Open Banking will be the biggest change to financial services since the introduction of electronic payments. However, to date Open Banking has fallen short of the expectations set throughout Europe. Why?
Consumers aren’t aware of the initiative—92 percent of them are not, according to Which?—let alone educated on the opportunities that it presents. Without consumer demand, there is little immediate pressure on incumbent banks to accelerate Open Banking activities.
Despite this, the scale of change required by the regulation is forcing banks to examine their business models and, in some cases, has precipitated an existential crisis. While change has not been immediate, that doesn’t mean that the chess pieces in the background aren’t moving—TransferWise’s tie up with Starling Bank and Mastercard’s purchase of VocaLink are major hints at things to come.
Traditional and challenger banks, as well as fintechs and other financial-service providers, need to be ready now for what is coming next in the Open Banking era.
Welcome to the post-card world
One of Open Banking’s biggest potential ramifications is the elimination/shrinkage of payment cards and the entire industry that supports the existing model.
Open Banking requires banks to open up their systems to allow third parties such as merchants to initiate customer payments from consumers’ bank accounts. This combined with instant-payment rails allows third parties to accept payments directly from a consumer, in real-time, without the use of card networks. Furthermore, customer account and payment data can be used to drive innovation such as contextualised pricing or enhanced loyalty. As more data is accrued, organisations can better serve customers, potentially across a whole gamut of services such as transport, entertainment and gaming.
Open Banking married to Instant Payments allows transactions to become more tightly imbedded in the overall commerce experience, rather than just something that simply happens at the end. It is this approach that will seamlessly interweave payments, commerce and the convenience of myriad services, which we’re already seeing pioneered—without new legislation—by the fintech giants of the East, such as Ant Financial and Tencent.
With seismic change on the horizon, what will the post-card world look like? Who will win, and who will lose?
The payments battleground
As technologically agile PSPs (payment service providers) begin leveraging automated access to customer accounts, the squeeze on both pricing and margins will almost certainly continue to tighten with increasing pace and frequency. In particular, account-based payment alternatives will pose a serious threat to card-issuing and -acquiring businesses, not only on pricing but potentially on speed as well. For companies such as Mastercard and Visa, this shift could be catastrophic.
A recent study conducted by Icon Solutions with Ovum shows that this shift is set to become a reality, and sooner than expected. As predicted, the shift away from cards will gather pace, and by 2027 cards will drop from the top spot, declining from 40 percent market share to just 11 percent. This isn’t solely isolated to the United Kingdom; the effects will ripple throughout the European market. The survey also predicts that with the decline in cards, Instant Payments and digital wallets will lay claim as the two dominant payment methods across Europe.
But let’s not forget about the banks
On one hand, banks issuing and acquiring businesses will lose revenues from interchange fees. On the other, this is an opportunity to start again and “insource” these payments. Historically, banks have outsourced their consumer payments to card networks, thus relinquishing their control and insight into data, customer engagement, brand, etc. With payments initiated from customer accounts, banks get control of this data back, and richer than ever before with the rise of instant payments.
Partnering at scale
Banks will need to innovate to replace lost revenue and capitalise on the data opportunity. This will challenge existing business models as banks shift from being transaction-led to data-led. To achieve this, banks need to create two-sided models through which banks and third parties utilise and monetise data via APIs (application programming interfaces). With more data, banks and their partners can innovate more, develop more services and ensure more happy customers.
To do this, banks will need to partner at scale. Today the number of bank partners is probably equivalent to less than 0.01 percent of customers. These partners are largely focused on the backend, and integration is largely hand-crafted. What if the number of partners goes up to 1 percent, or even 10 percent? Banks need to create new governance and structures—and the APIs that enable them, that allow them to work quickly and efficiently with thousands of customer-facing partners.
The combination of APIs and instant payments can, and will, unlock a new universe of data that will help banks not just to survive but thrive in the future.
However, large internet companies such as Google, Apple, Facebook and Amazon (GAFA) aren’t going to sit back.
The marriage of Open Banking and Instant Payments will enable these large internet organisations direct access to account data and payment initiation, to not only reduce costs but compete directly with banks for the most lucrative pieces of the value chain. We’vealready heard that Facebook Wants Access to Your Banking Data.
Fintechs won’t be far behind, either. TransferWise has already reached an agreement with Starling Bank for access to the UK’s Faster Payments scheme to help it better compete, reduce cost and gather more data.
The power of data is the real key here—especially for the members of GAFA, which already hold massive amounts of customer data. The combination of existing data sets with customer bank-account data would give GAFA unprecedented insight on which to deliver their services, to who and when.
Data is the new oil
The post-card world is around the corner and set to rewrite the rules of commerce. In this new world, if data is the new oil then instant payments are the new pipes. Whether the giants of the East, GAFA or fintech disruptors, organisations will use a combination of Open Banking and Instant Payments to embed payments into the customer journey and deliver new sources of value.
Incumbents need to accept a future without cards dominance—and find their place in the post-card world.