NatWest’s Proposal To Unlock the “Unmet” Potential of Open Banking
19:16 09 Nov 2023 Guidance on incentives, expansions to the mandate and multi-party schemes from Stephen Wright, Head of Regulation and Standards, Bank of APIs, NatWest Group.
The UK has not yet unlocked the true potential of Open Banking, even though we have made tremendous progress. Since Open Banking launched in January 2018, seven million consumers and businesses have used it. Last year alone, there were more than 68 million Open Banking payments.
These figures are certainly positive but must be understood in a wider context in which cards and direct debits remain far more popular options for retail payments. The number of adults using Open Banking in the UK represents around 10% of the adult population. The adoption of account data services has lagged behind Open Banking payments, whilst the number of Open Banking use cases is limited and it has not yet entered daily or weekly usage for most consumers and businesses. We have some way to go.
A report by Oxera, an economics and finance consultancy firm, commissioned by NatWest called ‘The (Unmet) Potential of Open Banking’ identifies challenges holding back the wider adoption of Open Banking and the development of innovative use cases. We call for a step change in banks, fintechs and regulators’ approach to Open Banking and ask all parties to work together with a focus on adoption and use cases. Our recommendations will help the UK realise the true potential of Open Banking and bring its benefits to more businesses and consumers.
Obstacles to Open Banking
During our research, we found several key economic obstacles that are limiting the wider adoption of Open Banking and slowing the development of new use cases:
- A lack of commercial incentives for ASPSPs to improve their APIs and innovate beyond the mandated regulatory minimum.
- Insufficient coordination between ecosystem participants on the development of APIs beyond the Open Banking mandate, reducing commercial incentives for ASPSPs to develop discretionary APIs.
- A suboptimal allocation of fraud liabilities to ASPSPs and consumers. TPPs have no incentive to take expensive action to reduce fraud risk because they do not face any liabilities.
- Challenges around managing trade-offs such as security and convenience. ASPSPs incur the costs of fraud but do not internalise the potential negative impact of fraud prevention measures on customer and merchant convenience at point-of-sale.
We have achieved a great deal by laying the groundwork for Open Banking in the UK. If we do not tackle these obstacles and promote additional expansion, there is a risk of consumer adoption stalling.
How Should The UK Catalyse The Development of Open Banking?
There are three possible routes forward. Each use case will be most suitable for one of these approaches, depending on the needs and outcomes created by product features. Some may also benefit from a hybrid approach, such as mandating API development but giving each bank the freedom to decide its own charging scheme.
1. Broaden the mandate: Include more use cases within the Open Banking mandate and require ASPSPs to provide data via APIs for free. This approach delivers coordination without commercial incentives and may be most appropriate for use cases where universal availability is necessary, but which demand fewer trade-offs and in which commercial incentives and dynamic innovation are less important.
2. Expand use cases through Premium APIs: Encouraging ASPSPs to deliver more Open Banking use cases through Premium APIs provides commercial incentives, but will not improve coordination. This option may suit use cases in which incentives and internalisation of trade-offs are more important than universal reach.
3. Enable multi-party schemes: Encourage ecosystem growth by offering a commercial incentive to design new, flexible frameworks for industry collaboration. Multi-party schemes would be similar to systems used in other European countries in the development of digital ID and credit-transfer-based payments.
The first two of these solutions are already under discussion. NatWest outlined the third in its report. Commercial arrangements can support incentives and trade-off internalisation, with coordination of day-to-day management of the product handled by a commercially incentivised scheme operator that’s incentivised to set liability rules and put governance arrangements in place. Additionally, the constitution of a scheme entity must be carefully considered to manage competition law risks.
JROC and Future Progress
The ground has shifted since we published the report in July. We were concerned that the idea of having to pay for Premium APIs might be controversial – which has not been the case. Throughout 2023 after JROC published its report, we have seen far more conversation around the alignment of incentives.
Developing products to meet use cases within the Open Banking ecosystem will involve paying close attention to which of the characteristics of Open Banking products are most important and
carefully considering which of the three options for provision is most appropriate to provide sufficient incentives for rapid development and adoption.
A future regulatory framework should remove roadblocks to the development of new services and recognise that multiple parties must be incentivised to deliver these products. By applying the correct framework to the right use cases, we can drive the faster roll-out and adoption of Open Banking. If we choose to act on the recommendations in this report, the UK can enable Open Banking to reach its full potential and deliver new and enhanced propositions that improve customer choice and experience.
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