And how do you know whether it is succeeding or failing?
There is an interesting debate going on in the UK right now about open banking. It was launched by Starling Bank CEO Anne Bowden, whoold parliamentary committee That open banking has failed to encourage people to change accounts. A group of fintech CEOs then wrote to the committee to say that their remarks were “uncompetitive and typical of banks trying to thwart the future of innovation in financial services”.
(I’m using open banking, capitalized, to mean open banking that is enforced through rules, as opposed to lower case open banking which is a generic term.)
So what’s the deal? Okay, first let’s be clear: Anne is right. The data shows that he is right. We can install it easily. The UK has an automated bank account switching system. This is called the Current Account Switching Service, or CASS, and it predates open banking by several years. The latest figures available for June 2021 show that only 647,000 people switched accounts (nearly half the number of people who switched in 2014).
So open banking has not increased account switching. But I’m not sure this means anything about the future of open banking or fintech innovation because account switching is, and always was, a poor metric for the open banking ecosystem.
The whole point of Open Banking is that consumers can access the services they need without having to switch current accounts. Banks can provide plumbing to anyone to create an ecosystem by providing “banking as a service”. The regulatory framework around financial services is so tough that many super apps just don’t want to navigate it Anyway, especially in many jurisdictions.
Thus increased competition for services that “class” the current account (as Mike Kelly, an open banking expert, nicely phrases it) is not reflected in the switching statistics.
change is not always good
As more banks provide the Open Banking API, there is less need to change accounts. In form of November 2021 The open banking ecosystem in the UK includes over 330 regulated firms, made up of over 230 third party providers of services and over 90 payment account service providers, which together account for over 95% of the current account market .
Open banking means customers can access the portfolio of services they need without the hassle of changing accounts, especially since all accounts are basically the same. There are plenty of UK businesses that are delivering on this promise. look at Account Technologies (Disclaimer: My son used to work there!) Those are building an excellent range of products, which John Heaton-Armstrong, their CISO, calls Open Banking’s “sustainable tech ecosystem.” Profitable and with over a million users, they are exactly the kind of business the new environment enables, and no one needs to change their account to use their services.
Another good example of a business in this ecosystem, but in the SME market, is Coconut. Coconut was launched as a current account for freelancers and self-employed people to help them keep track of their expenses and especially taxes. It used open banking to get a complete picture of customers’ finances and aimed to optimize the use of financial services and reduce tax liabilities. A great idea and a great team – they were one of the winners of open up challenge In 2018 (disclaimer: I was one of the competition judges) – and just the kind of business that an open banking ecosystem can enable.
Coconut is now all set to provide the app without a current account: Since they can connect to over 25 current account and credit card providers to transact automatically, what about providing those accounts themselves? Meaning, specifically the regulatory burden that goes with being a Account Service Payment Service Provider, or ASPSP (in Eurospeak)? Sam O’Connor, CEO and co-founder of Coconut, has identified that no need to combine current account and financial instruments, and this ability to allow customers to bundle services is at the heart of the matter.
I’m a small business and now that QuickBooks can use OpenBanking to access my accounts, life has improved even though my current accounts are unchanged. I use Intelligent Multi-Currency Account, I use Revolut, I use Coinbase etc. The old bundle of financial services is irrelevant: the days when I would open a savings account (or whatever) with my main bank just because I already had a current account with that bank are long gone.
We are now in the era of embedded finance, where open banking means that customers have access to the financial services they need in the context of whatever they are doing. This means a seismic shift in the finance sector with effects across all sectors. Lightyear Capital anticipates embedded finance could unlock $230 billion in net new revenue by 2025, As they phrase it, the change will benefit companies with a “digital mindset” that can claim opportunities in other areas of fintech innovation. They give a clear example, which is that access to accounts will open up banks’ data hoarding for better lending, as risk assessment will be guided by rich data on under-served markets and business owners, but this is only a start. .
The success of open banking should not be measured by account switching but by the growth of the ecosystem. Here, the data value shows a significant increase at every point in the network. The number of API calls was 60 million or more in 2018, six billion or so in 2020 and I’m sure the figures for 2021 will show more growth. Last year 25 lakh people were using the services sitting on open banking interface, this year it will exceed 40 lakh, next year it may double. Tim Waterman at Zopa recently said that we could reach 40 million users in 2025 if the region continues to offer more innovative services. I agree: the ecosystem is ripe for the expansion of identity and reputation management, data management, etc. Yet I’m pretty sure that while I’m one of the 40 million people using these new services, I’ll still have the same current account I have now!
So, in short, OpenBanking has not increased account switching, but it does not necessarily mean that OpenBanking is failing because account switching is an irrelevant metric of OpenBanking’s success or failure.