Open banking seen as a challenge rather than a need

Reported by: |Updated: March 9, 2020

Capgemini came out with its World Payments Report 2019 highlighting major roadblocks that banks face in adopting open banking:

Many global banks perceive open banking as a potential challenge when it is a necessity for improved customer experience and retention in the longer run and as such, they remain reluctant to embrace this system, finds global consultancy firm Capgemini in its World Payments Report 2019. The report tracks and analyzes non-cash transaction volume, regulatory and industry initiatives and digital transformation across the global payments market.
The report finds that even though open banking is a fundamental and holistic approach that will help banks progress towards the new payments ecosystem, as an initiative, it ranks third in terms of budget allocation for digital transformation initiatives. “Most banks still treat open banking as a compliance tool to regulatory mandate and limit their efforts to mandated APIs, which is delaying the progress,” the report said, adding that multiple factors are delaying open banking progress, including slower adoption of instant payments outside the retail segment, including corporates and merchants, the reluctance of banks and regulatory issues.

The report mentions that banks’ API adoption rate is steady only when it comes to sharing non-critical and basic data. “Our survey data suggests that the percentage of banks offering APIs that both expose and consume data is anemic. More than half of survey respondents said they had implemented instant payments-based APIs, but for APIs that expose data, the number if far less robust. On the other hand, while 53% are offering aggregator APIs, only 35% are active in marketplace APIs.”
The report also finds that the transaction volume of non-cash payments is growing rapidly, particularly in developing markets within Asia (32% growth) and Central Europe, Middle East and Africa, (19% growth). “It is projected to top 1046 billion non-cash transactions globally by 2022, which equates to a compounded annual growth rate of 14%. Yet, in a market defined by innovation, many incumbents are more fearful than optimistic about the pace and direction of change. In numerous cases, they cite the threat of BigTech challengers alongside only embracing open banking to the extent that regulators require, rather than seeing it as an opportunity for offering differentiation, customer retention and market leadership.”

Developing markets are leading the growth in the non-cash payment sector, says the report, and this is projected to rise by a compound annual growth rate of 23.5% between 2017 and 2022. Emerging markets will soon dictate and shape the global payments landscape in terms of innovation, transaction capacity handling, and industry trends, it adds.
In 2017, says the report, these markets accounted for 35% of global growth, a share expected to rise to 50% in the coming years. Key contributors include Russia, where non-cash transactions grew by 40% in 2017, India (39%) and China (35%). By contrast, mature markets, including APAC, Europe and North America, saw a steadier growth rate of 7%. Globally, non-cash transaction volume rose by 12% in 2016-17 to 539 billion.

Some other key findings in the report are:

  • Less than half (48%) of those surveyed said they are planning to use open APIs beyond the level needed for regulatory compliance.
  • While a clear majority (63%) identified BigTech competitors leveraging their global reach, brand equity, customer trust, great customer experience and finally payments infrastructure as a leading threat.
  • Although banks are gradually, though too slowly, moving towards a more open, data-led and cloud-based approach, there remains a reluctance to fully embrace open banking. 90% identified ecosystem-based business models as key to long-term success, yet only 44% expressed interest in building and orchestrating an ecosystem of their own.

The report also maintains that new technology has spurred sweeping systemic and operational changes that are difficult for banks to navigate. Bank executives, it says, now face decisions about further technology investments within a volatile environment that offers little opportunity for steady-state analysis. The technologies it sees as disruption opportunity and unique challenges are distributed ledger technology, APIs, artificial intelligence and bank-as-a-service. Added to this, says the report, is the regulatory complexity, which is adding another layer to the already complex landscape.

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