Open Banking has the potential to disrupt banking by changing the way customers manage and move their funds. Although the precise size, scale and speed of the impacts remain uncertain, it is clear that banks need to consider how the diffusion of Open Banking will affect their liquidity, funding strategies, and even business models.
The disruptive possibilities of Open Banking
Retail deposits are generally considered ‘sticky’ – that is, unlikely to move around the banking system quickly or frequently. Customers have tended to leave surplus funds in lowly-remunerated transaction accounts, which gives banks a cheap and stable source of funding. But PSD2 will enable customers to manage multiple accounts from a single place, facilitated by third parties which will be able to aggregate data across multiple banks. Customers will therefore be able to make payments and balance their funds centrally, without needing to log into multiple accounts. What’s more, in time, the principles of Open Banking could be extended to investment and insurance products, blurring the line between different sectors of the financial system, while we also expect future regulatory interventions to reduce the remaining frictions in payments processes.
Customers will be better able to manage their finances, avoid unplanned overdrafts more easily, and move idle funds to more productive places more easily than ever before. Coupled with the inevitable growth of automation, AI and robo-advice, we can also expect new tools to encourage customers to move funds outside the banking system.
Liquidity and funding
The historical ‘stickiness’ of bank deposits is a central part of the management of liquidity risk, with preferential regulatory treatment for types of deposits that are seen as ‘stickier’ than others in liquidity and funding rules. If deposits become less sticky, or less stable, banks may therefore see changes to some of their regulatory ratios, such as the LCR, as well as impacts to their funding models if they lose deposits to rivals or to non-banks. The potential for Open Banking to disrupt liquidity and funding is therefore a concern of regulators, with the BCBS and EBA both having indicated that this is on their watch list. It is too early for an immediate regulatory response, given that the scale and speed of change isn’t yet clear, but we can expect regulators to balance their support for innovation against the need to ensure the regulatory framework remains fit for purpose. It is not outside the realm of possibility that liquidity rules – notably the LCR – will be adapted in the longer-term to fit new market realities.
How can industry respond?
Most banks plan to use Open Banking to drive new strategies in the ongoing pivot towards digital models. But there is some way to go if strategic visions are to be translated into practical realities. A key part of the response will involve decisions relating to deposit stickiness – do banks look to re-engineer stickiness through product innovation and pricing? Or do they adapt their funding strategies and business models to cope with the loss of stickiness? These and other complex trade-offs need to be worked through. The future will also demand new capabilities – for instance, to optimise liquidity and funding in a world in which customer decisions are far more automated and do not necessarily match up with historical patterns of behaviour.
The path ahead
The diffusion of new technology is always more complex than just having the technology itself in place. There are obstacles ahead for Open Banking, not least of which is the low propensity of some segments of the population to adopt new technologies before they are widely established. There remain technical issues for product developers, potential trust issues among consumers relating to personal data, and possible conduct of business regulatory frictions around account opening processes. But we are still in the early days of adoption, and the market is not small: UK retail bank balances are in the order of £1.5 trillion, with somewhere between a fifth and a quarter of that sitting in current accounts. For banks that don’t want to wake up one morning and realise they’ve missed the Open Banking boat, the time to start working through these complex issues is now.
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