Open Banking: Into The Mainstream?
Adoption and usage of Open Banking in the UK appears to be another example of the boom and doom prediction cycle. However, L.E.K. believes that a more nuanced, diverse and steadier middle road is emerging, which, although slower than initially hoped, should ultimately underpin a more robust and varied landscape of providers, services and customer benefits.
Back in the middle of the last decade, there were increasing expectations that Open Banking would lead to a fundamental shift in the financial services industry, disrupting established products and markets. For example, in 2016, 38% of consumers expected Open Banking to be core to their banking and personal finance experience (source: Harris Interactive).
However, in our 2017 Executive Insights paper, we had argued for the need for compelling use cases that catered to various customer segments, and not just the availability of the technology, as a vital step to drive the adoption of Open Banking. It was unsurprising therefore, in our view, following the launch in 2018, that the overall uptake remained low (<2%) of the total consumer population in the initial 2 years that followed. Various industry participants and commentators were quick to write off Open Banking, suggesting that it would die a slow death or remain a niche service addressing only a small part of the financial services customer base.
We continued to observe that, beneath the headline figures, there was the continued development of multi-faceted use cases that had practical value to an increasing number and breadth of customer segments. Additionally, the pandemic led to rapid changes in the lending demand and supply landscape, and the value of insight and increased transparency provided by Open Banking increased materially. As such, we anticipated healthy growth in adoption of Open Banking by both the financial services providers and end users, consumers and businesses alike, identifying COVID as a potential inflection point in our 2020 article.
Since then, the latest reports and figures (see below) indicate that our views from the early days of the pandemic were largely accurate, with strong growth in adoption, the continued growth of usage, and the overall use and utility of Open Banking continuing to expand.
We expect that the next 12-24 months will likely be a period of continued growth driven by: further penetration within existing customer segments using Open Banking; a wider set of businesses and consumers, who, under pressure from the macro-economic challenges, value Open Banking-enabled services (somewhat similarly to their experience during the pandemic); and growth of specific use cases such as increasingly sophisticated payments services (which have grown rapidly over the past 12-18 months).
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Open Banking user base growth
From a demand perspective, the business community, in particular SMEs, were early adopters of Open Banking-based services. An estimated 6%+ of the SME population (c.350k+ SMEs) were adopters pre-pandemic, which has since grown to 10%+ as of 2Q 2022.
Earlier adoption by the SME population vs. consumers was driven by quite specific use cases such as: improved cash flow management; optimising payments and related costs; improved access to funding; and more efficient production of accounts and tax returns. The pandemic and related business challenges also increased digitisation of systems and processes, and drove increased need for bespoke or new financing, which continued to drive the development of new use cases, further increasing the relevance of Open Banking systems and overall SME adoption.
In contrast, as illustrated in Figure 1 below, only c.2% of the UK consumer base had adopted Open Banking services pre-pandemic (just over 1 million users of Open Banking in 1Q 2020) as the (perceived) value of the services did not outweigh the (real or perceived) practical and emotional costs associated with Open Banking-enabled access to private data. In particular, near-simultaneous introduction of Open Banking and increased privacy protection under GDPR appears to have created some cognitive dissonance, with many consumers confused by the idea of giving access to their personal data at the same time as being made pro-actively and repeatedly aware of the risks of poor online security discipline.
However, the pandemic appears to have spurred a drive towards the use of digital tools and services as well as helping to overcome any mental barriers. An estimated 10-11% of digitally enabled consumers (over 5m consumers) have since used Open Banking, significant growth over a relatively short period. This has been enabled by the development of practical use cases such as fiscal management and budgeting tools, improved product comparison, credit score management and enrichment, and use of Open Banking as a payment option.
Further, for a segment of the population, financial product providers (e.g., unsecured loans for non-prime customers, a larger part of the population following the pandemic) now value or require Open Banking access leading to increased adoption out of necessity or in exchange for clear benefits, e.g., lower prices for loans for complex credit history or ‘thin file’ consumers.
