Regulation reinforced

PSD2 came into full effect in September 2019, while UK’s Open Banking equivalent is set to celebrate its second birthday in January. The effect thus far however has been fairly minimal, with technology research company, Forrester, describing their failure to deliver “the competition, customer choice, or level playing field between banks and innovators that they set out to introduce. No one is happy.”

Forrester predicts that 2020 will see regulators step in to “mop up the spills” of open banking legislation, such as the lack of technical specifications and their allowing for wide interpretation of the standards.

“The fragmented environment will require a reset”, Forrester says, which it believes will come in the form of reinforcing legislation that better favours new entrants to the market.

Indian consultancy, Infosys, also singles out the ongoing development of open banking, with financial services partner, Jayakumar Venkataraman, predicting, “2020 will see the rise of the ecosystem approach.”

Venkataraman sees the “API economy” rapidly growing, with banks bringing together multiple partners such as shipping companies, local chambers of commerce and insurance companies, orchestrating new products and richer service propositions for their customers.

Capgemini develops this further with its prediction of moving from open banking to “Open X”, where banks extensively leverage data to provide personalised products in collaboration with incumbent and non-traditional players.

Capgemini’s 2020 “Top Trends in Retail Banking” report describes Open X as the “inevitable future”, as banks reap the benefits of sharing data in a standardised and secure manner to participate in a shared marketplace and expand their customer reach.

Competition and collaboration

The expansion of open banking initiatives will take place against a backdrop of increased competition in the industry, with Forrester highlighting the savings market as the key battleground.

New entrants will draw customers with better savings products as incumbents will continue to struggle to offer competitive rates. Not limited to digital challengers like Monzo and Revolut, Forrester predicts that Apple will extend its partnership with Goldman Sachs to offer a digital deposit account. We could even see Starbucks entering the market owing to the $1.6bn currently stored on pre-paid cards and in its app.

This points toward a necessity to collaborate with both intra- and extra-banking industry partners, with Laura Crozier, senior director of industry solutions at Software AG, citing the work of Alibaba and Tencent, who own Alipay and WeChat respectively.

“They are leading the world in financial services and payments products and have discovered the secret sauce for creating value out of data: cloud for scalability and AI for perishable insights.

“Separately, neither big tech nor banks have this capability. But together, they do - and the West is taking note. Witness the recent announcement of the Citi and Google partnership.”

Crozier predicts that banks will accelerate their move to the cloud in the year ahead, to better harness the power of data in creating added value for their customers.

Nordea Bank’s head of transaction banking, Erik Zingmark, sees the entry of Big Tech as the prime accelerator to innovation in financial services.

While fintechs will continue to grow and partner with incumbents, once Big Tech starts to move, he says, “the implications are much greater. The punching power of the Big Techs makes me think we will see more of them coming closer to the financial industry faster than earlier expected.

“By partnering with other banks, the Big Techs are able to achieve their objectives without having to carry a banking license.”

Consumer and commercial crossover

One example of this already in the offing is JPMorgan’s partnership with Amazon and Airbnb to offer their customers virtual bank accounts.

Commentators predict a blurring of the line between retail and business banking thanks to the gig economy, which the Bureau of Labour Statistics estimates to account for more than 35% of the US workforce and predicts to rise to 43% in 2020.

Financial technology vendor, NCR, believes that gig workers and small businesses will seek relevant tools from banks and will not hesitate to look elsewhere if they are not on offer. Non-bank competitors are wise to this and are aggressively marketing to these prospective customers, with Uber Money being one example.

“Traditional institutions must quickly deliver the digitally optimized experience small business owners and gig workers want with the robust functionality they need, or risk losing these relationships,” says the firm.

Forrester however believes any warning of this nature will fall on deaf ears.

“Incumbents will miss out on the opportunity to serve the gig economy segment, with fintechs launching innovative new services in this area,” its report states.

“For example, Portify offers gig workers a view of their cash flow, emergency funding, and tax budgeting tools via an app. Qwil provides flat-fee-based working capital for gig workers.”

Breaking new ground

Capgemini’s report also predicts banks seeking additional sources of revenue, such as the largely uncharted unsecured consumer lending market through digital channels. This is an area that banks have started to explore in response to the demands from millennials of instant financing and digital ease of access.

At present, they are turning to non-bank players and fintechs, meaning traditional banks who feel threatened by these competitors will seek a share of this market to remain relevant and avoid risking these customers looking elsewhere for their other financial needs.

Capgemini points to numerous incumbents already making headway in this space, such as Goldman Sachs’ Marcus and HSBC using Amount, a tech platform from Avant which processes and lends to consumers digitally.

With a concerted move towards unsecured personal lending prioritising speed and convenience, banks will also need to reinvent their operating structures, using data analytics to ensure collaboration between credit risk and fraud detection teams.

As with multiple areas of banking, commentators believe success in the immediate future lies in dismantling legacy, siloed business structures and demanding different departments to collaborate to deliver the joint-up approach required.