Open Banking: Threat or opportunity?
‘Open Banking’ is an umbrella term used, simplistically, to refer to the opening up of banking to non-banks by widening access to customer data, and allowing third parties to initiate payments on a customer’s behalf.
It is intended to drive more innovation, cooperation, and competition between industry participants, and more choice for customers. However, for the established UK retail banks, who for many years have enjoyed a near-monopoly on their vast amounts of customer data, and the distribution channels to service their needs, this is beginning to cause something resembling an existential crisis.
Although some would argue that ‘apathy is writ large’ in consumer banking and consumers are wedded to strong brands and the status quo, Open Banking seems likely to force banks to reassess their business models and revenue streams to keep abreast of the ever-growing competition.
Open Banking will present a number of challenges that established banks need to consider sooner rather than later
- Strategy and Business Model – business models and revenue streams will be challenged by increasing competition for core banking services across the market. Traditional strategies based on a core set of services for a stable customer base are under threat.
- Customer Engagement – non-banks will threaten the customer engagement layer by providing functionality to initiate payments and display account information from across a consumer’s financial estate. Banks may become a layer within a service, rather than the single end to end provider that the consumer interacts with.
- Technology – building and integrating secure API gateways with old and complex internal technology systems presents a challenge, as do the lack of finalised technical standards across the industry.
- Comply or Compete – banks will need to identify and pursue new commercial opportunities enabled by an Open Banking world, and not just sleepwalk into compliance. For example, what APIs will they offer, and how will they create and price them?
- Culture – Open Banking represents a real change in how banking will be conducted, and the way banks respond has to be faster, with more emphasis on trying and delivering new things quickly, and not just protecting old business models.
- Partnerships and Risk Appetite – building effective partnerships with third parties (e.g. FinTech) as a way of accelerating time-to-market requires a shift in mind-set, approach, and risk appetite to make an impact quickly.
To navigate the challenges presented by Open Banking, banks first need to recognise Open Banking for what it is: a paradigm-shift that will re-draw the borders of banking as we know it. Business models will need to adapt in order to survive.
Successfully embracing Open Banking will require strong strategic action across all areas of the bank
Banks should not just see Open Banking as a technology challenge to be complied with; the challenges and opportunities it presents are unique, and go to the heart of a bank’s business strategy. It’s imperative that banks respond decisively if they are to emerge as winners in the Open Banking era, ensuring their response is:
- Strategic and Holistic – the response must break through existing business / technology and product silos to ensure all teams are bought into a common vision, aligned to the wider Corporate Strategy, with the implications on the business model fully understood. In parallel, full alignment will be needed across key related areas such as PSD2, CMA, and GDPR, with buy-in garnered from all key stakeholders.
- Commercial – just complying is unlikely to be a winning strategy. Instead, banks should consider what new revenue streams there might be in an Open Banking world. Part of this will involve thinking of APIs as products, and creating and pricing them as such. BBVA, for example, has already made headway by making eight APIs commercially available in the Spanish market, with plans to extend further even before PSD2 kicks in.
- Customer Centric – banks need to take the time to truly understand what their customers want, including the differing demands of millennials, and then be prepared to challenge the status quo where existing organisational practices conflict with customer-centricity. Similarly, they should explore opportunities to participate in digital journeys within and outside of banking, and also engineer their offering to promote customer loyalty: retaining and attracting customers by offering a better service, not by loss-leading and locking them in.
- Innovative – banks should start with a simple question: ‘what does Open Banking enable me to do differently?’, and then go from idea to delivery, via a proof of concept, quickly. Third party partnerships (e.g. with FinTechs) can help to open up new areas of innovation at pace. Santander’s InnoVentures is a $200m fund administered by the bank that has already invested in 15 FinTech firms to help Santander “innovate with purpose”. This level of financial commitment, as well as a core appreciation of the value of new ideas, is likely to reap rewards in an Open Banking world.
The reality is, if we were designing a new bank from scratch, knowing what we know about Open Banking, it would not look like a bank of old. This, coupled with the increasingly demanding nature of consumers and an unprecedented influx of new entrants, will necessitate a change of approach. Arguably, entire business models for established retail banks will need to change.
Banks may not be in the grip of a full blown existential crisis just yet, but as the competition grows and market shares begin to erode, it’s the established banks that need to act now to challenge the status quo and turn these threats into a defining opportunity.