Overall, this growth amongst the wider consumer population suggests more mass market-style adoption with 10-11% now using Open Banking services. However, it still lags well behind the 38% of population expected to be users back in 2016 or independent reports of Open Banking service providers such as True Layer suggesting 60% user adoption by Sep 2023 (Quoted in CMA’s Nov 21 report ‘Update on Open Banking’).
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Open Banking usage growth
A key measure of Open Banking usage, ‘API calls’ have been growing consistently over the past few years, crossing the 1bn API calls per month mark in May 2022 as illustrated in Exhibit 2 below.?
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The chart also shows that the total number of API calls and overall growth has somewhat tapered over the past two years, i.e., relatively slow growth period between in the year to March 2022 followed by a relatively flat period over the past 9 months.
API calls per user have declined from c.280 in Dec 2019 to c.170 in June 2022. ?In our view, this is likely not to indicate decreasing consumer engagement but rather a change in mix of usage, extending towards less frequent use cases and users rather than lower use by earlier adopters. For example, this could be due to:
Similarly to API calls, Open Banking-based payments have also grown significantly, from a total of 700k in 2020 to over 7m in Nov 2022 as illustrated in Exhibit 3 below.
Although still decidedly a small proportion of the many billions of annual payments in the UK, this is also starting to head more towards the mainstream.
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Open Banking supply landscape
The primary customer-facing use cases for Open Banking enabled services are to improve financial decision-making, expand payment choices, and better borrowing. Part of the user growth has been driven by a growing and wider variety of propositions deepening the offering for these key use cases as well as the development of a broader set of use cases as demonstrated in Exhibit 4 below.
The Open Banking ecosystem now has over 300 active participating firms according to the OBIE (Open Banking Implementation Entity), with participants from across the size spectrum and offering a wide variety of consumer- and SME-facing propositions. The number of new entrants also appears to be beyond its initial boom phase, indicating greater maturity in the industry and its use cases. One such notable example is Clear Score’s ‘D?One’ proposition to drive improved risk assessment for lenders leveraging Open Banking (launched in January 2023).
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Where does Open Banking go from here?
Overall, we believe Open Banking usage is likely to continue to grow as an increasing number of consumers and businesses use the services enabled by Open Banking and more financial institutions routinely adopt Open Banking in their systems and process. Around 15% of UK adults have now signed up to Open Banking, in and of itself a significant figure: Open Banking has started to penetrate the more mainstream segments of the population rather than just early adopters or users in distressed situations needing to or benefiting from use it given requirements of specialist financial institutions.
As more mainstream consumers and businesses serving those consumers use Open Banking-related data as a part of their decision-making processes, the use of Open Banking is likely to become ingrained and routine, increasing trust through familiarity and leading to further adoption as it no longer feels risky even to more sceptical consumers.
This article was written with my colleagues Amit Gujar and Bronswe Cheung .
AI/LLM product development I Co-Founder
2 年Those are some good points Peter Ward, Amit Gujar and Bronswe Cheung that are also observed in the financial services space. Looking back to when I lead the Open Banking launch during my time at a major credit card issuer in the UK I can add some observations: - On the consumer side significant, sustainable growth of Open Banking will only happen if market players can develop profitable and competitive use cases where every player in the value chain (consumer, financial institution(s), third party data supplier(s)) will benefit commercially at least in one broad group of use cases - In a nutshell there are non-payment and payment related use cases? o In non-payment you will mainly have? (1) ‘front-end’ solutions such as lending (to new and existing customers) – (includes thin file) (2) ‘back-end’ solutions such as price comparison recommendation tools, budgeting etc. o In payments you have essentially an additional payment channel
Consultant at L.E.K. Consulting
2 年Very interesting point of view and certainly encouraging news for open banking providers and consumers alike.