Open Banking – Think Customers, not Compliance
The Open Banking journey so far – Scraping the barrel of compliance
‘Open Banking’, the term used to describe the opening up of banking to non-banks by widening access to customer account information, and allowing third parties to initiate payments on a customer’s behalf, has frequently made the news over the past months. However, all too often news stories and bank announcements did not herald successes as banks underestimated the complexity and scale of Open Banking implementation, leading to slippages. Banks are now required to share specific customer data via Application Programming Interfaces (‘APIs’) by the regulator, yet six out of the nine CMA banks missed the January 13th deadline for implementation. Banks’ attitudes towards Open Banking have been largely reactionary in nature, characterised by reluctance to implement more than the bare minimum required, and driven by a fear of non-compliance. These problems have been exacerbated by banks’ limited resources, a lack of in-house expertise, and a need to prioritise projects in light of tight budgets and competing priorities.
A change in perspective – Realising customer centricity
The resulting lack of proactivity is a strategic mistake. Open Banking is far from a doom and gloom scenario for incumbent banks, provided that they understand the opportunity inherent in these new market dynamics. What is needed for this, however, is nothing less than a paradigm shift in assessing Open Banking. Instead of viewing the initiative with a pure compliance lens, banks should think ‘value’ when hearing the phrase ‘Open Banking’, and see it as a digital channel that will enable better customer journeys. Even against the backdrop of various pressures associated with PSD2, GDPR, ring-fencing, other CMA remedies compliance, and budgetary concerns, Open Banking should be used as a lever for value creation rather than just be seen as a legal requirement imposed by the CMA.
What this means in practical terms is that banks ought to analyse their full product suite, have a look at the customers’ pain points associated with each product, and see where Open Banking can enable compelling customer journeys. The value to be unlocked will be directly proportional to the size of the friction removed – and frictions abound in current customer interactions with their prime banks.
Such an approach can help banks embark on the journey of turning themselves into truly customer centric organisations, and create services which more flexibly wrap around a customer’s lifestyle. Given that Open Banking will allow banks to adopt a modular approach to product design, banks also have an opportunity to work in partnership with FinTechs to acquire new capabilities. By clearly articulating current problems and potential remedies, five types of products can be identified as sample use cases which stand to benefit greatly from Open Banking: lending products, deposits, advisory services, investment products, and payments.
Lending Products – Removing pain from mortgage journeys & loan applications
One doesn’t have to look long to find pain points in a traditional mortgage or loan application journey. The applicant’s experience is clunky at best, characterised by a document provision process prone to fraud and human error, a needless duplication of input throughout the journey, illogical trigger mechanisms for valuation processes, and Decisions in Principle (‘DIPs’) which are reliant on unverified data and likely to lead to suboptimal customer expectation management. Together, these factors fuel an experience which is cumbersome for applicants, cultivate a culture of ‘shopping around’ for mortgages, and directly lead to high applicant drop-out rates throughout the journey, with banks investing considerable amounts of effort, time and money in a deeply flawed process characterised by high up-front costs and uncertain outcomes.
Open Banking can be the cure for many of these issues. It can enable a leaner, faster and less costly journey by using API-accessed data to prepopulate applications, reduce the number of questions asked, and even enable interactive tools to test credit decisioning. Likewise, it can streamline or altogether eliminate document provision, and as a side effect lower fraud instances as Open Banking data is significantly more difficult to manipulate than physical documentation provided by customers themselves.
Deposits and Current Accounts – Casting a wider serviceability net
Open Banking can also serve as a lever for reducing friction associated with deposits and current accounts. Easier access to a wider range of information can provide tangible benefits to customers as it can enable better current account availability for previously underserved market segments, and allows the customer to compare current accounts like-for-like instead of having to make decisions purely based on incentives. The flipside of this development is that ‘buying credit’ becomes easier for financial institutions when previously underbanked parts of the general population turn into serviceable customers based on the availability of more accurate and detailed background information.
