To win in an open banking landscape, banks need to proactively define their role in the financial ecosystem to create new value for customers.
In the early days of banking, banks did it all. They opened accounts, took deposits, provided loans, and processed checks and other payments.
In the latter half of the 20th century, as electronic payments grew and automation took hold, banks became integrators. To the customer, banking still meant banks. But behind the scenes, banks brought together a variety of third-party products, services, and capabilities—including payment processors, card networks, ATM networks, core banking systems, fraud tools, and mobile check deposit solutions—to create customer-facing offerings.
We are now in the early days of another fundamental evolution: the rise of open banking. This transformational shift takes banks from integrators to banks as part of ecosystem driven business models. The ramifications of this change are profound, and every bank (and service provider to banks) should be thinking about what this new reality will look like and how they plan to succeed in it.
What Is Open Banking?
Open banking is a landscape in which banks give third-party providers access to customer data via APIs (with customer consent). The exact drivers of this transformation differ across geographies. In the UK, for example, the transformation began with a top-down effort by policymakers to increase competition in a highly concentrated banking market. In the US, by contrast, the transformation has been organic and market-driven, as fintech startups and brands working independently and with partner/sponsor banks to break down and re-assemble the banking landscape. Open banking is continuing to gain traction around the world, and Canada will be one of the next countries to adopt open banking regulation, after its regulator and industry working group converges on the exact open banking standards.
Whether regulation-driven or market-led, open banking presents similar opportunities and drawbacks for banks. On the plus side, banks are able to increase their footprint of services and customer relationships without taking on expensive development and technology work. They can benefit from targeted innovations pioneered by smaller, more agile companies without themselves investing in a host of unproven strategies and building capabilities in niche emerging technologies.
There is also a massive potential downside to open banking from the perspective of traditional banks. If banks do not proactively set a strategy within the open banking ecosystem, they could fall in the trap of becoming utilities, which means they will be limited to offering only fundamental undifferentiated products or services like taking deposits, providing access to payment networks and issuing loans.
At least for the foreseeable future, banks will have a legal monopoly on taking deposits and accessing payment networks, and they will have meaningful advantages in several other areas (including their cost of funds, ability to lend on a nationwide basis and access to backup sources of liquidity).
However, as utilities, they would be increasingly stuck in a low-risk, low-reward position, providing services to popular customer-facing apps that own the customer experience and hold most of the pricing power. As utilities, banks’ profitability would be highly dependent on their ability to achieve scale and minimize costs. In addition, like other utilities, they might find themselves dependent on government licenses to define their market and provide what little market power they have.
A Win for Consumers Demands New Approaches from Banks
For consumers, open banking is often a significant win.
Peer-to-peer payment applications like Venmo and ApplePay don’t just replace old tools like cash and checks with faster, easier, real-time payment options. They also add a social media component and connect the payment to an event (like a dinner) or an emotion (such as appreciating a friend). However, they also insert a non-bank front and center into the experience.
The same goes for ride sharing: It’s all in the app and there is no separate experience for the payment, and no bank to be seen as drivers receive instant payments, earn cash back on purchases and even buy per-mile insurance.
Financial services are part of a larger experience, and the role of banks is not immediately obvious to customers.
Banks are not likely to reverse the open banking transformation. The question is: How fully will open platforms allow for reciprocal value creation between platform players and ecosystem players? As with other platforms (credit card systems, telephone networks), value increases with breadth, depth and interconnectedness – and success becomes increasingly challenging for those who decide to go it alone. From the perspective of banks, “ecosystem banking” is perhaps a more useful concept than “open banking,” if we refer to open banking as a regulation, they need to advantageously position themselves among a host of other players. In many cases, their collaborators will also be their potential competitors, and banks need to carve out the right footprint to grow and protect their share of this evolving market.