2023 Will See the Start of Consumerization in Open Banking
Simone Martinelli, Founder and CEO, Volume
Ask the average person on the street about open banking and you will probably get a blank look. For all the energy, money and hype expended on it so far, open banking remains an esoteric subject, as far as the general population is concerned. That’s true even in countries where it has been around – or talked about – for nearly a decade and where it is an established part of banking rails.
In the UK, where open banking started early and has probably gone furthest, the latest Open Banking Impact Report (June 2022) shows that only 10–11% of digitally-enabled consumers were using an open banking service by the end of March 2022. Despite a steady month on month growth of 10%, actual payments made with open banking, as we will see, are a small pimple compared with card payments.
I don’t think we should be surprised about this slow mass market adoption. It’s a pattern that you can trace across any number of technological innovations. It even has a name: “consumerization”.
What is consumerization?
Innovation adoption often starts with business users but eventually percolates to the mass market and therefore consumers. When this happens, economies of scale mean the price drops and then quality and reliability improve to the point where there’s little to choose between the original business-orientated products and the new consumer versions. Business users, naturally enough, then switch to the consumer products.
Let me give you some examples.
Refrigeration started to be used by large scale industrial brewers and meat packers from about the 1860s. The first domestic fridges weren’t marketed until 1913, after which prices fell and capacities increased – to the point where consumers started to use them as we know it today.
Likewise, the early computer market was initially restricted to business users. IBM’s president, Thomas J Watson, allegedly said in the 1940s “I think there is a world market for about five computers.” By the 1970s, computers were still highly expensive and even so-called “minicomputers” were restricted to office use. Then personal computers began to appear and, in the form of desktops and then laptops, started to take over many of the functions of business computers.
Open banking is still at the B2B stage of evolution
With just 10% of consumers making use of open banking in the world’s most advanced market, in effect it is still a B2B proposition. All the noise we hear as professionals – and there is a lot – is fintechs talking to legacy banks and other fintechs about building the rails and ecosystems needed to deliver the benefits of open banking to consumers. Delivering those benefits is a work in progress. It’s coming, but we are not there yet.
The advantages on offer from open banking divide into two broad categories: better/faster access to account data and account-to-account (A2A) payments. Progress to date has mostly been on the data side of things. If consumers are aware of the impact of changes wrought by open banking, they are probably thinking about the ability to import or export data from one account (or many accounts) to another.
On the payments side of things, it’s a slower story. A few merchants are offering A2A payments, but it’s a sluggish start and the volume is low. According to the June 2022 Open Banking Impact Report, in the six months to March 2022 there were 21.1m open banking payments, compared with 6.1m in the same period in 2021.
For perspective, this compares with 2.3 billion debit and credit card transactions made by UK cardholders in July 2022 alone, an annualized rate of 25.5 billion.
How does consumerization apply to open banking?
As the 345% half year-on-half year growth in UK A2A payments indicates, things are starting to change. Thanks to fintechs such as Yapily, the rails are now in place to enable A2A payments for online purchases. At the point of sale, consumers can be offered the option for an A2A payment authorized by the standard biometric login they use to open their app.
This is a much faster and more secure process than the 2FA process now mandated by several regulators – where the shopper has to wait for a text or email and then enter a code to sign-off a payment.
But consumerization has not really happened yet. The mass market potential is huge but still largely untapped. At the moment, card issuers are continuing to syphon off $800 billion annually globally in charges for simple transactions. Fees range from 2% to 8% – a nice little earner for a process that is fully digital.
Towards segmented open banking payments
In the refrigerator market, you can pay, if you choose to, a handsome premium for certain brands – Bosch, Miele, AEG, for example. They position themselves at the top end of the market and differentiate their offers on a range of factors, such as energy efficiency, warranties, reliability and after sales service. That’s not a comprehensive list.
Or you can buy on price. I’m thinking of Indesit or Beko here, where you’ll get some of those attributes, but probably not all of them, and not all to the same degree. The consumer is being offered a choice and they decide what factors are more important to them. This is marketing 101: segmentation.
The same is about to happen with A2A open banking. Some fintech providers will brand themselves at the AEG end of the market, with bells and whistles, a price to match, and accept a smaller number of customers in return for higher margins. In financial services terms, this is the Amex positioning with rewards, flights and gifts of all kinds, and insurance to protect your valuable iPhone purchase.
Other brands will go for volume and offer a low-cost no-frills payment service across billions of transactions. This sort of scale will eventually drive the cost of a payment transaction down from today’s absurd levels to just a few cents. Others will take a hybrid position, with lower costs – but not the lowest – and some benefits – but not the most extravagant. Banked is a good example here – offering consumers Avios points with their purchases.
The starting gun has already been fired. Merchants are offering online checkout discounts for A2A payments. Segmentation is emerging and I predict that 2023 will be the year that consumerization of open banking takes off in earnest.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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