The bank of the future: Open data and open platforms
Open Banking will introduce a new era of open data and by extension, open platforms. This transition will necessitate a radical change in mindset away from the current traditional banking mentality, which has typically been closed, risk-averse and certainly not one which involves wholesale data sharing.
In this new world, banks will need to be collaborative, with a strategy that looks to build a banking service ecosystem comprised of multiple partners, as well as a new platform-led business model akin to those pioneered by tech giants like Amazon in the retail sector. These are core building blocks of the “bank of the future”.
Digitalisation has meant that establishing platforms has never been easier and, at a high level, there are three transformative technologies which are driving an increase in digital platforms: cloud, social, and mobile. Moreover, financial services (FS) specifically has global, regulatory and industry initiatives to expose data and services to third parties and establish common standards.
A key principle underpinning the shift from a vertically integrated business model to a platform-led business model is “The network effect is the new driver for scale”. In a world of open data and interconnectedness, holding the customer interface will be the key. The more customers, the more participants in your platform of products (or “marketplace”) and in turn this will build on itself. The bank of the future’s value will come from how far it can connect customers to the right products, not just their own products; this is the essence of a successful platform.
At the heart of this is customer advocacy; truly placing customer needs first and not just pushing commodity products to them. In reality, this could mean the bank of the future will forego fees it could earn from overdraft charges because it will provide warning to its customers. It will also recommend competitor services to its customers if they are the best for them. Banks will find this worthwhile because there is a strong chance that traditional banks become nothing more than the “pipes”: still holding money and pushing it around the financial system, but without any customer interface or ability to provide other products and services. If customers can use a service that offers the ability to manage all banking from one place with objective advice built in, why would they interact with a bank that only offered their own products and services?
“At the heart of this is customer advocacy; truly placing customer needs first and not just pushing commodity products to them”
To remain competitive, there are clearly many aspects to be considered for how banks need to adapt and respond to changes. Some of these are societal and external to banks themselves. For example, success relies on generational attitudes to the use of data, the use of mobile and the broader shifts and changes in technology. However, many of them are internal to banks and within their power to affect immediately. Below are three key considerations that banks should look at across the themes of culture, risk, and data:
- Making the shift from a closed to open mindset by seeing themselves as part of a broader ecosystem, where sharing and partnerships are the norm, and moving away from a vertically integrated business model that focuses on cross-selling products to a traditionally immobile customer base
- Empowering teams (e.g. make them cross-functional, co-locate them) and giving colleagues the opportunity to try, fail and succeed
- Not having an innovation function (it should be everyone’s job!)
- When building partnerships, learn when to invest, acquire, compete, and collaborate – and doing it at speed
- Giving the second line of defence “skin in the game” to overcome the current asymmetry of risk that slows the ability to do things differently. This means bringing 2nd line of defence in to projects instead of being purely advisory with no accountability for the delivery of new products.
- Enabling real-time, single source of truth systems underpinned by advanced analytics
- Embracing the change brought about by GDPR and PSD2 that means customers are now in control of their data
- Make understanding customers by analysing their data at the forefront of strategy, moving away from the idea that customer data is sacrosanct and should just be stored and left alone
The threats to banks are likely to come from a combination of new FinTechs and the existing tech giants like Google and Amazon. What each of these will have in common is their ability to utilise the three key areas above to their advantage in this new open world. These companies have data analytics, partnerships, agility and innovation written into their corporate DNA. If banks want to compete with them, they need to use their existing brand and customer trust and combine that market position with proof that they can evolve and provide the kind of customer focused service that will become the norm.
In summary, the priorities of the bank of the future will be very different to today. To thrive, it will need to:
- Establish and operate the platform / marketplace where its customers can find the services they want
- Provide services to customers that save them time and money
- And do all of this at scale (whilst making money!)
Whether they like it or not, banks are becoming central players in a new world of open data and open platforms, and a real change to their priorities and capabilities is going to be necessary to survive and thrive in this new era. Whilst their market share has not been significantly impacted to date, new competitors like Monzo recently reaching a £2bn valuation, and Revolut talking openly about reaching a $20bn valuation, shows that serious competition is close to becoming a reality. As more regulation comes into force, more and more competitors enter the landscape, and technology increasingly enables customer choice, these changes could be seen in as little as five years. The question is can banks respond before it is too late?