Further potential synergies which should be explored by banks relate to the better availability of account comparison providers, which can now directly access more product details than ever before using Open Banking APIs. While the associated account-switching scenarios are currently dreaded by incumbent banks, they will soon become a reality. To prepare for the challenges of operating in such an environment, banks should pursue strategic partnerships with comparison providers to test additional channels for driving demand in an increasingly competitive market.
Advisory Services – Tailoring personalised advice
Open Banking is a key enabler for account aggregation and associated advisory services, as it creates the possibility of providing customers with a comprehensive picture of their financial lives, powered by secure APIs (rather than screen scraping). Open Banking creates a standard for secure data exchange, allowing all market participants to handle data in the same way, which enables aggregation to be provided either as an additional service (in the case of banks) or as a standalone offering (as a money dashboard). Consequently, the aggregator can draw on a range of data from other sources including utility bills, insurance, cost of car ownership, and reward programmes to provide personalised advice and nudges depending on spending patterns.
By cooperating with product comparators, and taking advantage of new applications of artificial intelligence and machine learning, banks will be able to strengthen the customer centricity of their proposition and provide targeted suggestions across the full product suite.
Investment Products – Enhancing suitability services & overall engagement
The management efficiency of assets can also be pushed significantly through Open Banking enabled initiatives. Robo Advice, the term given to automated financial advisers which provide digital services based on mathematical rules or algorithms, has increasingly been recognised as key to engaging the next generation of HNW customers, and is an area which is well positioned to take advantage of the Open Banking revolution. Guidance and personal recommendations on investment products are significantly facilitated by standardised and complete access to a client’s financial data, and suitability questions can equally be answered with greater confidence.
Banks should thus actively invest in better understanding the opportunities provided by Open Banking for KYC processes, and explore opportunities for more targeted and less intrusive engagement with the clients whose money they hold. The associated reduction in friction and greater responsiveness to a customer’s needs will be key differentiators in an era of greater transparency and reduced barriers to switching.
Payments – Enabling payments straight from accounts and streamlining card applications
Payments is an area which stands to benefit from Open Banking in manifold ways. Cards themselves are a retail product currently plagued by problems potentially to be remedied by Open Banking, as application times can be cut short through direct access to information, and better credit limits be obtained – given that a lack of data is currently one of the most common reasons for card application rejections.
However, focusing on cards alone obviously falls short of the required analytical rigour for assessing Open Banking’s complete impact in this space, given the initiative’s focus on payment initiation services. Open Banking also facilitates the making of payments (agnostic of channel chosen), as it enables customers to shop without the need for a payment card by initiating a payment directly from their bank account, improves direct debit mandates by providing a complementary ‘push’ mechanism to the existing ‘pull’ payment systems, and provides for streamlined peer-to-peer transactions via the provision of trusted beneficiaries exemptions. The result will be a measurable friction reduction in payment journeys – be it online, mobile or at the point of sale – in particular once combined with tech-enabled and SCA (“strong customer authentication”) compliant initiation processes, such as retina scanning or fingerprint payment systems.
Making a payment in this new Open Banking world can be as easy as selecting your account and scanning your eyes with your smartphone – which is poised to become the ‘new normal’ within a timeframe measured in months rather than years (and, in fact, is becoming commonplace in other jurisdictions already). Banks would be well-advised to stay at the pulse of ongoing developments in this space, even if it means looking beyond one’s immediate competition.
Pursuing the road less travelled
A bank which embraces these opportunities, adopts a proactive approach towards Open Banking and actively invests in the potential solutions described above stands to benefit greatly in the medium term, and will likely establish itself as a market leader in an environment undergoing truly transformative change. The emergence of new industry standards will also lead to reduced costs of integration or separation, and strategic partnerships with FinTechs offering complementary services ought to be analysed in the same vein, from seed funding to acquisition.
It stands to be seen whether traditional banks will leverage the considerable advantages that they still hold in the race for Open Banking-enabled innovation – brand awareness, customer trust, existing relationships, and the ability to shape the UK standards for Open Banking – in a timely fashion, or whether they will sleep through this revolution and be swept aside as more and more tech giants embark on the journey of transforming themselves into financial services hubs, with incumbent banks turned into simple, commoditised product providers. For now, the window of opportunity is still open – but it will not remain so forever.