Smart Banks Gain Ground in the Open Banking Arms Race

Posted by Raiha Buchanan on 4/25/18 7:38 PM
Raiha Buchanan
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Incumbent banks might view the arrival of Open Banking as a threat since it makes things much easier for their newer, more nimble rivals. But there are significant advantages if they think and act positively.

GDPR Open Banking OpportunityImage: Olga DeLawrence

The Challenges for Incumbent Banks

Providing access to their customer data has, understandably, worried many of the incumbent banks:

  • They could lose the role of primary bank relationship if customers gradually move their products to different providers. Potentially they could be left with nothing or become a utility provider, receiving the customer's salary but transferring it quickly to the customers other banking providers.
  • Loss of revenue/market share due to competitive offerings.
  • Inability to attract or retain young customers. Typically, this group have had their expectations set by daily doses of social media and mobile apps and don’t like the rigid command and control structure of incumbent banks. They want choice and don’t want barriers that prevent them from exercising it.
  • Reduced customer interaction and hence reduced opportunities for cross-selling.

Opportunities for Incumbent Banks

Open Banking isn’t the first disruptive challenge incumbents have had to resolve. Online banking (which encouraged many new entrants) and the banking crisis in 2008 are examples, and in each case, the banks changed and survived.

While many people dwell on the challenges, there are just as many opportunities:

  • Innovate and develop new, differentiated, products.
  • Acquire new customers.
  • Exploit Open Banking APIs to source new data to improve products.
  • Monetise services, e.g., offer KYC for new entrants.

In a survey of Executives at ten large banks, 65% of respondents view Open Banking as an opportunity not threat, and 50% see it as a way of differentiating from traditional competitors.

Banks that comply with the regulation, but then carry on much as before and focus on proprietary products will be the losers. They need to compete, not just comply, and they need to make choices.

Open Banking OpportunityImage: Matteo Catanese

Six Ways to Seize Open Banking Opportunities:

  1.    Source, combine and take advantage of data

Incumbents have the significant edge of large customer bases capable of storing enormous quantities of data stretching across the customers banking history. If they combine it with new API sourced data, they have an asset which is the envy of challenger banks.

By using powerful big data tools and techniques, they can develop insights as a springboard for new products and improved customer engagement.

  1.    Develop new products

Banks need to put a simple question at the heart of their product development planning: what can we do differently with Open Banking? And re-shape their product strategy around the answers.

The customer journey for financial services products in the post-PSD2 digital world will be different and needs a different response. Innovation and moving from a focus on individual product profitability to revenue sourced from a broader range of products and channels will be increasingly important.

New products enabled by Open Banking and informed by data analysis could include peer-to-peer payment services, multi-account management and robo-advisors for financial planning.

Instantor Banks Open bankingImage: Floriane Vita

  1.    Build a partnership mentality

Recognise they need to operate in an ecosystem with new participants and new dynamics. FinTechs aren’t the enemy but a source of ideas and innovative technology that can help accelerate product development and delivery.

Proactively seek partnerships and opportunities for working together and develop a culture of interdependence. Speed and agility is the prize.

  1.    Emphasise security and trust as critical brand values

Open data increases the opportunities for fraud, security failures and the loss of personal data. The GDPR regulation means regulators will be paying close attention to any problems and can apply heavy fines. 

Incumbents have established processes, tools and lengthy practical experience for managing any of these issues, while most new entrants aren’t at the same level of maturity. It’s not an invitation for scaremongering, but it’s worth pointing out the difference to customers.

  1.    Make quick decisions about technology

Incumbents need to adapt or replace their legacy architectures with modular architectures that are API friendly and can be changed easily to accommodate new products and partners.

API Standards are still emerging and will need to be acted on quickly once they have been formalised. New skills might be required, in which case recruitment activities should be in hand, or existing abilities re-purposed through a training program.

Mobile is everything, especially for younger customers. Face to face banking interactions are plummeting and online products, mainly accessed through portable devices, is taking their place. So, mobile apps need to be continually developed and enhanced.

  1.    Leadership and organisational culture needs to change

Cultural change is required if these actions are to be successful. Bold, firm and long-term leadership needs to step forward.

The current organisational structure will need to be reviewed and likely changed. Some industry commentators advocate one part of the bank focuses on traditional banking, the other on the fast-paced innovation of Open Banking. That’s a lot easier to say than do, but the principle is sound.

Leaders will need to attract new talent, and ways of working across the organisation will need to change.

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Open Banking will require a degree of transformational change for incumbent banks, but the benefits can be realised with proper planning, firm leadership and faultless execution. As Open Banking takes full effect, smart banks will reconsider redesigning some of the core processes from a strategy perspective and even embrace some aspects as new opportunities.