Open Banking’s activity statement

Introduction

Vyne has folded its tents in the UK, or rather it has closed its Open Banking portal, apparently one offering a top customer experience and with traction into a large customer base:

https://www.linkedin.com/pulse/vynes-withdrawal-uk-open-banking-supplier-proves-dead-bob-lyddon-6xk3e

This does not augur well for this activity area: a top player cannot make Open Banking work financially. That is not a surprise because Open Banking is not a genuine business but a prime example of state-directed activity, where private sector players are invited to invest in an activity that has public policy objectives. The investment case that is built around this situation has attracted hundreds of players, but into an activity, not into a business.

Open Banking is neither fish nor fowl as a ‘business’

Open Banking falls outside a common taxonomy for analysing the market actors in an industry, called Porter’s Five Forces:

  • It is not a substitute product: it only does part of what banks had been doing for many years on their own – offer electronic access to customers to their services;
  • It is not a new entrant that stimulates greater competition amongst existing suppliers – its offering is more limited than that of banks so it cannot compete head-on, and it has failed to act as a catalyst for a major shift in market structure and terms-of-trade as, for example, a GoCompare has amongst car insurers;
  • It is not an innovation – there were plenty of examples of multibanking services offered by banks and non-banks to retail and small business customers (Isabel and Multicash) and to mid-corporates (IBOS and Connector).

At best it is a quaternary activity, dependent upon a tertiary industry – the provision of banking services for retail and business customers – and within that on Account Servicing Payment Service Providers.

That always looked like a very narrow market space and so it has proven to be.

Open Banking kicked off by public policy, not by customer demand

Open Banking did not respond to a proven customer demand: it was ordained as a matter of public policy by those charged with diagnosing and offering solutions to the causes of the UK’s version of the Global Financial Crisis. The ‘Changing Banking for Good’ process, the Vickers Report and then the Competition & Markets Authority decided that the concentration of retail and business customer deposits on 5 or 6 major banks was a contributor to the crisis, and they opined that this concentration was underpinned by (i) these banks owning the payment systems; (ii) these banks having a lock on current accounts over which payments into and out of those systems were made; and (iii) this lock being strengthened by customers using the electronic banking system of one of the 5 or 6 major banks.

Open Banking was aimed at weakening the market position of the incumbent banks. It would remove their lock on electronic banking, contribute to much greater switching of current accounts, and spread deposits more widely across the banking system. Within the same timeframe the Payment Systems Regulator was established and charged with the associated objective of enabling a wider range of banks, and then neo-banks and non-bank financial companies, to obtain access to payment systems.

Open Banking has failed to reach its objectives, but has done much better at Public Relations

Open Banking was created to foster a supposed public good and it has largely failed: deposits and current accounts are as concentrated as they were before.

Hundreds of companies have invested to become Open Banking intermediaries and they are naturally not willing to throw in the towel. As a result Open Banking has been multiply repurposed from its original objective: for financial inclusion, for credit scoring, to accelerate loan applications, for paying your taxes to HMRC, to help you gamble more, and now possibly to help the Department of Work & Pensions to spy on all of us.

It has been much more successful in its Public Relations: it daily re-declares its success and transformative potential. Based on these claims it has positioned itself as the main forum for the design of innovations and developments in UK payments: the Payment Systems Regulator’s Digital Payments Initiative recommended that the Open Banking entity should be charged with realizing its proposals and four out of the seven recommendations of HM Treasury’s ‘Future of Payments’ review were put into the hands of the Open Banking entity for implementation.

Unfortunately Open Banking’s PR has run some way ahead of reality.

Open Banking’s contribution to economic growth: it’s usually called spending

Open Banking claims to have contributed to economic growth but this is only true to the extent that monies have been raised and spent, and the spending gets added to UK GDP. Much of the spending is capitalised as an investment: there are a lot of balance sheets out there with Fixed Assets and Intangible Assets related to Open Banking.

The real question is what wealth has been created, both at the customers and at the suppliers. The proof for value-creation amongst customers is manufactured by the Open Banking PR machine, and we have written before about how misleading the measures-of-success are. The proof for value-creation amongst suppliers is no more than a board’s statement that the supplier remains a going concern. With Vyne’s withdrawal – a top player against whom they were no questions about its being a going concern – Non-Executive Directors on the boards of Open Banking suppliers need to be cleaning their spectacles in readiness for the issuance of 2024 annual reports, and asking themselves if the supplier’s accounts give a full, fair and accurate picture of its condition and prospects.

