, and there are more interesting Open Banking propositions under development ahead of the final implementation deadline in September 2019. Many banks are partnering with smaller, more agile firms to provide technical expertise to speed up time to market and differentiate from competitors.

There’s also the consumer element to consider. With concerns surrounding data security and privacy still fresh in the mind after high profile breaches, the public have become wary of sharing their data. Open Banking may be compulsory for financial institutions, but it is entirely optional for consumers, and it is only when public confidence in the safeguarding of customers’ data is restored that we can expect any significant consumer uptake to happen.

There’s unlikely to be any major upheavals of banking and payments models in the short term. That said, there’s the potential for a great deal of change in the medium term. Whilst it’s difficult to predict the exact outcome, based on our work helping an array of financial institutions with their strategic planning, A.T. Kearney has created four potential scenarios for what the future of Open Banking holds across payments and retail banking.

Big banks cement their position

In this first scenario, the largest of the retail banks are the first and most successful at seizing the opportunities presented by Open Banking. Recent blows to the profitability of banks, such as the compression of net interest margin and the capping of interchange fees are recouped through new products and services.

Using their brand value with customers, the big banks create their own payment partnerships, integrated directly with the largest retailers such as Amazon, thus cutting established payments players out of the loop.

This could present an issue for small and medium-sized banks as they’re undercut by their larger rivals and can’t compete in terms of scale. The end result is a significantly consolidated market.

FAANGS take a bite out of big banks

Retail banks have long been keeping a watchful eye on the FAANGS, anticipating their eventual move into financial services. Open Banking could be the catalyst for this shift.

In this scenario, the largest tech companies make their way into retail banking across Europe, putting real pressure on incumbent banks.

Taking full advantage of their digital expertise, their focus on user experience, vast quantities of customer data and near limitless resources, the tech giants create enticing propositions for consumers on a foundation of technology. The incumbent banks would have to move quickly and decisively to compete.

The FAANGS platforms’ ease of use, and their experience analysing customer data, helps them snatch any and all customer-facing activities away from traditional banks, relegating the latter to utility and balance-sheet duties.

This would be the most disruptive scenario for the payments and banking sector, and only the largest banks would likely have the scale to compete. With Amazon having already unveiled plans to launch a current account, this tech-dominated banking landscape could arrive sooner rather than later.

Retailers take control of the payments journey

In this third scenario, Open Banking supports the struggling high street. If retailers get buy-in from consumers, they move from simply selling goods to controlling the entire payments process, creating more seamless experiences and finally offering the greater convenience that online shopping has been offering consumers for years now.

In this world, Open Banking enables large retailers to take full ownership of payments and the checkout process, ring-fencing their customer payment journey, keeping control over transaction data and reducing costs.

Through this better understanding of their customers, retailers broaden their relationships with them, creating more personalised product offers, and even offering credit at POS when a customer is purchasing a pricier item.

Status quo

In this final scenario, Open Banking fails to make a real impact on the market or achieve consumer uptake beyond very niche levels. Fears surrounding data security mean that consumers are less likely to embrace third-party offerings at scale.

Because Open Banking relies entirely on customer adoption, if this scenario came to fruition it would mean the banking value chain remains largely unchanged and the status quo is maintained. Widespread adoption of Open Banking would be seen only in very specific use cases such as streamlined customer onboarding and know your customer.

Because of the investment that banks have made and will continue to make in accommodating Open Banking in line with PSD2, this scenario isn’t likely to happen. The regulatory pressures along with progress made in its adoption across various sectors mean that it is more likely to be a game changer than have limited impact.

Picking a winner

It’s difficult to say which of these scenarios will bear out – likely, we will see a combination of some or all of these scenarios.

At this stage, armed with this scenario-based view of the future of Open Banking, payments companies need to be planning strategically and modelling their own pathway based on their current and desired market positioning. The only certainty will be uncertainty. Payments companies need to be planning for a changing world, driven by Open Banking.

Related reading