Key economic obstacles are holding back the wider adoption of open banking reports NatWest. Moreover, a step change in the approach to open banking is needed if innovative use cases that go beyond the regulatory mandate are to be realised.
These obstacles include a lack of commercial incentives to develop or enhance new use cases. In addition, NatWest highlights a lack of alignment between banks on the benefits of open banking.
The unmet potential of open banking
A report entitled The (Unmet) Potential of Open Banking, published for NatWest by Oxera outlines three routes forward. Namely, mandating banks to offer a wider set of open banking use cases, encouraging banks to expand open banking use cases through premium APIs and the development of a new multi-party system.
The report aims to provide economic analysis and insight that will support the upcoming decision-making on the next phase of open banking in the UK.
Since launching in 2018, open banking has been a qualified success. Over 7 million businesses and consumers have used it to date. However, this only represents around 10% of consumers and SMEs. Open banking payments, by several orders of magnitude, are dwarfed by more traditional payment options like cards or direct debits.
The report identifies the economic challenges that currently prevent Open Banking from reaching its full potential. These include a lack of commercial incentives to develop or enhance APIs. There is a lack of alignment between ASPSPs (Account Servicing Payment Service Providers – i.e. banks) on the benefits of open banking. There are also significant challenges around managing trade-offs. For example, in relation to security and convenience, within the open banking ecosystem.
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There are three possible routes forward to address these challenges. The first two are already under discussion.
The reports a third possible route to optimise the potential take up of open banking. It suggests mandating banks to offer a wider range of use cases. To expand the scope of open banking and require banks to provide the necessary data via APIs for free.
Commercialised APIs: banks should be encouraged, says the report, to expand open banking use cases through premium APIs.
In addition, multi-party systems should emerge that have a commercial incentive to grow the open banking ecosystem through the design of new, flexible frameworks for industry collaboration.
The report notes that different routes may be optimal for different open banking use cases. Some use cases may benefit from hybrid approaches. For example, mandating the development of an API, but leaving its commercialisation to the banks themselves, or to a multi-party system.
Claire Melling, Head of Bank of APIs at NatWest Group, said: “This report makes it clear that banks, fintechs and regulators need to work together to design new, flexible frameworks and commercial incentives that will support a far wider range of open banking use cases. By acting on the recommendations in this report, we can enable open banking to reach its full potential and, ultimately, deliver new and enhanced propositions that will improve customer choice and experience.”