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Our great hope: open banking, PSD2 and SCA - challenges and opportunities

One of the great hopes for the fintech community this year is that open banking truly takes off.

The sector is working tirelessly to deliver solutions that let consumers easily, and securely, manage their personal finances and data through one app. 

However, meeting customer expectations and developing solutions is not straightforward. It takes a great amount of hard work and perseverance to truly deliver the open banking dream that we all hope for. 

That is not to say 2020 won’t be noteworthy for the advancement of open banking, because it will. Alongside these various developments, and with PSD2 and SCA firmly in place, European consumers will naturally become familiar with this new frontier of banking.

Sharing data benefits consumers

For consumers the prospect of easily accessing their full financial profile in one place is exciting. It will mean a world where they can compare terms, fees and interest earned on multiple accounts and where information on loans and investments will all literally be in the palm of their hands. In addition consumers will be able to easily budget and accurately examine every expenditure.

What makes this nirvana possible is the fact that various regulations and rules allow data to be shared among banks, third-party service providers and businesses. This includes retailers and other parties selling services, which will lead to a whole new kind of commerce. 

Constructing the right technology infrastructure 

This new open banking model is complex though. It needs the financial sector to not only construct the right technology to facilitate our great ‘hope’, but it also requires effective alliances and incentives. For now, unfortunately, the truth is that banks are ill prepared to offer all that is needed to seamlessly provide this new form of commerce. Equally, consumers are not ready either.

This mismatch between open banking’s potential and the readiness to be able to use, or benefit from it, means there will inevitably be problems. Within this landscape, user experience will become a crucial differentiator. It will differ from bank to bank and by each third-party provider. The differences will be largely driven by what consumers demand and need.

Banking haves and have-nots

Another conceptual challenge that comes with open banking is that it has largely been designed to support the ‘haves’— meaning people who have enough money to benefit from apps that track and manage their finances. These are usually people with access to smartphones, connectivity and a natural familiarity with using technology and apps that deliver the value provided by third-party applications. In contrast, the idea of open banking is somewhat of a non sequitur and a non-starter for the unbanked. So, this aspect needs to be further considered during the year too.

New cyber security risks

As open banking starts to take off, the convenience that comes with sharing data will be accompanied by new cyber security risks, as criminals strive to attack the framework.

Additionally, open banking will put pressure on IT teams. Their expertise will be needed because, while some financial accounts integrate seamlessly through banks with third-party providers, others will fall short and result in consumers not truly benefitting from the so-called benefits of open banking.

Consequently, rather than 2020 being the year when open banking truly flourishes, 2020 is the year that banks, fintech and regulators need to sell consumers on a new model of conducting commerce more effectively — a model that more than likely will get off to a shaky start.

Customer engagement drives open banking

Aside from dealing with the various IT challenges, banks will need to develop sophisticated communication campaigns that explain how open banking works and benefits customers. These communication campaigns must involve two-way dialogue between banks and customers too. Banks need to listen to their customers and ask them what the open banking experience is like for them. What works? What doesn’t? What new services and possibilities would make banking more valuable?  As they do this, banks – and the wider fintech community – will need to practice humility, compassion and customer obsession, because they have some catching up to do.

Including PSD2 effectively within open banking

Alongside open banking sits PSD2. Both aim to provide better security, experiences and more choice to consumers. However, regulators and open banking architects moved ahead without consulting the end-users of their model.

Now consider open banking’s vision of building meaningful online portfolios for consumers through sharing data across banks, businesses and institutions. Sharing data requires consumer consent, which is good and necessary. But public opinion polls reveal that consumers are reluctant to allow their banks to share data. To emphasize this point, Accenture Research found in late 2017 that 69% of consumers in the UK said that they would not share data with third-party service providers. And 53% said they’d never make use of open banking options, instead sticking with the way they’ve always banked.

Convincing consumers 

Over time the public perception and receptiveness towards open banking will naturally change. Already some businesses are making progress toward demonstrating the added convenience open banking can bring. HSBC enables consumers to access all their accounts, including competitors, through an app that they developed. Chip allows people to work out how much they can save each month and automatically deposits savings into an account. Credit Kudos analyses a user’s finances and establishes creditworthiness for financial services. Equally, some firms in the mortgage market generate spending reports, automate loyalty programs and more. 

As more companies build convenience into their business models, people who were closed to the idea of open banking at first might decide to give it a try. Although, at the moment, the idea is hardly being rapidly adopted. The Financial Times recently reported only 25% of people polled by the banking technology firm, Splendid Unlimited, had heard of open banking; and only 20 percent of those said they actually knew what open banking meant.

As you can see, the sector has a big task ahead. Not only does it need to keep up with the technological and regulatory changes that are necessary to successfully deliver open banking; it also needs to educate the all-important consumers and bring them along too. Convincing them of open banking’s benefits will be crucial to this. Targeting early adopters, who have the potential to become advocates, is one approach that has the potential to drive long term adoption. The opportunity to lead the pack is there, the question is who will truly capitalize on the moment. 

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Ed Whitehead

Ed Whitehead

Managing Director

Signifyd

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22 Jan

Location

London

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This post is from a series of posts in the group:

Open Banking

Open Banking regulation, innovation and technology and it's potential to revolutionise the Financial Services Industry.


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