Open Banking, Interoperability, and the Bank of the Future

Consumers don’t really care about banking

It’s boring for them. However, they do care about money; all they want to do is exchange their money for goods and services in the easiest possible way. Given this, some might say banking is a necessary evil; it’s the friction in the middle of this exchange.

So, the objective of the industry should be to reduce this friction; Digital Banking is Frictionless Banking.

Open Banking 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), where interoperability is the ability for systems and organisations to work seamlessly together, based on common standards.

The Opportunity

Based on this increased interoperability, banks have two key opportunities to embrace the open paradigm that Open Banking presents. Firstly, they can better leverage third parties 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 seeing Open Banking as a new distribution channel that allows them to innovate their business model and offer new products and services.

The Bank of the Future

To bring this opportunity to life a little bit, let’s imagine a bank of the future – it’s a frictionless, interoperable Bank that has fully embraced Open Banking; it’s a Platform / Marketplace Bank. And to decide what type of Platform Bank the Bank of the Future should be, it’s worth noting recent Mckinsey research that found that the distribution (origination and sales) aspects of banking are much more profitable than the manufacturing (financing and lending) aspects. Whilst it’s clearly not one size fits all, I 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 Bank of the Future:

1. Establish and operate the platform / marketplace where 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
2. Providing services to customers that save them time and money, and only offer a customer its own products when it’s best for them – the Bank of the Future will understand that trust and transparency are key to this exchange, as are partnerships, and it will also recognise its customers’ time as form of wealth
3. Manufacture its own products, but not to the detriment of the two other key priorities

And the five things the Bank of the Future will need to be good at:

1. Solving end-to-end customer problems; it will deliver services that wrap around a customer’s lifestyle, and won’t just be a product pusher
2. Owning the customer relationship and using this to build a rich set of data and insight that allows the bank to offer its customers better propositions
3. Having a smart data strategy – the bank will know when to be a data hoarder, data donor or data seeker, to allow it to help save its customers time and money. The Bank of the Future will also embrace GDPR as complementary to Open Banking, as it understands that it’s all about customers having consensual access to their data
4. Knowing when to collaborate vs. compete – and when it partners, it will embrace the open paradigm, as the Bank of the Future 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)
5. Being nimble to take new ideas from proof of concept to mass market, quickly. It 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 Open Banking 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 banks should realign their priorities and develop new strengths.

It’s still unclear who will win. Will it be the Tech Titans? The Neo Banks and FinTechs? Or the incumbents? Regardless of the answer, it’s going to be fascinating to watch; the race is on!