Report: What Open Banking will change

By James Buckley, head of Finacle Europe

A research report on Open Banking in the UK says that the use of APIs for banking functions, such as account aggregation, financial management, and credit scoring, could potentially yield £7.2bn worth of revenues by 2022. By making it mandatory for banks to share customer information under consent, subject to data security and privacy norms, with authorised third parties, open banking has opened the floodgates to a variety of financial services marketplaces. A typical marketplace is a platform network where diverse providers – incumbent and challenger banks, Fintech firms, telecom operators, retailers, insurers, and travel & hospitality companies – consume each other’s services via open APIs in order to fulfill a range of financial and non-financial customer needs. This is unrecognisable from the traditional paradigm where banks catered exclusively to consumers’ financial needs, in isolation from other businesses; today, they are expected to provide, singly or in synchronous partnership, a host of lifestyle-fashioned products and services under one roof to enhance convenience, choice and quality of experience for consumers.

The emergence of platform-led open banking marketplaces is changing the fundamentals of banking in the following ways:

Bringing about extreme personalisation and micro-segmentation: Earlier, banks would maintain a limited set of products and services, such as deposits, loans, cards etc. In the absence of choice and competition, customers had to make do with what was on offer. The available products and services covered their most common needs – for a term deposit or housing loan, for instance – but left a long tail of specialised wants unmet. Open banking has changed that completely by enabling bank offerings to be personalised and segmented to such a granular degree that a bank can now, easily and viably, create a product for a small audience of a few thousand. This is unprecedented among UK’s high street banks and those who are quick to personalise and micro-segment their offerings will reap the benefits.

Changing the definition of a “good” product: Before open banking, high street banks had few ways of differentiating their products. Their options were mainly limited to tweaking the interest rate or improving access by expanding their channels; in the absence of innovation, low interest and easy access were the proxy definition of a good product.

In contrast, the open banking marketplace provides almost unlimited opportunities to innovate and bundle products to offer immense value to customers. A product’s merit is not defined merely by its cost or accessibility, but by many other considerations, such as its relevance to its host platform: for example, how it fits with the industries represented on the platform or how it synchronises with other platform offerings to capture new customers. For instance, in a hypothetical marketplace with Lloyds Bank, Aviva and others, a good product would be a combined offering of travel insurance and best fares alongside hotel bookings and car hire completed in one single screen access mode, as well as suggestions of nearest pharmacy/ clinic based on locational geo tagging.

The reality is that incumbent banks have no choice but to continually innovate their offerings. Remember that open banking democratises banks’ customer data, making it equally accessible to other ecosystem players, such as challenger banks and fintechs, who are only too eager to provide relevant, innovative and highly personalised offerings to the customers of rival banks. If banks are to protect their turf, they must leverage their data and innovation abilities to create good products that improve the lives of their customers. In time, customers will flock to those banks and marketplaces that improve their quality of life.

Which brings us to a very important change in open banking, where an entire marketplace, and not just a bank, is pitted against another. The rivalry between financial services marketplaces will be decided based on the revenue streams enjoyed by member banks, exclusivity of partner arrangements, synchronisation between ecosystem participants etc. A marketplace will present a homogeneous identity to compete with another marketplace, also with its own homogeneous identity.

Big tech firms, such as Google, Amazon and Apple, which have enormous platform networks and ecosystems, not to mention humungous customer bases, are in a great position to succeed in a fight between marketplaces. Amazon already offers credit cards and business loans to increase the sales on its platform; Google recently announced that it would offer smart checking accounts in partnership with banks and credit unions in the US. Given their reach, it is very possible for a full-fledged bank from such companies to grow to many times the size of their nearest bank rival in the space of a few years.

Changing the role and conduct of banks: Going from a “pipeline” universal banking model to a platform-led marketplace requires fundamental changes to the internal organisation. For a universal bank that manufactures and distributes its own products through its own channels, the biggest priority is to run a highly efficient operation; here, success depends largely on the performance of the individual entity.

A platform-led marketplace model, on the other hand, succeeds through collaboration and partnership. It feeds off the network effect, and prospers as the ecosystem grows in size and interaction. The bank’s priority here is to orchestrate its role in the marketplace and engage productively with the other players in the ecosystem. Should it fail to do so, the bank will get edged out of the marketplace irrespective of its standing.

With success factors that look outward rather than inward, open banking will need a new set of metrics, for example, the extent of process integration versus other players in the marketplace, seamlessness of database integration, number of partnership agreements, autonomy allowed to partners, and so on.

In closing, open banking will expose banks to a new level of competition, where they fight challenger banks, tech companies, retailers etc. for customers. Incumbents should capitalise on their traditional strengths of customer trust and knowledge of compliance to remain the chosen custodians of customer wealth. The way for banks to succeed in the platform-led marketplace is to adjust to its new reality and their new role as its lead orchestrators.

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