Revenues, marginal cost of servicing a customer, and prospects for future profits

The services appear to be provided free-of-charge to customers so, absent other lines of revenue like selling on customers’ data, there must come a point where assets have to be written off at a faster pace than the initial depreciation schedule anticipated, because there is no prospect of the asset generating cashflow.

Vyne have presumably realised that this is the point they had reached. It is not beyond the bounds of possibility – in an industry with next-to-no-revenue streams – that the revenues-per-customer are lower than the marginal costs of servicing that customer i.e. greater market penetration increases losses.

Open Banking is a rentier business model – the direction of travel for the entire UK

The suppliers are ‘rentier business models’: like a toll bridge, if you want to get from A to B, you must use the bridge and you must pay the toll, or ‘rent’. With Open Banking, the customer logically would pay a toll every time they take an action across the supplier’s platform. There must be a rent, or the business will fail, and Open Banking appears to be rent-free for customers. Open Banking as a whole will fail if this is the business model, and a whole economy in which such models predominate runs itself increasingly into the sand.

That is the worry, as the Open Banking business model seems to have become the model for UK economic growth as a whole.

Open Banking as part of the growing ‘state-directed’ sector

Those purporting to represent the interests of the public as a whole have had a strong hand in determining what Open Banking is meant to do, what public policy objectives it is supposed to meet, what the services are, what the business processes look like and so on. This is part-and-parcel of the growth of a third area of the economy beyond the ‘public’ and ‘private’ sectors, which we can call the ‘state-directed’ sector.

The ‘public’ sector is already around 40% of the economy and is not likely to shrink any time soon. The private sector is possibly already in recession. These circumstances and the government’s approach mean that any growth will be concentrated in this ‘state-directed’ sector. It could grow to 30% of the whole, and Open Banking is part of it. That would push the size of the private sector down to 30%, the same size as it was in the Soviet Union. The private sector ceases to be the economy’s engine: it is at best a trailer.

In such an economy – which tends also towards being highly regulated and punitively taxed – genuine competition reduces, innovation dries up, services become homogenized, the price of the services tends towards being free, wealth creation goes into reverse.

How services are developed (or not) when payment services are part of the state-directed sector

Service development is decided via quangos or through officially-sanctioned working groups (such as the PSR Panel and the Digital Payments Initiative): everyone appears to be onside including customers (who are represented by trade bodies, pressure groups, private individuals who built a CV of being on several panels…), but no customers were genuinely consulted.

The ethos is to keep the train rolling, so that everyone has their diary full, with working group meetings, conferences, round tables, All-Party Parliamentary Group sessions and so on: that keeps the CV refreshed and in a position to attract still more engagements of the same kind.

The service does not move forward – it becomes commoditized. However, new entrants cannot come in and displace Open Banking suppliers, because they have to become Open Banking suppliers themselves, submit to the same regime, join all the same groups – this is a regulated activity or, to use a legacy phrase, a closed shop. The life can soon be squeezed out of any upstart that tries to rock the boat.

The result is that, within this service space, no new or alternative services can be developed either as direct competitors to incumbents, or as substitute offerings, and the existing offering is developed only marginally and at a snail’s pace.

The EU payments activity as the epitome of the stagnation inherent to a state-directed sector

This permafrost effect is even better assured in the EU where all payment services must be conducted in the ISO20022 XML data format, and be vetted by the appropriate groups over a long period before a new service can be launched. Lead-time-to-market is thereby elongated so as to undermine the business case for the new service, and all competitors are given an advance view of the service in time to replicate or counter it.

The result is that the Single Euro Payments Area service is the same as it was at the time of its launch in 2008/9, other than where change has been forced by the imposition of further public policy objectives. That is called stagnation, we have replicated it in the UK, and Open Banking is a perfect examplar of it.

Conclusion

The UK has led the way on Open Banking. Unfortunately it has created a form of sinkhole: the Digital Payments Initiative concluded that its ideas needed to be ceded to Open Banking, four out of the nine recommendations of the ‘Future of Payments’ review were channeled into Open Banking. Nothing gets past Open Banking, nothing can be considered or developed in the same area without its being caught in its gravitational field, and yet nothing of value comes out of it.

This is because Open Banking was a public policy intiative, not a response to customer needs. It has been state-directed from the beginning and has mastermined the invention of a sclerotic way-of-working that has progressively displaced private initiatives in the payments sector. It has led the way on an approach that will ensure paralysis across the economy as a whole.