High street banks must grasp open banking opportunity

Open bank­ing, as it’s called, is designed to give con­sumers more con­trol over their mon­ey – where they put it, how they track it and even what they spend it on.

The new ini­tia­tive means improv­ing cus­tomer ser­vice by open­ing up banks’ APIs (appli­ca­tion pro­gram­ming inter­faces) to third par­ties in the finan­cial tech­nol­o­gy (fin­tech) space. By putting their infor­ma­tion to work, cus­tomers can do any­thing from seek­ing inde­pen­dent finan­cial advice to pay­ing bills and arrang­ing over­drafts through user-friend­ly apps.

These third par­ties are often plat­form busi­ness­es, which pro­vide bet­ter inter­faces and improved user-expe­ri­ence with­out direct access to pri­vate data. They can offer com­ple­men­tary non-bank­ing ser­vices to help peo­ple organ­ise what they do and get more out of their every­day lives, by sync­ing finan­cial and non-finan­cial activ­i­ties effort­less­ly.

The mea­sures are enshrined in the Revised Pay­ment Ser­vices Direc­tive (PSD2), approved by the Euro­pean Par­lia­ment in 2015. The rules apply to the UK before it for­mal­ly leaves the Euro­pean Union and, due to the glob­al nature of bank­ing, they will almost cer­tain­ly apply after­wards as well.

It’s a brave new era for the indus­try. A fresh bank­ing envi­ron­ment is about to take shape and finan­cial insti­tu­tions across Europe are work­ing to com­ply with the EU stan­dards. But accord­ing to Stéphane Berg­er, head of inno­va­tion and dig­i­tal at Sopra Bank­ing Soft­ware, not enough of these insti­tu­tions have grasped the full oppor­tu­ni­ty.

“In recent years, we have seen a huge amount of inno­va­tion in fin­tech com­pa­nies,” he says. “They have the poten­tial to rev­o­lu­tionise per­son­al finance and we have part­nered with them to offer ser­vices to high street banks.

“But the response in the bank­ing sec­tor is mixed. Some insti­tu­tions under­stand that this is a chance to improve cus­tomer rela­tion­ships and dri­ve rev­enue, where­as oth­ers see it as red tape; some­thing they must com­ply with, but not nec­es­sar­i­ly take advan­tage of.”

Insti­tu­tions that hes­i­tate could be in for a shock. Accord­ing to Mr Berg­er, the indus­try has entered a peri­od of flux in which there is more choice and cus­tomers are gain­ing new con­trols.

His­tor­i­cal­ly speak­ing, bank­ing has been a slow-mov­ing sec­tor. For years, young peo­ple would sign up for a stan­dard cur­rent account, per­haps a sav­ings prod­uct too, and then stick with the same provider their whole lives.

Switch­ing banks was time con­sum­ing and peo­ple wor­ried about tak­ing what they per­ceived as a bold step. The risk seemed to out­weigh the reward, but things have changed. Com­pe­ti­tion in the mar­ket­place is hot­ting up with chal­lenger banks and fin­tech com­pa­nies grab­bing mar­ket share.

In the UK, mil­lions of cus­tomers have changed banks in the four years since new rules made the process eas­i­er. With more com­pe­ti­tion and new entrants, this trend is like­ly to increase in the short-term future.

“Some banks under­es­ti­mate how quick­ly indus­tries can change,” explains Mr Berg­er. “They think ‘I’m OK today’ and fail to grasp the speed at which inno­va­tion is hap­pen­ing. Cus­tomers are ask­ing for new ser­vices; the banks can help, or some­one else will.

“There are many prece­dents across indus­try sec­tors in retail with Ama­zon, hos­pi­tal­i­ty with Airbnb, trans­port with Uber and tele­vi­sion with Net­flix. Bank­ing is the new focus and big tech­nol­o­gy brands like Google or Ama­zon could dis­rupt the mar­ket quick­ly because of their sheer scale and cus­tomer base.”

Mr Berg­er cites the exam­ple of Nation­al Aus­tralian Bank – a cus­tomer – which was los­ing mar­ket share and saw the oppor­tu­ni­ty to grow by part­ner­ing with fin­tech com­pa­nies.

In a mat­ter of months, he says, the bank rev­o­lu­tionised its cus­tomer jour­ney with a range of new ser­vices, both finan­cial and non-finan­cial, that pro­vid­ed added val­ue to its exist­ing line of prod­ucts.

Fin­tech is the future and, by cre­at­ing part­ner­ships, banks can ensure they stay rel­e­vant and use­ful

This changed the bank’s image, bring­ing it into the 21^st cen­tu­ry, and pro­vid­ed new rev­enue streams as the bank mon­e­tised its API. Turnover increased as a result and the bank has suc­cess­ful­ly man­aged its rep­u­ta­tion as a tra­di­tion­al yet for­ward-think­ing out­fit.

This was a coup for the bank and good news for cus­tomers too. Accord­ing to Mr Berg­er, it is this kind of inno­va­tion that can set busi­ness­es apart from each oth­er.

Banks are putting a new focus on cus­tomer ser­vice to encour­age loy­al­ty, while giv­ing fresh incen­tives for new accounts. But an increas­ing­ly com­pet­i­tive mar­ket means cus­tomers are demand­ing even more from their providers.

He says: “We have seen a grad­ual change in adver­tis­ing cam­paigns, from ads look­ing to attract new cus­tomers at the begin­ning of their careers to a focus on loy­al­ty among exist­ing account hold­ers. Tra­di­tion­al banks are not dig­i­tal natives, so they have to work hard­er in the face of com­pe­ti­tion from new­er play­ers.”

Banks have tak­en note of the threat from star­tups in the fin­tech space and, for some, the response has been to acquire these fast-grow­ing firms or acquire large stakes in them to mit­i­gate a per­ceived risk. But Mr Berg­er sees this as a short-sight­ed approach because in some cas­es the deals are struck to remove a threat, rather than grab an oppor­tu­ni­ty.

“There are a few exam­ples of banks buy­ing fin­tech star­tups to remove them from the com­pet­i­tive land­scape,” he explains. “The small­er busi­ness gets absorbed into the larg­er business’s infra­struc­ture, but it doesn’t affect change. Inno­va­tion slows down, the strat­e­gy stays the same and the start­up is swal­lowed up.”

This, clear­ly, is not a sus­tain­able approach to main­tain­ing mar­ket posi­tion. But it also miss­es the point of the fin­tech rev­o­lu­tion. Banks must grasp the oppor­tu­ni­ty of part­ner­ing with fin­tech in a mutu­al­ly ben­e­fi­cial way. Banks that ignore it risk being sur­passed by rivals and Sopra Bank­ing Soft­ware helps them avoid being bypassed.

“Banks need to move quick­ly,” says Mr Berg­er. “Fin­tech is the future and, by cre­at­ing part­ner­ships, banks can ensure they stay rel­e­vant and use­ful. It’s a huge oppor­tu­ni­ty for the mar­ket.

“Open bank­ing may be a tough tran­si­tion, but the rewards will be sig­nif­i­cant. Inno­va­tion is hap­pen­ing right now, so it’s vital that banks get on board.”

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