Whilst the disruption of open banking is well underway, in reality only a tiny proportion of banking services have opened up and already it’s taking its toll on the traditional banking model, writes Bryn Barlow
Solaris Bank defines banking-as-a-service as “licensed banks that enable other businesses to integrate digital banking and payment services directly into their own products”.
This ability for non-banking organisations to create their own banking products is arguably the biggest shake-up in the industry’s history since digitisation. It’s great for consumers, of course.
They’re seeing more exciting services from a broader range of providers than ever before. It’s not so great for the traditional banks, for whom the implications in terms of risk management, and even their fundamental operating model, are huge.
The impact is growing fast. Even though PSD2 is still deliberately limited in scope, in the UK we saw 138 million API calls in October 2019, and 110 regulated Third-Party Providers (TPPs) are already registered. An early braking mechanism lies in how complicated it remains for consumers to give data permission.
The challenges and risks are becoming clearer.
- Confidentiality and data access. If you’re allowing a TPP to execute banking services on your behalf, you’re still responsible for protecting users’ confidential information. The challenge is how to control what data is outsourced to which TPP, to know what they’re doing with that data, and to be able to prove to regulators that you have that control. This is leading to a wave of technology solutions and processes that help banks keep track.
- There’s a real risk that banks will lose touch with the end customer completely. In the past, people were loyal to their banks – although in truth that loyalty was probably more to do with how painful the process was than out of any real love for the bank. Today, we know that people coming into banking in their late teens or early 20s would be prepared to move banks for a better deal and a better experience.
For some banks, though, that won’t matter – they’ll be happy to become invisible in the transaction. BBVA, for example, has a deal with US retailer Target, where a customer takes out a loan that appears to them to be with Target, but which is provided by BBVA. BBVA’s Chief Executive, Javier Rodriguez Soler, has gone on record saying he’s “comfortable with the bank being invisible in that transaction”. The key, he says, is in the customer getting a good deal, not where that deal comes from.
- Loss of value. Many banks can’t move fast enough to keep up with the challengers, to offer the experiences that consumers want. This will get worse as other financial products, such as mortgages and loans, open up to TPPs.
- Loss of revenue. This is a very real threat. New, challenger banks are emerging, and they do things harder, faster, better. We can look to other economies to see our future. In Germany – which is far more “Open” than the UK, for example, new banks like Fidor and N26 are cleaning up.
But some of the challengers are making regulatory mistakes – they don’t have the same culture of risk aversion that the traditional banks do.
They could do with some ‘old bank thinking’. The stiffest competition will come from the next wave of market entrants – those that have learned the lessons from the early challengers. And look to other markets, too. It takes less than three years to build a billion-dollar business now and disrupt a market (look at Tesla, Uber and Facebook). Will banking follow the same trend?
There’s potential for a positive societal impact here. The traditional banks have never served all areas of society well. If you have a well-paid, regular job, then a mortgage is no problem, for example – but if you’re a contractor, or run a small business, many banks won’t touch you. As the gig economy grows, and more people work for themselves, business will grow for the relevant.
New technology, new thinking
All this is giving rise to a new stack of vendor management tools and techniques that banks can use to manage the ever-growing list of TPPs they’re dealing with, and to track data and mitigate risk.
It’s a start. But legacy banks are changing not just their processes and technologies, but their thinking, too. The idea of opening up to new models of business requires an entrepreneurial mindset that can be hard to activate in a well-established system. Some will succeed. Some will consolidate. Others will simply extend their death (or not).
Ultimately, banks need to find what segment of people they’re relevant to, and give those people what they want. And perhaps this is the biggest shift in thinking of all. That banking should follow what consumers want, not what banks traditionally have offered. If you can do that, you have a bright future.
Bryn Barlow is a Partner at global technology research and advisory firm, ISG (www.isg-one.com).