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.
Who Will Succeed?
There are three fundamental competencies that will let banks succeed in the “ecosystem banking” world.
One, companies can design a compelling user experience: a product that relies on hyper-personalization to address an important need, at a fair price and at the right time, reached through a great user interface, backed by reliable customer support, and offered by a brand customers are drawn to and trust. Open banking enables UX improvements for enterprise customers as well as retail customers.
Two, companies can aggregate and enrich data to generate customer insights. Rich data sets will be the “coin of the realm” in ecosystem banking, because it is through data that companies will be able to individualize and optimize their products, manage fraud, reduce friction, and create a first-rate customer experience. From a retail perspective, personal finance management has become a particularly attractive area for API-based innovation in the UK open banking system, as API-enabled aggregation of internal data allows banks to cross-sell more effectively, create new value streams and realize increased ROI through automation. In the Canadian context, aggregating and enriching customer data—including data from other banks—will allow banks to build competitive, personalized product offerings and new value propositions.
Third, companies can create “must have” infrastructure. Consumer-facing brands get a lot of the attention, but infrastructure plays can be massive winners. Partners such as Plaid have succeeded by re-inventing infrastructure or re-designing who can connect to existing infrastructure and re-defining what they can accomplish through those connections. We recently utilized fintech partner, Codat to extract receivables and payables data from accounting systems to help a bank’s SME customers better manage their cashflow and also offer products like overdraft protection. Even if banks are unable to make infrastructure plays on their own, they will be able to create valuable infrastructure and drive customer retention by transforming themselves via fintech and software partners that can help them re-envision how they use and monetize their data.
Compliance as an Enabler of Monetization
Banks are often apprehensive about new open banking regulation, and for good reason. Succeeding in this new ecosystem requires significant shifts in mindset and even organizational structure as digital transformation impacts employee roles across the bank. To remain competitive, banks will need to adopt the agile, “fail fast” DNA of technology startups. As they accelerate their technology adoption, banks will need to inject new homegrown capabilities (often rewiring current capabilities to meet future needs rather than starting from scratch) while also driving innovation with partners. Finally, they will need to make sure these strategies cohere into competitive business models.
As they explore new business models, banks must frame compliance with open banking regulations as an enabler of new monetization opportunities. Compliance should be viewed not as the end of the ecosystem banking journey, but the beginning. In a recent engagement with a SME-focused UK bank, compliance became an occasion for a much more holistic digital transformation. The bank leveraged open banking compliance as an opportunity to build new digital capabilities (like biometric account access) and improve loan origination speed through automation. They are working with partners and third parties in the open banking ecosystem to expand internationally and drive monetization outside of core banking services. They are also finding that an API-driven ecosystem creates new opportunities to build business services and monetize data with business support services partners. All of this effort was harmonized with a cloud platform that delivers new cost-saving efficiencies.
Anmol Grover – Global Practice Head, Open Banking
Anmol is an open banking and open finance SME with more than 20 years of experience working with global and regional banking and financial services clients. He is responsible for delivering open banking compliance and monetisation programs to clients as well as developing Wipro’s open banking product suite. As an expert on open banking, he is often sourced to give talks and provide expertise at public forums, industry gatherings and client interactions.
Luke Sykora – Content Writer, iDEAS