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Open Banking: A Watershed Moment

We have reached a critical juncture in the banking industry. Welcome to the new frontier.

Consumers now perceive the benefits of open banking outweigh the risks, and as a result collaboration between fintechs and incumbent banks is becoming increasingly more important to drive the experiences consumers expect from their primary financial institutions.

Once upon a time, we would see fintechs directly challenging their traditional counterparts. However, with open banking causing shifts in customer preference, incumbents have been forced to think more strategically about their offerings to incorporate new technology, whilst providing the necessary security the customer selected the bank for in the first place.

The European Union's revised Payment Services Directive (PSD2) is revolutionizing the payments industry as EU member states implement it into their national laws. PSD2 changes the "payments value chain" and impacts which business models are profitable. When bank customers can use third-party providers (including social media platforms and messaging apps) to pay bills directly from their bank accounts, banks will begin to lose longstanding interactions with their customers ­– unless the banks can create equally appealing solutions that will satisfy and delight their customer base.

I believe PSD2 and the regulatory move toward open banking is a watershed moment for both fintechs and banks in Europe in that it levels the competitive playing field between both parties. For fintechs, open banking allows access to new and potentially huge opportunities as it allows them to directly access any EU-based bank's data services to build their applications without the need for a direct partnership with the bank. For banks, the PSD2 directive will likely increase competition in the European banking market, which will accelerate the rate at which banks innovate and acquire fintechs in order to stay competitive. There are also indications that open banking will similarly spread across the U.S. and other markets.

The response? A growing trend in the banking industry is the platformification of financial services, mimicking the success of Big Tech (e.g., Amazon, Apple, and others). However, as Ron Shevlin recently pointed out in Forbes, while platform business models are taking over banking there is some confusion about what that means. As he states, "A firm can't pursue a platform strategy and not be 'open' – but it can be 'open' and not pursue a platform strategy. Simply providing a facility to share data doesn't make a company a platform." Platforms specifically refer to plug-and-play IT ecosystems that enable a myriad of providers and consumers to not only connect and interact, but also to create and exchange value. Again, think "Amazon" to visualize the concept.

Inherently, the most effective and efficient manner to execute Platform Banking is via partnerships. As financial institutions acknowledge and move more and more towards Platform Banking, the willingness and new norm of fintech partnership onboarding will become a stronger discipline, and eventually will permeate the entirety of the banking landscape.

Importantly, the consequences of inaction on the part of banks moving to a platform business model are likely to be severe. Business Insider Intelligence estimates that by 2024, £6.5 billion ($8.4 billion) of UK incumbent banks' revenues will be under threat of being scooped up by forward-thinking companies like fintechs and neobanks. However, when executed properly, legacy institutions can use open banking and platform business models to develop new revenue streams, reach more customers, and avoid losing out to neobanks and fintechs.

As the industry becomes more tech-focused, the alliances between banks and fintechs is heading in the right direction. Consumers want the innovations fintech companies offer, but most importantly want reassurance their savings and transactions are completely secure.

Culturally, it's important to remember that everyone should be trying to serve the customer as best they can, and this often means collaborating to develop and deliver optimum solutions for customers. Right now, people still value the trust of banks over new innovations; but attitudes change with time, so this could be a very different story in 10 years' time. "Innovate or die" is more than just a catch phrase in today's tech-savvy world. 

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Comments: (1)

Tim Klemmer
Tim Klemmer - Enterprise Engineering, Inc. - New York 31 October, 2019, 14:48Be the first to give this comment the thumbs up 0 likes

Generally agreed on all points. Missing here is the key first step: have a digital strategy. It’s not enough to say “We want to build a platform” “We want to offer banking-as-a-service”. Without a clear-cut well-developed strategy, there is no platform or service.

Banks need to finely hone a digital strategy, understand what they are digitizing with the ultimate goal of creating new powerful customer experiences. Customer Experience is the new product. Digitizing, omni-channel, mobile banking, and APIs are tools to get there.

Tim Klemmer, Head of Open Banking

www.joineei.com