Open Banking’s US Success Will Be Use-Case Specific

open banking

At first glance the latest open banking stats coming out of the U.K. might hint at a seismic shift in payments across the pond.

And would signal that open banking might be a proverbial slam dunk in the U.S.

But dig a little deeper and the reality is that the differing approaches between here and there are starkly defined, where the U.K. is a mandated market, so to speak, and the U.S. is market-driven.

And in the latter case, open banking’s success and evolution will be determined on a use case by use case basis.

The year-to-date numbers show a doubling of transactions in 2023 vs. 2022, and in the U.K., individuals made 11.4 million open banking payments in July, up 9% from June, per a Wednesday (Aug. 30) press release. Active payment users were 4.2 million, up 10.5% from June and up 68% from July of 2022.

The growth rates are impressive, we note, at least on a headline basis. But they’re coming off a small base. And open banking, in the U.K., has been taking shape since the middle of the last decade, since the Competition and Markets Authority (CMA) mandated that banks open up customer data. The CMA made its determination in 2017.

The World Bank estimates the U.K. population at around 67 million individuals. Separately, the U.K.’s own government site details that 63% of the population is of “working age” — between 16 and 64 years old.  That’s conceivably the pool of individuals who might be most widely pre-disposed to use open banking services. Statista estimates that roughly 49 million individuals in the U.K. have a bank account, which of course means that they’d be ready and able (and presumably willing) to use open banking.

This week’s announcement noted that the “key drivers of growth are single domestic payments,” as that class of transactions were up 8% from June to 10.5 million payments.

“This was propelled by government payments solutions and the onboarding of several financial institutions and investment platforms. These institutions have introduced ‘pay by bank’ options, allowing users to fund a variety of savings and investment products,” and among the top payments of choice were account top ups and credit card bill payments.

The active payment user count as noted above is a roughly 10% slice of the eligible “population” for open banking — and it shows both greenfield opportunity but also a slow adoption curve.

Disrupting the Market

The read-across for open banking elsewhere — particularly here — is that there’s no guarantee for open banking’s success. The key, of course, rests with solving customer pain points, where the payments themselves will be deemed “better than” say, using cards, which of course are ubiquitous in this market.

As noted in our own research on open banking, the market-driven approach is one where bank and FinTech collaboration will bring those “better than cards” aspirations to fruition. In terms of mechanics, banks will have to make API accessible portals available to users and authorized third parties, in order to enable the flow of permissioned data.

The low-hanging fruit may be pay by bank and account-to-account transfers. In an interview with PYMNTS, Craig McDonald, chief business officer at Trustly, said open banking can help merchants and consumers realize some key advantages.

“Merchants today want three things: a great UX, which means high conversion; a low cost, meaning less fees; and a non-refutable transaction, so no chargeback,” McDonald said.

Open banking, he added, can route transactions based upon their attributes, such as cost to a merchant or end-user behavioral profile, to either a real-time rail or to a debit network. McDonald said those new routing parameters could eventually disrupt the card-dominated U.S. market.

“We have embedded economics and structures that are in place [already], including consumer incentives, for A2A payments to take hold as a viable payment rail outside of cards,” McDonald said. “If you look at the incumbent payment rails in the card-not-present transaction environment, A2A has a lot of benefits.”