Why banks should build on their heritage in the Open Banking era

Since PSD2 became effective on 13 January 2018, banks are legally required to open up their customers’ data to third parties – such as challenger banks and digital offerings. The intention is to develop new digital offerings as well as increase competition and make it easier for customers to switch bank accounts: despite more consumers deciding to move their money to a different bank in 2018 compared to last year, still only 3% of the UK population switch their accounts, according to the Competition and Markets Authority (CMA).

As the majority of us simply are not enticed by monetary incentives, Open Banking aims to encourage bank account switching by enabling third parties to enter the market and create products and services that are real and “better” alternatives to existing accounts. This means that banks are now competing with culturally nimble start-ups which are not restricted by technological heritage. With a slim tech set-up, it is often easier for a fintech company to create a compelling banking offering than it is for an established bank.

Demand for these new banking products and services is often driven by consumer sentiment and expectations: A recent survey showed that 58% of US banking customers consider moving their money to accounts offered by non-banks such as Amazon, Google or Walmart – which have no or only little experience in offering banking products. But because they touch their customers lives in many areas already and make it so easy to do business with them, consumers seem to think they can replicate this for financial services. Their big advantage is the positive perception of their brands.

Banks need to build and publish APIs to make data available to third parties, requiring them to re-define their operating models. They need technology to extract necessary data from a message transported into a bank, and to determine what steps are required to complete the request.

Despite these challenges, the opportunities for banks are also beginning to emerge. According to a report from PWC, banks can add value by “harvesting and analysing real consumer data to offer innovative products and services.” As PSD2 is limited to a focused set of accounts and services, there will be others which could be opened to APIs where banks could charge for access. Also, existing and new start-ups that want to work with consumer account and transactional data need to register with their local regulator. As banks already have this certification, they can now build on this by offering new services - before their smaller competitors can get out of the starting blocks.

Finally, customers will remain in charge of their own data, and they expect their bank to handle their data safely and securely. From the perspective of trust, established banks are much better positioned to make customers feel confident compared to start-ups which may have great ideas, but no clear track record of delivering what they promise.

So here we are. Open Banking has arrived, and whilst it poses challenges for banks to stay competitive, it has also created opportunities for them to bring their heritage into the modern world. Creativity, a thorough understanding of customers’ needs and, most importantly, trust are essential for banks to not only survive, but also thrive. It remains to be seen how the market will evolve, but it certainly is a good time for banks to build on their strengths and prove that they are not mere utilities.