With Open Banking here to stay, it is fast becoming a top priority for financial services organisations that want to stay competitive in terms of innovation and customer offerings. However, many banks are still uncertain over how to tackle the practical aspects that need to be considered as they prepare to seize the opportunities presented to them within the Open Banking* environment.
Firstly, it is key for any organisation looking to move into this new area, that they gain the right level of knowledge and insight in order to understand the challenges and the potential opportunities of embracing open banking. It may sound obvious, but firms need to do their research, do their market scanning, get a good sense of the current state, and seek out best practice, the best experience and also secure an able senior sponsor. If firms do all of these things well, they will already be on the right path.
However, when we talk about open banking there is not yet a great deal of historical knowledge for companies to draw upon to make it an easy process to adopt, since it is a relatively new concept. While there is this a desire to seek out best practices to serve the customer better and win new business, the search is on for lighthouse projects and experience. One place we can look at for such experience is within the European banking market, with the likes of BBVA and Fidor Bank.
The three key building blocks of open banking
Given that this is a new space for most banks that requires agility, speed and bank-wide cooperation, firms need to embrace more of an entrepreneurial spirit than before, in order to exploit the true value of the open banking revolution. We have determined three key factors that are essential for financial services firms as they begin to construct their open banking strategies. In order of importance, these are: culture, technology and monetisation.
Culture: open banking is new and requires new ways of thinking, and new ways of working. Organisations need to develop so that they are both technically and business enabled, as doing either in isolation will not provide the right answer. This means to achieve open banking success, teams will become hybrids; they will be more agile and have a mix of skills and people. This hybrid approach is one which cuts across the more traditional financial services methodology in terms of its siloed organisational structure. This siloed structure is a problem that most banks are aware of and are currently working through and the challenge it presents should not be underestimated.
Technology: is of course a significant enabler in creating a successful Open Banking strategy, with the most advanced firms creating a new channel for the development community through their own ecosystems. Financial services organisations must ensure that that developers want to work with them, particularly in those areas where there are potentially alternative API services they can consume from competitors. Firms also need to focus on how ‘portals’ operate for their developer community, how the gateway manages them, and how it supports the monetisation of access, ensuring they are able to rapidly spin-up sandboxes to support the developer community.
Monetisation: all firms must live with the financial implications of the decisions they make, and anyone embarking on an open banking strategy must consider the implications of how it will enhance and drive value for their organisation. We believe there are three different aspects to be considered when evaluating how open banking value is measured.
- Internal value: This is a measure that can be used to demonstrate the value created from open banking, since often there is a cost reduction benefit in terms of creating more agile, leaner and more cost effective development environments, or for example, supporting greater flexibility in terms of migrating data to the Cloud.
- Partnership value: Within open banking, ecosystems are a hot topic, as this is from where added value is expected to be created, and there is still plenty of opportunity to work with innovative third parties.
- Utility value: In the UK, the regulation from the Competition and Markets Authority (CMA) on Open Banking is defining which set of baseline data is allowed to be exposed through the various APIs that are being developed. Potentially it will be feasible to derive additional revenues from this data, for example, by charging for metadata on top of the baseline data within transaction environments that can add greater insight and value.
What is the future of open banking?
The reality is that Open Banking is more than just a new department pursuing a new opportunity. This topic is more wide-ranging; it is technical, it is infrastructural, it is about agility, it is about those new hybrid teams working together quickly and at pace across the bank, and it is about new partnerships. Open Banking is about creating value in ways that banks have never previously considered, being enabled by technology; utilising APIs as a product that will enable firms to execute in a way that many never before believed was possible.
Initial use cases are likely to revolve around data being used to drive more accuracy in credit scoring, and potentially exposing specific elements of the bank value chain for utility purposes. Going forwards it is likely to grow exponentially as firms begin to expose more data around all of their product sets, which will move from just data to process and service over time.
The core driver for open banking is innovation and the entrepreneurial spirit, which for many is a new and somewhat daunting prospect. However, there really is little choice than to embrace the open banking approach with agility, determination and a realisation that this will break down silos and traditional ways of operating, to the benefit of the bank, and its customers. Those firms who fail to embrace the opportunity risk being left behind not only by their traditional competitors, but also the innovative tech firms who are happy to provide ‘financial looking’ services that were once the sole domain of the bank.
You can also find out more about Open Banking by reading our latest thought leadership paper in full entitled Open Banking – are you ready?
Open Banking (term): in the UK is the Competition and Markets Authority (CMA) initiative to encourage greater transparenitcy and competition in retail banking. The regulator is compelling financial institutions to make their customer data available to external services and providers delivering ‘added value’ (should the customer so desire it).
open banking (concept): is the overall strategy of providing open API access to customer data, products and services, either within a regulatory mandate (PSD2/CMA) or outside of this. Some banks are seizing the opportunity to reinvent their brand, expand their business model and provide attractive new offerings that can compete with other banks and new technology entrants providing financial services.