Searching for the killer app: Is open banking a threat or an opportunity?
April 24, 2018
The advent of open banking is often presented as a zero-sum game, in which what’s good for challengers and FinTechs must inevitably be bad for more established banks. Some even claim that Bill Gates’ prediction that banking will continue to be necessary, but banks won’t, might finally come true.
As ever, the list of winners and losers from all this disruption is likely to be far less clear cut. As the panel discussions at PwC’s European Bank Restructuring Conference highlighted, open banking presents as many opportunities as threats for mainstream banks, and boards are actively looking at how to capitalise. Yet, business as usual it won’t be, as the Open Banking and PSD2 regulations provide a catalyst and accelerator for shifts in business model and market structures.
So, what’s changing? Consumers can already choose from an array of apps that enable them to aggregate all their different accounts and track outgoings to help them budget and save. Other FinTech-developed offerings range from bitcoin wallets to zero fee currency exchange. The problem is that the data used by the aggregators has come from ‘screen-scraping’ – in other words passing account details and passwords to a third-party so they can mine the data and then feed this into their algorithms.
Under PSD2, the financial data that banks once held now belongs to the customer, allowing them to share it with whoever they think can make best use of it on their behalf. Crucially, PSD2 also replaces screen-scraping with a more secure and regulated common application programming interface (API). With third parties now able to access banks’ customer data and infrastructure, the stage is thus set for open banking, with implications for card providers and credit agencies, as well as banks.
How much of a threat to their prized customer relationships are banks likely to face as a result? We will shortly be publishing research that shows that more than three-quarters of consumers are actually quite happy with the relationship with their bank. The same goes for 60% of SMEs. Is this because they’re genuinely satisfied with what’s on offer or do they have low expectations? Either way, these findings don’t point to a big appetite for switching, for now at least. The challenges of breaking into the retail bank market are compounded by wariness among many customers about handing over data and, within the UK specifically, a reluctance to pay for bank services.
However, competition is set to increase. Many banks are partnering with FinTechs to help differentiate their offering and improve their appeal to digital natives. Modular APIs allow banks to quickly and easily link up with multiple partners to offer a range of new services, just as large online retailers have been able to do in their ‘marketplaces’. As offerings are augmented and competition increases, retail banking is going to be less of a utility business and more like other sectors facing constant pressure to innovate, differentiate or die. Moreover, even if FinTechs don’t have the brand strength and resources to challenge incumbents head on, banks could still find themselves cut out of the loop by mobile phone companies and other well-funded entrants.
As our study reveals, the most valuable revenue opportunities from open banking focus on the SME market. We’re already seeing tie-ups between banks and accounting software providers. The resulting surge in data and analysis would pave the way for a big increase in customised products and fee-based advisory services.
Many banks are looking to M&A to help position their businesses for open banking. This includes acquisition of payment platforms and FinTechs as banks look to gain access to key talent as well as technology.
The strongest banks will have competitive capabilities right along the value chain. The advantages of M&A include replacing any weak links in the chain and securing the required technological capabilities at the necessary speed – by the time they’ve been developed in-house, the market may well have moved on. The prize is being able serve customers more effectively at less cost. The challenges include integrating these capabilities to ensure seamless front to back service.
Further deal openings include acquisition from tech and mobile giants. The modular nature of open banking and its regulation would allow these businesses to move into selective areas of the banking market, without necessarily having to acquire a banking licence.
As offerings become more differentiated, open banking could eventually provide a further spur for consolidation as stronger and more capable banks acquire weaker competitors.
For open banking to be truly transformational it still needs a killer app – an innovation that brings unmissable benefits and captures the public imagination. While this has yet to materialise, game-changers are emerging – the panel discussions cited examples ranging from frictionless mortgage origination to the ability to rent a flat without the need for a deposit or bank references. And as open banking fires up innovation, the killer app may be around the corner.
So, far from being a zero-sum game, open banking has the potential to reinvigorate growth within the banking market and create a bigger cake for all to share. To capitalise, banks need to find ways to differentiate their offering, use data more effectively and bring innovations to market quicker. This in turn demands a shift in mindset. As a panellist said: “The winners and losers won’t be marked out by size or whether they’re entrants or established players, but whether they get it.”
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