How open is open banking?
The truth is, open banking is simply not as ‘open’ we think. As the initiative turned two this year, and banks opened their systems, industry attention is now turning to how open banking and the services they enable will form the core of entirely new business models and revenue streams. But the ecosystem we find ourselves in has not yet reached its full potential.
If open banking was to deliver on its promise, the opportunity for growth would be enormous; think business-to-customer (B2C) offerings as diverse as digital identity and the support of loan origination, through to providing businesses with enhanced account management functionality and payment services.
Prior to the COVID-19 pandemic, open banking was seen as the catalyst that would trigger the hoped-for transformation among the traditional financial services sector. But 2019 research from Tink, demonstrated that while 15% of traditional banks have built an API, not one was fully meeting the Second Payments Directive (PSD2) requirements. Open banking has been less of a catalyst and more of a “gentle nudge”, with consumer-facing applications being limited to account aggregation services.
While open banking has been less than a success from a B2C perspective, there is even more of an opportunity in business-to-business (B2B) around small and medium-sized enterprises (SMEs) and corporate banking. In this new normal, COVID-19 will inevitably force rapid acceleration of digital transformation across the financial services industry.
An unfulfilled promise?
Fintechs have already recognised the potential of open banking, leaving the incumbents playing catch up. In fact, a recent Aite survey revealed that the majority of traditional institutions acknowledged the need to shift from a transaction-led model to a data-led revenue system but few had made the leap. The problem is, banks still see open banking as an imperative rather than an opportunity. Although they recognise potential, they are reluctant to open their APIs to the fintechs they consider their competition.
The strained relationships in this sector are natural, as traditional banking methods and fintechs jostle for the top spot. But major banks need to foster valuable collaborations with fintech developers if they are to remain competitive. A successful strategy cannot rest on the notion of building a series of interfaces and expecting third parties to come running. A whole new series of developer-focused support services, from API discovery to supporting ideation, testing and deployment must be considered in the strategic future of banking.
Creating the infrastructure to attract talent
Banks’ commitment to developer relations was important but now, is vital. COVID-19 has thrown a spotlight on the banks’ ability to adapt and survive without people visiting branches and without reliance upon manual processes. Those that didn’t truly commit to a digital transformation strategy yesterday, are set to pay the price today. By allowing third party fintechs access to business accounts, payment providers, lenders and equity managers, they will be able to better serve businesses desperate – especially under COVID-19 – to improve operational efficiencies, cut costs and better serve their customers.
But what separates the banks that say they’re open to open banking from the ones who are truly embracing it?
For banks to make this necessary step, they must work hard to make their platforms and sandboxes attractive to third-party developers looking to rapidly prototype new applications. With such rife competition and an ecosystem of continuously evolving platforms, individual organisations must work hard to stand out. To attract much-needed talent, developers need to be treated as a valued customer would be. High standards of service should be upheld, high-quality, rich APIs must be produced and relations must seek to exceed developer expectations in the same way banks should for their traditional clients.
Beyond being welcoming, banks need to make open banking easy for developers. This means documenting as much code as possible and putting everything into an API interface which will allow consistent testing and rebuilding. The availability of testing not only holds benefits for developers who will be able to customise their working processes, but for banks who will gain a more enriched user experience from a tried and tested integration.
Collaborating beyond financial services
Improved developer relations and the shifting of operational systems for collaboration can only take a bank so far. Mining for better data is the essential next step in delivering on open banking’s potential which means collaboration must extend beyond financial services.
Banks can only collect a limited layer of data; the actual owners of the data tend to be the retailers or service providers that customers are purchasing from. If banks were to take the plunge into insurance and retail data, there would be a greater understanding of consumer behaviour, leading to an enhanced service offer. This is why early innovation has focused on personal finance management – once the industry has a grasp on how and with whom those consumers are willing to spend, banking and fintech as we’ve known it can start to make insightful recommendations that take us beyond open banking into open finance.
The door is ajar on open banking
There’s no two ways about it. Banks need to acknowledge the potential of open banking and fully embrace it. Doing so means fostering partnerships that can deliver the creation of new services and therefore new revenues, or else, banks run the risk of losing out to the more innovative challengers.
It is no longer enough to just build platforms, advertise API-integrations and hope for the best. Banks must look to actively partner for success, which means actively harnessing open banking and tapping into fintech developers and retailers who are vital to achieve a truly ‘open’ banking experience.