Open banking: what’s in it for traditional banks and fintech startups? Part 2 of 2

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In the first article of this series we analysed what open banking means for fintechs and consumers. In this second and last article, we are going to outline the opportunities for banks in the open banking movement.

To most consumers and experts, the downside to open banking comes in as fraud and security implications over customer data. Even with SCA (strong customer authentication), the perception of a good part of traditional bank clients is that open banking poses a menace to their privacy and data ownership.

Outside of Europe, some of the popular open banking regulations currently in force are Australia Treasury Open Banking and HKMA Open API in Hong Kong. Brazil, Canada, Japan, Malaysia, Mexico and the US are also contemplating open banking regulations to be launched until the end of 2020.

Instead of seeing open banking as a threat, a group of traditional banks are already embracing changes to their service portfolios and leading the way to a better customer experience, cheaper services and data-enriched decision making. On the other hand, another group of banks seems to ignore or not totally understand the changes that are about to come and how to get involved in this new level of business opportunities and client service.

Fintech startups have been regarded as innovation dynamos lately, but they lack the trust that banks have enjoyed from their clients for decades – in some cases even centuries. Because many fintech startups are only looking forward to the roadmap of growing exponentially without truly getting their own revenues before a next investment round, clients are starting to wake up from the hype and looking back at traditional banks as their trusted financial advisers and money custodians.

Banks can profit from a scenario where they have been trusted for a much longer time in comparison with fintechs, by offering niche services where they stand now as safe and secure data holders for their clients. Looking to the near future, it is not difficult to see big banks adopting open banking features and offering services in data aggregation as payment and credit platforms – betting on one central app, especially banks with a big client base.

Services that are today offered only by fintechs are beginning to be offered by big banks. Data aggregation and enrichment is now part of many banking apps and platforms. Providing compelling digital experiences for clients that want to solve their problems where and when they need and the rise of Personal Finance Manager (PFM) and Business Finance Manager (BFM) apps will drive the adoption of open banking application programming interfaces (APIs) in areas like payments, credit and lending.

While open banking will result in the loss of some degree of control by the banks adopting it, the offering of new client propositions combining predictive analytics, artificial intelligence, and credit tends to compensate those banks with a wider range in their profit base.

The balance among information security, privacy, speed and innovation cannot create a terrain where traditional banks and new fintechs don’t have equal conditions to compete and good reasons to cooperate. In Europe, that balance is now favouring new entrants rather than banks, as the latter need to open their client data to fintechs through APIs, but fintechs are not required to do the same to banks.

As APIs remain the favoured method of sharing banking data, the rise of many third-party providers, or TPPs, already consider APIs in their business models and revenue intakes. One very good example is the startup iwoca, based in London: they were the first business lender in Europe to have connections with all of the CMA9 banks in the United Kingdom under Open Banking. Through iwoca’s API, it can read and access the potential borrower’s bank accounts transaction history and after a quick analysis of that track record, it can give the borrower a loan.

As with iwoca, first-mover advantage is there for the taking, open for banks that build or absorb intuitive interfaces and expenses categorisation. The advantage of having the ‘trusted agent’ status must be exploited now, either by developing new services or teaming up with a fintech to halt the loss of business and clients to new entrants and competitors who are adopting fintech to the core.

To be prepared for open banking opportunities and its current and future developments, it’s fundamental that banks focus on customer experience and needs, if they want to consider future growth and value.

For that to happen, a bank also needs to improve technical and operational capabilities – particularly through APIs and analytics – and focus on data security. Customers should feel confident about sharing their data with your bank and feel comfortable sharing their data with their favourite fintech or social media app.

Therefore, it’s imperative to identify and bring to the bank capabilities from partners that can assist in five main areas: identification, compliance, categorisation, design and client support.

  • Identification: for increasing client bases through remote identity confirmation for remote account opening
  • Compliance: through aggregating client data with third parties – thus creating a thorough financial track record for the company or individual
  • Categorisation: through artificial intelligence providers or modules that teach your platform to classify transactions with near 100% accuracy and that is ever evolving with the user feedback
  • Design: customer experience is responsible for much of the migration of clients from traditional banks to fintechs – because fintech apps usually have the action flow and clarity in information, being easy to use.
  • Client Support: last but not least, it is the single most important differentiation a bank needs to leverage for two reasons – (a) traditional banks are known for not having good client support when it comes to situations where the said client is not depositing money and (b) fintechs have usually a better client support where most of the tasks are performed via app without having to even interact with a bank employee. A bank that adopts a client support attitude as if it were a fintech startup can attract more customers and automate most of the predicted and common issues they have, leaving time for the employees to focus on the operation, sales and interacting with clients that have non-standard demands or issues.

The raw reality for banks is only one: their road to profitability resides in a bank’s capability to be a one stop shop for its clients and increasing their client base. By financial inclusion, that is, introducing the unbanked or the ‘badly-banked’ into the formal financial system, open banking improves market opportunities to deliver profitable services. On the other hand, fintech’s APIs are there to assist banks in fulfilling their traditional role of solidity and trusted advisor, but with a speed of light decision-making process and solving ability in the five areas outlined previously: identification, compliance, categorisation, design and client support.

The best strategy for these traditional financial players is that they compensate potential revenue loss by taking the lead and developing their own adaptation to the open banking platform or they can also organise a cooperation program that attracts and links startups to them, like Alior Bank in Poland, Raiffeisenbank in Austria, BBVA in Spain, BNP Paribas in France and Commerzbank in Germany do with their acceleration and innovation programs.

In conclusion, one point is worth noting: there are plenty of opportunities for banks that do their homework – as many of the challenger banks and credit fintech startups haven’t done – after the initial hype. Both fintechs and traditional banks need to be wary of leaving customer service by the wayside – and thus losing clients to newer fintechs who seem to be a better bet against client bad service, maze-like procedures and extra fees hidden everywhere.

Open banking is the contrary of all that: it allows for excellency in client service, easy and intuitive interfaces and procedures, and depending on the service, low or no costs to customers.

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