This article, authored by Abe Smith, CEO at Dealflo, first appeared in Finextra.
As the first banks start implementing Open Banking, much of the talk in the industry is about how banks will manage security issues to become compliant. Whilst security is clearly an issue, I don’t believe that it is the biggest issue at hand.
Banks are experts at dealing with security issues and managing risk. The real issue banks face is the possibility that they will become gradually disintermediated from their customers.
Traditional banks have, in some cases, had more than a hundred years to perfect their services. It’s no surprise that for some, change doesn’t come easily. Tradition lies heavily on their shoulders.
The advantage that traditional banks do have though, is trust. While it’s true that few people know their bank manager by name, many still interact with their bank on a regular basis, whether online, in-branch or on the phone – establishing a bond of trust. In a recent Ipsos Mori survey on whether consumers were ready for Open Banking, only 4% of respondents said that they would trust either a ‘well known digital brand’ or ‘new-to-market fintech’ to provide their banking services (Open Banking Global Study, Ipsos Mori).
The threat of disintermediation
Open Banking isn’t going to destroy traditional banking, but it will broaden options for customers, making it significantly easier for them to switch providers or pick and choose the best product or service for their need, regardless of who is behind it. As banks open their APIs to third-party providers (TPPs) they may start to face competition from more user-friendly rivals; whether tech giants Google, Apple, Facebook and Amazon, or other well-known consumer service companies with strong customer-relationships, such as major supermarkets or retailers.
This means that, as well as competing on products, banks will be competing on customer experience. Losing customers to more customer-centric rivals, could lead to a situation in which traditional banks are one step further away from their already fragile relationships with customers.
According to The Wall Street Journal, Amazon is already in talks with major American banks (including JPMorgan Chase) to create a checking account for young people and those without a current account. At the moment, Amazon wants to make banking more accessible, rather than become a bank itself. For example, it also offers retailers Amazon Pay as an alternative payment option for customers to use during check-out.
Who will be the winners of Open Banking?
While many agree that GAFAs and consumer-centric retailers are best at talking to their customers and communicating with them, banks who are open to collaboration will be winners in the new Open Banking landscape. Although they’re hard pushed to compete with the likes of Amazon on customer experience, they have the edge on matters such as data security and privacy, areas where consumers may not be as likely to trust newer entrants. Ipsos Mori found that while people are generally receptive to the idea of Open Banking, two-thirds wold be concerned about how their personal financial data might be used. The recent Cambridge Analytica scandal will no doubt play heavy on the minds of consumers considering whether to trust social media companies with their financial data in the new Open Banking landscape.
For these reasons, it is likely that the winners of Open Banking will likely emerge when traditional banks and customer-centric tech and retail companies collaborate, with all parties playing to their strengths.
The opportunity for banks with Open Banking
It seems then, that for banks willing to embrace change, there are great opportunities under Open Banking. Open Banking, as well as competition from challenger banks, will force traditional banks to become more innovative and to improve the customer experience to retain a relationship with their customers.
Forward thinking banks are looking at areas of their operations where they can improve processes and even delight their customers. One of the successes of challenger banks has been their ability to use technology (as well as simple, approachable copy and user design) to turn previously mundane activities, such as signing up for a new account or ID verification, into customer-delighting experiences met with excitement by the online community. The point at which banks verify a customer’s identity in the customer onboarding process is an area that Tom Blomfield, CEO at Monzo, recommends traditional banks invest in to keep up with challengers, retailers and GAFAs. He cites that technologies such as eSignature and digital identity verification offer the ‘best cost benefits and consumer benefits for banks’.
Achieving onboarding excellence, from both a risk and customer experience stand-point, would also allow banks to set best practice and create standards in digital onboarding for TPPs to follow.
Far from spelling doom for banks, Open Banking presents a significant opportunity: to innovate, and radically transform core services. Those that do, will flourish in this new world.
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