Nigel Wilson
Nigel Wilson Aug 20, 2018

How banks and fintechs can converge in a new season of open banking

Radical changes in data privacy and sharing are happening in Europe and the U.K.—and by now, most Americans have been swamped with notices from their financial institutions and anyone else having access to their data that “our privacy policies have been updated.” This comes, of course, in the wake of the ratification of the General Data Protection Regulation (GDPR) in Europe.

But even prior to that, open banking laws had come into force in the U.K. and Europe. This is bound to have a profound knock-on effect on U.S. banks and financial institutions: In short, open banking means open data.

In exchange for access to their data, consumers have the chance to benefit from more competitive and transparent deals and services. On the face of it, fintechs may realize the most gain from this opening up of consumer data. But traditional financial institutions that figure out how to navigate in the new environment also stand to benefit—albeit with the assumption that they’ll have to evolve new business models, as well as products and services they may not have even conceived yet. 

And taking a cue from the U.K.’s requirement that banks open up their data in a standardized format, the U.S. will inevitably need to adopt some form of open data regimen—sooner rather than later—whether by industry consensus uniting as a consortium or regulatory directive, to answer to their customers’ needs.

Notwithstanding the ambiguity that shrouds proposals around a fintech national banking charter (or perhaps even because of it), it’s more important than ever for banks to grasp the emerging reality of the fintechs’ significance and take steps to hypercharge their digitization speed. While this could take many forms, we see the need for some form of convergence with the newer companies that have driven these changes.

Fintech startups have developed new norms around what consumers have come to expect. The leap, to suggest an analogy, is like going from an old flip phone with its stone-tablet-like texting capabilities to the 360-degree experience and addictive properties of a smartphone. Once we know the difference, who can live without their smartphone?

Small fintech companies have claimed the hearts and minds of consumers as they rapidly move toward claiming their dollars. Is there a way for traditional banks to reach a consensus over data sharing when their entire business model has been predicated on keeping customers’ information safe and private, in exchange for their loyalty? An entirely new mindset has already come in to replace that model.

There is some good news for banks that face this brave new world with open eyes and heads out of the sand. A fintech-banking convergence means banks will not only reclaim a table spot as these financial transaction forms take over but can also retain their strengths—the stable cash flow and long-range planning that have made the sector indispensable to free trade for centuries.  But to keep hold of these assets, they will have to change.

With open banking as the foundation, embracing or converging with fintech will allow traditional banks to do increased good for a broader number of people. The digital mindset presents the opportunity for banks to gain a much broader set of customers, albeit making less profit on each one. This is a move away from reliance on a few affluent, low-risk customers to generate most of their revenue.  The “small-amounts-from-more-customers” model is what fintechs offer and what banks need to adopt in order to remain relevant: a consumer-facing, democratic and yes, data-driven model of financial engagement.

Consumers now expect value from their banking interactions as from all other commercial transactions. This means banks must shift their focus from their traditional revenue streams—for example, high overdraft fees—to the new need for consumer value and comparison. That’s something smaller fintech companies are getting right.

Open data holds the key that opens the door to growth and customer loyalty in this new system. Quite simply, banks that succeed will make it their business to have as many customers as possible and develop as-yet unimagined services and products that keep them happy—otherwise these customers, armed with data and comparison sites, will take their business elsewhere.

There may be open banking lessons that U.S. banks can apply as they watch their foreign counterparts move towards this new mindset by fully embracing digital technologies and business models. For example, this type of reinvention is already showing up in the U.K. as the small, competitive market there leads consumers to expect the same level of frictionless experience from banking as they do when buying something from Amazon.

Recently I’ve written that one way the banking industry could support fintechs is by investing in second- and third-tier city infrastructure, thereby creating new hubs in affordable geographies. As an extension of this idea, I believe traditional financial institutions face an ultimatum of sorts: to fully embrace digital economies and the fintech revolution, or risk irrelevance and fading gradually out of the consumer’s field of vision.

As with all change, benefits as well as initial discomfort lie ahead—but for banks and fintechs the sooner this happens, the better. The industry’s embrace of open banking, in the final analysis, depends first and foremost on open minds.

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Nigel Wilson was appointed group chief executive of Legal & General in 2012 having joined as group chief financial officer in 2009.

If you enjoyed this artilce, check out BAI's recent white paper: GDPR: The General Data Protection Regulation.

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