Engineered with the promise of delivering a financial revolution, the introduction of Open Banking by the Competition and Markets Authority in January last year has yet to deliver anything close to the expected seismic shift.
The concept of Open Banking means that the biggest banks in the UK are compelled to share customers’ data securely (and with their consent) with approved third parties using a set of application programming interfaces (APIs). While a dramatic change in consumer behaviour and hyper-competitive market shift were touted as being a likely outcome in the UK, Open Banking has so far fallen short.
There are many reasons why this is so, one of which is that banks perceive the legislation as a threat, forcing them to share their valuable data – widely recognised as their biggest asset – with fintech rivals and gain little in return. Until banks start to actively promote it, the ‘Open Banking revolution’ will stay firmly on the horizon. However, continuing to neglect Open Banking initiatives means banks are actually missing out on a huge revenue opportunity.
Banks on the backfoot?
Established banks have a clear advantage: they already enjoy the benefits of a healthy customer base, along with the reputation that goes with it. Challenger banks do not boast these attributes, but the lack of legacy does mean they can move far more quickly to exploit opportunities. Even so, fintechs are yet to create that one ‘killer application’ that would give customers a concrete reason to fully migrate to challenger services – but that could be on the horizon.
What the established banks fear is that while the killer application has yet to be developed, Open Banking could give challenger banks the data they need to develop something that would create an aggregated experience superior to the current frictions between different banking apps and services. This would all but freeze traditional banks out of the market, powerless to match the agility of their adversaries. Giving away exceptionally valuable data could be seen as a step in this process, only benefiting fintech rivals and helping them to dominate customer bases. This means banks are – to date – reluctant to actively promote Open Banking.
So, what options do banks have? They can whine about the destruction of their business models at the hands of the legislators and then watch as it slowly erodes – or they can embrace the future and the opportunities that Open Banking presents and rise to the challenge. The application of innovation is open to all, and the art of futurology is not reserved for the fintech challengers.
Banks and fintechs are a better match than many think
If established banks are to emerge triumphant, they are going to need help to develop the services their customers are demanding. They should, therefore, be looking to form partnerships with fintech organisations – rather than seeing them as a threat – that can help deliver new and innovative services to existing customers quickly. Open Banking can be a great opportunity, with those who embrace it looking to expect a 20% increase in revenue. By making their capabilities available for third parties to use, banks can use collaboration to combine the best of both worlds: speed of delivery and access to a much larger customer base than before.
While the reluctance of banks to embrace Open Banking is understandable, it is largely misplaced. Giving away proprietary data is bound to make any company nervous, and they will inevitably treat legislation that encourages the practice as a threat. However, Open Banking and the collaboration it requires of banks and fintechs can open up new revenue streams and help banks future-proof their business, while delivering improved and seamless services to customers.
The article was originally published on Specialist Banking (SB) and is re-posted here by permission.
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