How open banking will reinvent U.S. banking
Its model informs every major market change on a global scale: In January, the Payment Services Directive 2 (PSD2) arrived in Europe, forcing European banks to open up their application program interfaces (APIs) for the first time to fintech and other financial companies. In March, open banking arrived in the United Kingdom thus signaling an inevitable reinvention of banks’ approach to products and even more so to their customers.
Despite the threat banks feel, it’s possible to survive and even thrive in the new environment. But to do so, banks must channel the innovations produced by the new kids on the block—fintech companies—if they want to compete on a similar plain.
Open banking—or open data—necessitates adoption of new rules, a lot of technology and a whole new fintech mindset. In the U.K., some banks moved slowly (is that a surprise?) and missed their initial deadlines to open up their data. Hitherto, U.S. banks have shown similar resistance to getting on board to brave new, uncharted waters.
The hesitancy is easy to understand. In this new world, legacy U.S. banks fear disintermediation. They have everything to lose and nothing to gain, while the rest of the tech-driven business world has nothing to lose and everything to gain. To put a finer point on it, the tech companies stand ready to take over a huge share of customers’ business due to their original approach and the user-friendliness of their apps, combined with the data they will have access to if and when customers begin asking legacy banks to share that data with the new players. How to meet that challenge?
fintechs have charted this boat’s course. Indeed, these upstart-startups first put consumers center stage—not just in banking, but nearly every other market as well, be it retail, insurance or consumer products. And data fuels the transformation they’re effecting.
The U.K.’s move into an open banking rollout includes not only the EU’s PSD2 requirement, but the application of a standardized format as well. It’s surely inevitable the U.S. will adopt some open data regimen sooner rather than later, whether by industry consensus or regulatory directive.
As such, it’s useful to examine some of the benefits the U.K. will start to see. It might seem that the balance of power has shifted away from the bank. But if we understand that adoption benefits begin and end with consumers, it’s possible to map where financial institutions can reinsert themselves into this upended world.
The model resembles what Amazon brought about in retail. By “putting themselves out there,” empowered consumers gain the ability to sit back and let the best value offers, lowest prices and most suitable products come their way. In our industry, this means consumers will soon expect and demand a different approach to getting a mortgage or car loan, or to access funds from their paycheck.
Though legacy financial institutions are threatened on all fronts, rising to the challenge of entering this new environment presents itself with advantages. One key opportunity is for banks to leave behind a model that depends on a few low-risk, high-end customers to generate most of their revenue. Particularly in financial services, we now see that the opposite approach is far more sustainable: having lots of customers and earning small amounts of money from each of them.
This new reality turns the low-risk customer mantra on its head. Legacy banks need to throw out their outmoded weaponry and embrace the new, more inclusive model. In the old model, banks would rely on income streams such as charging big fees for inadvertent customer overdrafts—or benefit from using customer deposits that earned minimal interest. Now consumers expect return value: one of the things tech companies get right.
In the current financial services revolution, the banks that win will be very big, have lots of customers and do as much as they can for them—or risk having them switch institutions. Open data holds the key that opens this door. Reinvention is already under way in the U.K. as a small, competitive market leads consumers to expect the same experience from banking as from Amazon. Comparison thinking—seeing all products and prices in one place—is a real, interesting threat to banking. A nothing-to-lose challenger brand can lure customers with all available offerings, optimizing the user experience as a one-stop shop for everything they might need.
In the U.K., our comparison sites for mortgages and retirement plans have evolved beyond informational. They are breathtakingly simple to use. By opening ourselves up 360 degrees to everything the market offers, and striving for sheer user-friendliness, we’re witnessing a new kind of competition—based on quickly pivoting the customer in a new direction or toward a new product, without making them start over. Can you imagine inputting your address or credit card and account numbers every time you ordered from Amazon. They already know you. They don’t need to know you again from scratch.
So why do banks act like that for every new product?
In moving to a less formal, more app-oriented banking model, everything—from managing retirement savings to home refinancing to auto loans—resides in one place. Add to that an application that provides an easy, non-usurious way to give consumers advances on their paychecks and they’ll actually start to love their bank.
It’s clear to me that focusing on gussying up existing technology won’t help U.S. banks embrace this necessary new mindset. Our biggest imperative is to make sure as many people as possible can access the products and services we provide at the lowest cost. Data-driven technological innovations are desperately needed right now. If we can use them to help and empower the most people—with more choices and products that will help their lives, then the power of open banking will reward the bank that’s open to this concept.
Nick Frankland is managing director of fintech at Legal and General, a U.K.-based financial services and insurance firm managing more than $1.4 trillion in assets. He can be reached at [email protected].
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