Prompted by open banking, the big established banks will unlock new waves of fintech innovation by allowing a diverse range of external parties to connect securely with their core banking mechanisms. Or at least, this is the expectation.
While they could develop their own consumer innovations, this isn’t very practical or cost-efficient given the way banks tend to work – ie slowly and conservatively. A report published in September 2018 by Morgan Stanley suggests that only 7% of banks are developing in-house tech solutions, with the majority seeing better value in partnering with and investing in fintech companies.
Without a driver, no one’s going anywhere
As things stand, however, it’s frustratingly and painfully difficult for third parties to connect with the main banks to enable data exchange – the first key step in new app and service innovation. Whether the third party is another bank, payment processor, fintech startup or creative app developer, executing a great idea for a fresh and transformational customer experience is often an uphill struggle.
So, the next step must be for financial institutions to tap into the right expertise and employ innovative technology, so they can start to smooth the path of progress and stake their claim to any proceeds.
Consumers, of course, stand to benefit from a plethora of new services and experiences enabled by open banking – including the chance to view all of their financial affairs in one place, more intuitive and practical ways to manage money as they go, and more convenient ways of paying for goods and services.
But those providing the services have plenty to gain, too – not to mention the banks themselves if they play their cards right. Retailers, non-financial service providers, fintechs/app developers and other banks have an opportunity to impress customers and drive new revenue streams, if they can connect.
Say you’re a big-brand high-street retailer that wants to bring the bricks and mortar experience more into line with online retail, where a broader range of easy payment options help to reduce purchaser friction and boost sales. Adding those same options in-store would bring greater consistency to the customer experience.
Or perhaps you’re an app developer with a great idea for transforming accounting and invoicing to help businesses manage their cash flow, accelerating credit checks and access to borrowing options for the property market or transforming foreign currency exchange.
Alternatively, you might be a challenger bank looking to offer new services that aggregate financial information, sweep funds or fill a gap in the market for social banking.
Open banking dictates that all of this should be possible. But today this is easier said than done. For underlying data and funds to flow easily, continuously, securely, and reliably, banks must proactively co-operate – consciously providing a way to let third parties plug in to, and exchange live data with their core systems.
Lessons from the telecoms industry
Banks don’t really have a choice in this – not if they want to survive and prosper. Although it might seem counterintuitive to banks to facilitate new services beyond their immediate control and balance sheets, standing in the way of external creativity carries the greater risk. Future success will depend on their willingness to co-operate – even with the apparent challengers to their core activities.
In the telecoms industry, traditional providers of phonelines and broadband connections have found that possessively guarding those revenue streams without looking for ways to diversify into value-added services has curbed their ability to grow profitably. ‘Over the top’ service providers (Netflix, gaming companies, conferencing platforms) were tapping into the real money – and deeper customer relationships – while the traditional telcos saw their core business become commoditized.
To avoid falling into the same trap, banks need to accept that basic account services – which even supermarkets offer now – are merely a customer-acquisition tool. The real chance to shine, retain customers and grow healthy income streams is to provide chargeable value-added experiences that bring customers closer and encourage them to do more with their money.
Nor do these services need to be purely financial in nature. They could include ID verification services, so customers can quickly proceed with transactions such as hiring a car or registering with a home rental marketplace. Services that add value for businesses and consumers and cement client loyalty.
In the UK, Barclays has been diversifying into digital advice services. Initially, the goal was to support customers in the transition to online and mobile banking, and keep consumers safe in their digital transactions. But the bank is gradually broadening its Digital Eagle/Eagle Labs ‘community’ activities to include education and strategic collaborations around artificial intelligence.
However all of this eventually plays out, banks can’t afford not to take the lead. Fortunately, this should be relatively easy now that tools and services exist to take care of the technical detail. Which means that banks can concentrate on building libraries of third-party tools and shoring up their position within the next generation of financial services.