Open Banking, Interoperability, and the Bank of the Future
The traditional methods of engaging with financial service providers, including banks and asset and wealth managers, are becoming out dated – they are boring customers.
However, one thing customers do care about is money; all they want to do is ensure that their money is being handled in the best possible way, with ease of service. Given this, some may say that interacting with a firm is a necessary evil; it’s the friction in the middle of this exchange.
The objective of the industry should therefore be to reduce this friction; Digital Banking is Frictionless Banking.
Use of API’s is at the heart of enabling this reduction in friction as it delivers a core component of frictionless services: that of interoperability (powered by Open APIs). Interoperability is the ability for systems and organisations to work seamlessly together, based on common standards.
Based on this increased interoperability, firms have two key opportunities to embrace the open paradigm that new technology presents. Firstly, they can better leverage this technology within their own platforms to expand their range of services, enhance the customer experience they provide, increase efficiency and reduce cost e.g., they have an API and microservices architecture that quickly allows them to integrate third parties. Secondly, they can provide their services across third party platforms, effectively utilising the technology as a new distribution channel that allows them to innovate their business model and offer new products and services.
This is a potential game changer.
Firms of the Future
To bring this opportunity to life a little bit, let’s imagine a firm of the future – it’s a frictionless, interoperable service provider that has fully embraced use of API technology; it’s a platform / marketplace provider.
Firms will need to decide how they position themselves in the market, with the threat of an open marketplace disrupting the industry. For example, the introduction of an Amazon-style marketplace could put significant risk on asset management fees. Distribution (origination and sales) are being seen as more profitable than the manufacturing (financing and lending) aspects. Whilst it’s clearly not ‘one size fits all’, we strongly believe that we’re likely to see more distribution-led business models emerging over the coming years.
With that in mind, let’s take a look at the top three priorities for the future of the industry:
- Establish and operate the platform / marketplacewhere its customers can find the services they want – offer a great UI and best-in-class customer experience, underpinned by trust, and a depth and breadth of services
- Provide services to customers that save them time and money,and only offer own-brand products to customers when it’s the best solution for them. Firms will need to understand that trust and transparency are key to this exchange, as are partnerships, and they will also recognise their customers’ time as form of wealth
- Manufacture own-brand products,but not to the detriment of the two other key priorities.
There are five things the financial services providers of the future will need to be good at:
- Solving end-to-end customer problems;they will deliver services that wrap around a customer’s lifestyle, and won’t just be a product pusher
- Owning the customer relationshipand using it to build a rich set of data and insight that allow the firm to offer its customers better propositions
- Having a smart data strategy; the firm will know when to be a data hoarder, data donor or data seeker, to allow it to help save its customers’ time and money. This includes embracing GDPR as complementary to API technology, as they understand that it’s all about customers having consensual access to their data
- Knowing when to collaborate vs. compete; when it partners, it will embrace the open paradigm. The firm understands that in an open world, your value comes from the amount you can connect, not the amount of stuff you can produce (this is the essence of being a successful platform)
- Being nimbleto take new ideas from proof of concept to mass market, quickly. Firms will also adopt the app store mentality (little releases, often) and not the core banking transformation mentality (large, complex, infrequent releases)
Embracing the open paradigm
The interoperability that this change will provide has the potential to transform the financial services industry as it connects more and more businesses, customers and services together. To compete and lead in this world, new business models will need to be based around this open paradigm and firms should realign their priorities and develop new strengths.
It’s still unclear who will win. Will it be the Tech Titans? FinTechs? Or incumbents?
Regardless of the answer, it’s going to be fascinating to watch; the race is on!