There have been a lot of mixed messages around open banking - with some arguing that banks risk becoming marginalised as a result of the regulation, reduced to little more than wholesale providers, sitting behind a layer of agile fintechs with all the digital prowess providing services to the end customer.
But at the same time, more encouraging views focus on the idea that banks won’t allow themselves to become ‘just dumb balance sheets’ and that the regulation presents an opportunity for them to improve their customer experience, collaborating with best-of-breed fintechs and of course, other banks.
No matter what side of the fence you sit on, the question remains: how can banks and fintechs work together to make innovation a norm; bring about more enhanced customer experiences, and help to bring about more agile banking structures? The answer is in the name: by being more open with one another, and collaborating.
Next stop: collaboration
It’s never been easier for different organisations, such as banks and fintechs, to work together to build a product that is greater than the sum of its parts. APIs (application programming interfaces) have become the most obvious and practical means to do this.
By allowing the integration of various third-party services into banks’ offerings to create new products or enhance existing ones, APIs can help banks attract new customers while also strengthening their existing relationships.
Today, we can already see this happening in a number of ways. Corporate finance directors, for example, can easily make international payments from within an enterprise resource planning system or accounts package they already use.
In the future, it could be possible to have an AI-enabled executive virtual assistant that identifies a better mortgage or savings account available than the one you are currently using and automatically transfer you onto it.
But we are getting ahead of ourselves (for now). By requiring banks to open up their customer data to third parties through secured APIs, banks and fintech firms will be better able to take advantage of each other’s strengths.
For fintechs this would mean access to an extensive customer base; for banks, they would be able to enjoy the ability to innovate. This will allow both to deliver a bigger and better customer experience than either could on their own. Open banking will be beneficial for all involved, leading to a more innovative and collaborative financial market.
Will consumers even want it?
To use Henry Ford as an example, if he had asked consumers what they wanted, he would have been focused on creating faster horses. With that in mind, this isn’t a question that can be asked in the abstract.
If you ask consumers whether they would give Amazon access to their bank account to see their spending patterns and authorise them to make payments on their behalf, the answer would most likely be ‘no’ (especially post Cambridge Analytica...!). But if you offered them a product that enabled Amazon to offer further discounts on purchases and made life easier for them, chances are the answer would be ‘yes’.
Getting customers to say ‘yes’ is half the battle: there is currently a clear tension between cybersecurity responsibilities and the drive to boost efficiency. Regulators are rightly adding extra steps into transactions in order to protect data more effectively, but that adds friction, which essentially drives up costs.
For example, you wouldn’t put all your valuables on your back seat and then leave the car unlocked in the hope that someone will just respect your property enough not to take it. In the same vein, as you’d expect, many of consumers’ biggest worries around open banking are about the potential misuse or loss of customer data.
If we had asked people just ten years ago whether they would trust an app on their phone to do their online banking, arrange a date for them or order a meal, the likely response would have been ‘what’s an app?’. This is because most people are apathetic to things they can’t see or touch, like risk. Which means there could be a quicker uptake once open banking’s applications have actually been integrated into the consumer experience and people are aware of its benefits. It’s all about how it is presented. So with HSBC’s news that they will be releasing an open banking app soon, the pickup could soon take off.
People also worry that third-parties involved won’t have the same cybersecurity or compliance standards as banks. But, while banks are very focused on security, they are slower to innovate, which is why open banking is such an opportunity for consumers.
By letting the bank become a repository for the money and certain parts of the data, and enabling fintechs to take the lead on the analysis and processing of the data, we can supercharge innovation while ensuring that fiduciary responsibilities are also met.
And lest we forget: to participate in the open banking revolution as a fintech you also have to be highly regulated with robust data protection processes.
Changing the world
Open banking’s success will depend on the ability to effectively integrate its applications into the customer experience. In banking currently, people are limited to generic one-size-fits all products and services, and might need multiple accounts to access different services depending on their needs.
Once customers realise the benefits of being able to improve this experience through customised banking options, attitudes to open banking will change and adoption will logically follow.
As Raymond Lowey, an industrial designer once said: ‘the American automobile has changed the habits of every member of modern society.’ And in the same way, that is how open banking will change the world.