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Open Banking – The disruption has just begun

October 8, 2018 - Sandhya Radhakrishnan


Today, In India I can log into my PayTm app (a FinTech, which recently transitioned into a bank) to transfer funds from my ICICI account, second largest bank in India, to my account in DBS Digibank (a digital-only bank from DBS ). And all of this in real time.
This is just a precursor of things to come as open banking unfolds the world over. Of course, India with the Unified Payment Interface (UPI) has taken the lead, andthe UK and Europe with the open banking initiative and PSD2 are following fast with broader implementation guidelines scheduled for 2018. In simple terms, open banking empowers consumers to share their banking data with provider of their choice. It also enables one to access their bank account on the app / interface which suits their needs the best.
Clearly, open banking will bring in an era of customer centric solutions.
Personal Financial Management (PFM), in the last 15 odd years didn’t really get the success which it set out to achieve. While it did appeal to audiences in pockets, around the world people have been largely skeptical sharing sensitive information to enable screen scraping of their account information with other banks. With open banking guidelines of API exposure, it is likely to resurrect and finally help people make informed decisions with their finances. Of course, advancements in analytics and artificial intelligence will support this transition. Apart from the ability to aggregate financial information spread across multiple banks easily, customers can also expect more contextual offers as their service providers can now have a broader set of customer data to understand them better. For instance, with better understanding of a customer’s financial status and spending behaviors, the loan pricing could be better tailored for the customer.
While open banking is clearly favorable for customers, traditional banks are unlikely to feel upbeat about it, at least initially, as it takes away the long curated monopolistic access to customer data. Therefore, everywhere open banking is likely to be driven by regulatory changes instead of bank-led initiatives.
As the world moves towards open banking, the incumbent services providers have primarily two options. Be an aggregator of the customer’s financial information and use the data to drive new competitive differentiation, or run the business in a cost-efficient manner and be the provider of low cost products. While open banking is indeed slated to heat up competition with the entry of new players in the market, incumbent banks can ride on their reputation, trust and experience to emerge as primary service providers for their customers. Apart from challenger banks and FinTechs, the most disruptive competition is likely to come from popular digital businesses such as Google, Amazon and Alibaba. These businesses already have significant share of customer’s digital footprint and are likely to pitch hard to present them as primary interface for financial services in the open banking world.
Nevertheless, as an incumbent, one doesn’t have a choice but to embrace open banking and find an attractive spot to remain competitive. Considering it’s yet to be enforced in most countries and even customer adoption may be slow, one indeed has sufficient time to be prepared for this future. From a strategy and investments perspective, the following is recommended:

  • Creating the foundation for open banking by being ready to share customer data as well as accept customer data from other financial institutions. This will require building API-driven open systems, designed for ease of interaction with other financial institutions

  • Enabling appropriate changes in customer apps to access and transact on third party accounts. Here, if one is still running silo-based channels, the task is going to be extremely expensive and time-consuming. This may be a good time to transition towards modern omni-channel solutions which can offer enhanced speed-to-market with open banking.

  • Experiment and learn to generate actionable insights from data. Open banking will break the existing data monopolies. It will make it easy to get access to customer data. However, very few banks have been able to use customer data effectively. In the emerging world, insights-driven contextual advice will be the pivot holding customers and create differentiation.

  • Cost efficacies are critical to preserve and grow market share. If one would like to sell products in the open banking world, cost efficiency is of prime importance. Open banking will make it easier to compare competitive offers, much like one can do today with airfares on an aggregator’s website. This in turn will drive customers towards low cost commodity banking products such as personal loans. Therefore, banks should digitize and automate everything to keep costs low.

  • Above all, customer experience will determine the primary interface. Customers will decide their primary interface basis the overall experience the provider is able to offer. The ease and convenience of use will be key.

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