Despite the threat felt by banks from PSD2-driven open banking, it’s possible to survive, even thrive in the new environment.
But in order to do so, banks will have to channel the innovation being accomplished by the new kids on the block—fintech companies—if they are to compete on a similar plain.
Open banking, or open data, is necessitating the adoption of not only a new set of rules and a lot of technology, but a whole new mindset, the fintech mindset. In the U.K., some banks moved slowly and missed their initial deadlines to open up their data. And hitherto, U.S. banks have been similarly resistant to getting on board ship, sailing into new and uncharted waters.
The hesitancy is easy to understand. In this new world, legacy U.S. banks fear disintermediation—they have everything to lose and nothing to gain, while the rest of the tech-driven business world has nothing to lose and everything to gain.
To put a finer point on it, the tech companies stand ready to take over a huge share of customers’ business, due to their innovative approach, the user-friendliness of their apps, and the fact that they have their data—legacy banks could find that customers ask them to share that data with the new players. How can a bank respond to that challenge?
The fintech companies have been charting this boat’s course. Indeed, they were the upstart-startups that first put consumers center stage, not only in banking, but in just about every other market, be it retail, insurance or consumer products. And data is fueling the transformation they’re effecting.
As the U.K. moves into a rollout of open banking that includes not only the EU’s PSD2 requirement for banks to open up their data, but to do so in a standardized format, it is surely inevitable that the U.S. will be adopting some form of open data regimen sooner rather than later, whether by industry consensus or by regulatory directive.
As such, it’s useful to take a look at some of the benefits we will start to see in the U.K. While it would seem that the balance of power has shifted away from the bank, if we understand that the benefits of adoption begin and end with the consumer, it’s possible to map where financial institutions can reinsert themselves into this upended world.
The model is not so very different from what Amazon brought about in retail. By "putting themselves out there," empowered consumers gain the ability to sit back and let the best value offers, the lowest prices, and the most suitable products come their way. In our industry, this means that consumers will soon expect and demand a different approach to getting a mortgage or car loan, or accessing funds from their paycheck.
Though legacy financial institutions are threatened on all fronts, rising to the challenge of becoming part of this new environment presents itself with advantages too. One key opportunity is for banks to move away from a model that depends on a few low-risk, high-end customers generating most of their revenue. Particularly in the world of financial services, we’re now seeing that the opposite approach is far more sustainable—having a lot of customers, and earning small amounts of money from each of them.
This new reality turns the low-risk customer mantra on its head—and legacy banks need to throw out their outmoded weaponry and embrace the new, more inclusive model. In the old model, banks would rely on income streams such as charging big fees for inadvertent customer overdrafts. Or they have benefited from the use of customer deposits earning minimal interest.
What’s happening everywhere is that consumers expect return value. And this is one of the things the tech companies are getting right.
In the current financial services revolution, the banks who win will be very big, have lots of customers and do as much as they can for them—or risk having their customers switch to another bank. Open data is the key that opens this door. Reinvention is already beginning to happen in the U.K., as the small, competitive market there leads consumers to expect the same level of experience from banking as they get from Amazon.
Comparison thinking—seeing all the products and prices in one place—is a real and interesting threat to banking, because a nothing-to-lose challenger brand can present all available offerings to the customer, optimizing the user experience in order to become a one-stop shop for everything they might need.
In the U.K., our comparison sites for mortgages and retirement plans have evolved beyond being informational to being breathtakingly simple to use. The interesting thing is that by opening ourselves up 360 degrees to everything that’s available on the market, and striving for sheer user-friendliness, we’re witnessing the start of a new kind of competition, one based on quickly pivoting the customer in a new direction or toward a new product, without having to start them from the beginning.
Can you imagine having to input your address or credit card number or account number every time you ordered from Amazon? They already know you. They don’t need to know you again from scratch. So why do banks act like that for every new product?
So, in the move to a less formal, more app-oriented banking model, everything, from managing retirement savings to home refinancing to auto loans, is in one place. Add to that an application that provides an easy, non-usurious way to give consumers advances on their paychecks, and customers will actually start loving their bank.
It’s clear to me that staying focused on simply gussying up existing technology is not going to help U.S. banks move into this necessary new mindset. Our biggest imperative is making sure that the products and services we provide are accessible to as many people as possible, at the lowest cost to them.
These data-driven technological innovations are desperately needed right now. If we can use them to help and empower the largest number of people with more choices and more products that will help their lives, the power of open banking will come back to reward the bank that’s open to this concept.