Open Banking in the UK has been a qualified success to date. It is used by 7m consumers and businesses and 68m Open Banking payments were made in 2022. However, this success must be kept in perspective. These users only account for around 10% of the UK’s adult population and far more payments are made on cards (20bn a year) and through direct debit (4.5bn a year). Open Banking use cases remain relatively limited.

In this report we identify some of the key economic obstacles holding back wider adoption of Open Banking and the development of new Open Banking use cases. These include a lack of commercial incentives for banks to improve the APIs they offer within the Open Banking mandate beyond the regulatory minimum; a lack of coordination among ecosystem participants with respect to developing APIs beyond the Open Banking mandate which in turn depresses the commercial incentives for banks to develop discretionary APIs; and a sub-optimal allocation of fraud liabilities with no way to internalise the trade-offs between convenience and security.

These obstacles are a direct result of the features of Open Banking products. First, Open Banking involves multiple firms being involved in providing what is, from consumers’ perspectives, a single product, which necessitates a degree of coordination to trade-off costs and liabilities, and provide incentives. Second, network effects mean that, in order for a product to be credible on one side of the market, it might need to be at least available to a large proportion of consumers on the other side of the market.

This report highlights that there are broadly 3 possible routes for expansion of Open Banking:

1. Expand the mandate to additional use cases.
2. Encourage banks to promote new use cases through premium APIs
3. Enable multi-party schemes to emerge with a commercial incentive to grow the ecosystem by finding the optimal balance between the various stakeholders

The first two options have already been discussed while the third constitutes a new proposal. The most appropriate option may well depend on the use case being contemplated; and some use cases might be best served by hybrid options.