Biggest threats or greater opportunities? How open banking is affecting financial institutions
New technologies are upsetting the financial services sector regardless of whether Wall Street is ready or not, as they have already done in many other markets. From peer-to-peer lending and Robo advisory to bitcoins and crowdfunding, fintech is establishing new business models in the world of money, and there is no way you can go back.
Although initially open banking was intended to increase competition by cutting the link between transaction accounts and payments, we are moving away from the initial goal, giving customers the opportunity to control how their bank details are shared and used. And it is precisely here that cognitive distortion arises: the traditional banks often consider the era of Big Data more a threat than an opportunity because banks traditionally look at the custody and protection of their customers’ data as a responsibility, more a maintenance role than an asset to be commercialized. For this reason, the biggest steps forward have been made by non-bank startups, although there is no lack of initiative from historical operators in financial services. Banks need to move quickly if they wish to retain the business of customers who have been spoilt by tech giants like Amazon, Uber, and PayPal. In addition, they have to offer the ease and personalization that customers have grown accustomed to. Due to their complex and bureaucratic structure, traditional Banks will have it harder to implement those changes when compared to slim and dynamic “online-banks” — namely neobanks. However, there are inherent risks in data sharing that require development and governance processes underlying technical connections.
Incubators and venture capitalists have shown interest in newcomers looking to merge non-financial data together with transactions records. This will certainly lead to a bank control decrease, which on the other hand will be able to provide more and new services, being able to take advantage of predictive analysis, artificial intelligence and financing to improve the offers of consumers and businesses. However, the status of “trusted agent” (i.e. a privileged position due to the reputation of the institutions themselves) held by incumbents will remain a competitive advantage not for long if they do not go further: an example is Monzo which provides an intuitive interface, value-added services (such as the budget) and expense categorizations.
Classic institutions lack speed, innovation and genuine consumer attention in both capital and infrastructure management. For this reason, more and more fintech companies have managed to gain market share: they compete by serving the consumer without being tied to a legacy of operations and organizational rules and structures.
The current change in the banking sector does not allow any organization to walk alone. The value of establishing the right strategic partnerships has never been greater. With partners it is necessary to create perfect integration both at system and product level, generating previously impossible synergies. In addition, data and suitable technologies will be added in order to elaborate insights and consumer needs in order to identify the most suitable product/service. Banks and credit unions can provide significantly improved results by combining traditional and non-traditional data.
AliPay and WeChat can be considered almost open financial models that allow improved e-commerce through their platforms: they offer a more fluid personalized experience and a complete suite of payment options, including peer-to-peer. The potential benefits of open banking are substantial: better customer experience, new revenue streams and a sustainable service model for traditionally disadvantaged markets. In addition to famous players like Mint, examples include alternative underwriters ranging from the Lending Club in the United States to the M-Shwari in Africa to Lenddo in the Philippines, and to payment disrupters such as Stripe and Braintree.
The development of the ecosystem has varied considerably due to regulatory divergences. The more programmatic approach has been adopted in the European Union, through PSD2. Australia, India, the United Kingdom and Singapore, just to mention the most relevant, have experienced significant growth in the fintech sector in recent years to the point that they have developed process control structures, albeit in ways that are not always similar. In this way, countries can provide financial APIs to help current banks comply and compete.
On the other side of the coin, regulators in the United States have adopted a different stance towards fintech: they have yet to develop a global regulatory policy and have largely protected incumbents. Banks have a low-cost source of capital in the form of customer deposits: they pay very little interest compared to new open banks. Despite this, the SEC has started to set up groups like FinHub, where regulators, innovators, developers and entrepreneurs come together to learn from each other: paving the way for data sharing protocols similar to PSD2.
Analyzing the current open banking market trends, we can state that most players are focusing on three business models.
· Front-end providers: focus on delivering a superior customer experience and access to a range of bank-owned and third-party services, in particular through aggregation and product targeting.
· Product specialists: focus on becoming increasingly agile at designing and tweaking products to meet the needs of individuals.
· Infrastructure giants: focus on economies of scale and potential operating efficiencies, essentially providing the balance sheet and payments infrastructure that keeps the system operating.
Open Banking represents a significant opportunity to innovate and transform basic services. Once some strong proposals are successful, consumers will come on board and Open Banking will take off properly. It is clear that banks, in order to take full advantage of the benefits, must adopt the new regulations and consider them as an opportunity rather than a threat. The application of these new technologies can improve the capacities of all banks, in order to offer better services to technology-savvy consumers.
What are the biggest threats for the banking sector in 2020 and beyond? Complacency and reluctance to change the way the banking system has been done for decades.
Authors:
Sources:
https://www.bankinghub.eu/themen/open-banking-far-more-than-psd2#:~:text=Open%20Banking%20refers%20to%20the,data%2C%20subject%20to%20customer%20consent.&text=Open%20Banking%20is%20therefore%20part,customers'%20control%20over%20their%20data.
https://www.virtusa.com/perspective/open-banking-and-digital-transformation-trends-facts-and-figures/
https://home.kpmg/xx/en/home/insights/2019/05/open-banking-for-greater-customer-value-fs.html
https://www.mckinsey.com/industries/financial-services/our-insights/data-sharing-and-open-banking
https://www.forbes.com/sites/vishalmarria/2018/12/10/how-open-banking-has-changed-financial-services-so-far/#7c5bbd853e07
https://www.accenture.com/_acnmedia/pdf-77/accenture-brave-new-world-open-banking.pdf
