The top twenty European banks manage a combined total set of assets worth £18.26 trillion, with HSBC leading the charge at £1.84 trillion. This is a vast amount of money for only twenty companies. Traditional banks have almost monopolised the market across the globe for the past hundred years or so.

Recent years have seen successful disruption, as non-traditional financial services (FS) companies are beginning to turn their attention to these very profitable pools and are looking for ways to gain a toehold. For a start, they know each retail or corporate banking customer uses 3 to 5 services on average. Now, these start-ups are about to find out a lot more about every customer.

The banking space is growing with the influx of third parties like Virgin Money, and challenger banks such as Monzo, Atom and Tide using technology to infiltrate the lucrative market. They are all vying for space in the customer wallet.

Now, the size of customer wallet share for traditional banks is shrinking as customers are exposed to more choices. The information on the internet and social media makes customers increasingly aware about how to manage money and able to evaluate the different options available to them. As a result, customers are more willing to move money to different banks and non-banking fintechs with competitive offers. 

Increased competition is great for the customer as services and offers need to be more competitive and tailored to fit them, rather than the one-size-fits-all product of the past. Competitive banks will respond by delivering personalised products and services and larger value propositions. Open Banking is one of the key developments in the financial services industry that is moving towards delivering relevant customer services and larger value propositions.

Open Banking and its impact

The genesis of the Open Banking Revolution can be found in Silicon Valley. Bill Gates, the Founder of Microsoft, said in 1994 “Banking is necessary, banks are not” and ever since then, technology has been the maker or breaker of Financial Services institutions across the world. We have seen the rise of PayPal in the early 2000s challenging the dominance of MasterCard and SWIFT to today where FinTech start-ups are breaking up the traditional bundled offerings from the high street bank and owning specific segments, from remittance to savings, loans to mortgages.

Banks are gearing up for the Open Banking Revolution, which is where banks are opening up their back end systems through Open API technology. The process is being expedited by governing bodies bringing in new regulations. One such regulation is PSD2. Next January, the EU is bringing in PSD2 to force banks to open up their systems to third parties, it is a decisive step towards a more transparent banking world.

With European banks being mandated to open up their customer information to third-party service providers, they are running the risk of losing exclusivity to data and customers. Banks need to act quickly to get the most out of PSD2 for themselves, otherwise they won’t be competitive. Embracing innovations made available through Open Banking is the answer.

These innovations lead to better tracking and monitoring of user patterns, which can be used as a framework to improve future services. Open banking can enable banks to gain a greater customer insight in two ways; through AISPs and Partner Ecosystems.

AISPs

An AISP (Account Information Service Provider) enables customers to gain a full overview of all their accounts, for example credit, debit, joint. Banks could register as AISPs and consolidate customer information from all the parties involved.

This consolidation of customer information, including transaction data, revenue flows and account details, registered AISPs will be able to establish which other third parties their customers are banking with, and additional insights on consumption patterns. Banks could leverage this to cross-sell and up-sell products to these customers and thereby improve customer wallet share.

Partner Ecosystems

Open Banking ecosystems are formed when banks enter into partnerships with various third-party service providers - both financial and non-financial - with the intention of improving their value proposition to the customers. Banks open up their data through secure encrypted platforms to partners, the partners can utilize this to develop and provide various products and services through the bank. Banks could deliver innovative revenue models with the partners and expand their value proposition through a diverse array of products and services as well as co-innovated solutions.

These ecosystems allow banks to cater to the entire customer value chain, thereby making them a value aggregator, consequently opening up a number of new revenue channels for the bank through increased customer wallet share from existing customers and new.

Partner ecosystems enable banks to move from a utility-based service provider to a true value aggregator by providing financial, and possibly lifestyle services, to all customers. This ability to “see” across all partners enables both banks and third parties to not only get insights on who the competitors are, but also how to beat them. Ultimately, competition between banks will make customers happier.