- Open Banking will shake up the traditional banking ecosystem, but bring with it many possibilities.
- Through innovation, banks can provide exciting new products and services and amplify their reach.
- In the longer term, financial institutions will need to explore new business models to remain competitive.
If I had a dollar for every new banking app or new bank announced – including in Australia – I’d need a bank to put it all in. We’re in the midst of exciting times and changes due to the introduction of Open Banking, spanning from customers and regulators, to apps and platforms, not to mention the way we think about application program interfaces (APIs) and open data.
In our last article on Open Banking we examined this period of change that banks in Australia are entering. The introduction of the Consumer Data Right and a change in consumer expectations mean banks will need to reconsider their role in society in order to compete.
But it’s also a period of incredible opportunity for incumbent banks. While the ‘traditional’ model of banking might no longer be acceptable, new ways of thinking about banking means that innovation, and success, is right around the corner.
Banks in this new era will need to not only rethink how they will meet new compliance regulations, but how they deliver their everyday services and how these evolve. Instead of owning the entire value chain, banks have new choices around whether they unbundle their services alongside their data, allowing customers the freedom to choose third parties for particular links in the chain.
There are many different products (and services) enabled by this unbundling. To compete in an open world, banks will need to consider diversifying to differentiate themselves:
New services or brands
Firstly, services can be created that access customer data from other banks, extending those provided by the incumbent and aiding in customer retention. A customer could access a dashboard, for instance, where all their financial information – from other institutions, tax, insurance or superannuation – can be found in the one place. Fintech examples of open banking connecting to incumbent accounts include the ING-owned Yolt ‘Unthink Money’ service1 (following the Open Banking Implementation Entity (OBIE) framework).2 Yolt connects its customers to RBS Group bank brands via a Open Banking API and is slowly rolling out across the UK. Incumbent examples of new brands for open banking include HSBC’s Connected Money app which allows customers to see all their participating accounts in the one app.3
By placing their services into another party’s ecosystem, financial institutions gain access to new audiences, for example, payment services into accounting packages such as Quicken or Xero, or foreign exchange services via Alibaba. MeetCleo is an AI-driven service that users can connect with via Facebook Messenger or their home assistant to check their account balances for them.4 Partnering with others to provide bundled products and services could also be an option, allowing an incumbent bank to grow market share and revenue. New audiences could be obtained from banks providing white label brands or spin-offs for niche audiences – for instance, millennials, seniors or the gig economy.
Those wanting to provide a utility to enable other services, such as identity or payslip verification, or credit score confirmation, can play over the top, connecting other parties’ platforms via existing APIs and capabilities. In this way, banks can increase their relevance, and revenue, such as PayPal’s integration as a payment gateway, or BBVA’s API sandbox. Increasingly, with regulator focus on responsible lending in Australia, banks will reach out to other sources for information such as income verification.
And of course banks can branch out, so to speak, building their own platforms to enable third parties to connect and innovate. For example, by using their technical expertise to provide an API market or ‘factory’. N26, one of Europe’s first digital only banks, has offered its platform to connect third parties, with TransferWise, for international payment and insurance provision.5 Other concepts include Deutsche Bank’s Digital Factory where third parties can innovate, or an app store where others can can play in the incumbent’s existing brand ecosystem, such as was done by Crédit Agricole.
A range of other ideas around Open Banking services can be found on open banking sites such as The Open Bank Project.6
While new products and services will help banks to create strategies to try and differentiate themselves in the short term, in the longer term, more dramatic change may be called for in order to remain commercially buoyant.
As the PwC thought leadership piece, Demystifing Open Banking, details, “unbundling and recombining bank services creates the possibility of entirely new business models.” With the capabilities that traditional banks currently hold, they are well placed to specialise in the areas they have a particular affinity with, an advantageous and potentially necessary move when faced with greater competition. We see there being four main models of business that banks will inevitably need to consider as pathways to take.
Banks with a strong customer relationship focus could look to becoming customer experience masters, providing expertise in understanding consumers. These players could be the orchestrators of value, bundling services to deliver digitally. Equally, these banks should focus on identifying unmet customer needs and identifying opportunities for new products and services, such as those outlined above.
Those banks with a distinct technological or operational capability – such as security, risk or technology – may instead seek to leverage their local foothold globally or super-regionally and become infrastructure, or utilities masters, by selling their knowledge and services to other players. In moving to an open banking ecosystem, there will be a need for banks to meet the new requirements – whether technical or privacy-related, and those that can (and do so first) will hold valuable knowledge of interest to others.
Banks with more of a product focus, on the other hand, while still able to seek scale, should investigate using other players as distributors for offerings. For example, via insurance companies or digital payment providers. To prepare for the future, these providers should be focusing on partnerships and opportunities for collaboration in the present.
There will, we believe, be some incumbent banks who will be able to remain jacks-of-all-trades for a long time to come, providing integrated services and influencing an end-to-end value chain. Particularly for the larger, well-established platers, we expect they will be able to ‘lean toward’ new possibilities in the years to come. For others, especially smaller banks, it will be necessary to migrate to different models.
Regardless of where financial institutions fall on the spectrum of digital readiness and willingness to ‘open up’, it’s clear that business as usual is not an option for banks. It’s a dramatic change, but it’s one that makes sense and will benefit customers.
Banks “will have to make strategic decisions about capabilities, customers needs, required investments, and, as always the hardest, about the opportunities they will chose to leave for someone else,” the Demystifying report points out.
The ecosystem change won’t result in a survival of the fittest style fight to the end, but will likely require adaptation, with different players finding their new niches in which to thrive. While it won’t change overnight, it should, nonetheless, be designed into experiences conceptually already available now.