Open Banking is a catalyst for serious structural change in the financial services industry, that will increase competition, provide more control to consumers and foster a hospitable environment for financial innovations. How can established players take advantage of this change, rather than be disrupted by it?
What is Open Banking
Open Banking in Australia is a government mandate that says banks must make customer data available to third parties via API. The result will be that customers can access transaction history, product information and even acquire new products through third party platforms.
While often mistakenly seen as a technology focused initiative, Open Banking poses a strategic opportunity and challenge to the banks. One of the basic, assumed “rules of the game” for retail banking is that owning the customer relationship means you own customer data, but with Open Banking that is no longer true. Customers will now control and own of their own data, with the freedom to share it with third parties.
What does this mean?
For the first time in a very long time, banks will be forced to re-consider their role in a value chain that is being unbundled and re-formed by smaller, specialist service providers. They will need a clear strategy and vision for what they will be in the future, in a post Open Banking world. Part of that vision will inevitably include redefining their relationship with other financial services providers (particularly within the Fintech community) turning many from competitors into partners.
As the initial mandated milestone for the Big Four approaches (mid 2019) the time to fully understand and respond to this change is running out. Most of the discussion around Open Banking is focusing on the hurdles in order to meet the deadline, and security concerns. While these are both real issues and shouldn’t be taken lightly — there is a distinct silence about the specific opportunities that are enabled by Open Banking, and how banks can use the Open Banking regime to their advantage. Without a clear view of how to seize these opportunities, banks run the risk of being relegated to back-end infrastructure providers, without the ability to realise value from their customer relationships.
For us at Design Farm, we are interested in the new opportunities created by Open Banking — from a business model, operational, product and value-added services perspective. We firmly believe these opportunities for new value exist for both large, established banks as well as new entrants.
Opportunities in Business Model
Open Banking by nature encourages specialisation within the financial services value chain — no longer will customers have a single banking relationship, from which they meet all their financial needs. While many existing institutions will attempt to continue acting as an E2E integrated services provider, the market will see specialists emerge who serve only a specific function across a much larger shared customer pool.
There are four major business models that will begin to be pursued by established institutions and fintech players alike.
• Integrated, E2E Service Provider –This model relies on the institution owning every part of the value chain including infrastructure, interface, products etc. While this will primarily be existing, established banks that have chosen to defend their existing services, there will also be challenger banks in this category who are choosing to compete using a digital only service model.
• Own the Customer Experience — Digital experience players which provide added value to customers through convenience, ease of access, information and insights, and finance management tools. These players provide the front-end and brand, providing the best products from other organisations.
• Offer best in class products — Whether it be insurance, loans, transaction accounts or credit products, financial institutions can rely on their deep expertise across a certain product range and sell these products through a range of non-owned channels.
• Provide banking infrastructure — Excel through technical and operational excellence, providing back-end core banking and payments infrastructure, without worrying about end customer relationship management.
Example — UBank is a great example of our first business model. The UBank proposition is designed for digital natives who don’t want to access (or pay) for bank branches. However, when you peek under the hood, UBank is heavily reliant on the infrastructure of its parent company, NAB.
Opportunities in Operations
• Risk Profiling — The credit assessment process for most institutions is fairly one dimensional, reliant on demographic data and credit score. Open Banking will allow personal financial data to be utilised to perform more accurate risk profiling — not only reducing risk but potentially providing access to a new customer pool without an extensive credit history.
• KYC/AML Processes — With the ability to publish personal data for the purposes of ID verification, banks have an opportunity to significantly speed up and simplify compliance with regulatory requirements. While this not only has an impact on cost and efficiency, it also enables a much more fluid customer experience where applications can be submitted and verified in real-time.
• Advisory & Private Banking — Being able to access customer data across all accounts, assets and products presents an opportunity for streamlining of advisory and private banking services. Intelligent and automated advisory capabilities could support a fully digital robo-advisory offering, or simply empower your frontline advisors to provide consistent advice. In either case, these kinds of data-driven services can support compliance, enhance quality of advice and reduce costs associated with remediation.
Example — Companies like Plaid and Tink are interesting examples of the transformation taking place in this space. While being purely an API provider may become a commoditised business model with complete standardisation of banking systems and formats, these businesses have both begun to move into selling insights on top of the data to which they are providing access. Plaid currently focuses more on the “plumbing” of the financial services industry but is beginning to bake in things like identify verification services on top of its basic API access. Tink offers access to data enrichment and personal finance management insights to help both banks and Fintech’s alike easily provide tailored financial insights, advice and product offers. In the future we will begin to see more API based services that offer some of the traditional operational functions around risk, compliance and decision-making in an automated way.
Opportunities in Product
While we have witnessed the optimisation of traditional banking and insurance products over the past 20 years, the rise of the Fintech industry has brought the first wave of truly new product innovations in financial services. Our financial services sector is still meeting the same core customer needs (transacting, securing credit, saving/investing and managing risk), however there are far more choices about how customers choose to meet that need. While many product innovations are already reaching maturity as stand-alone offerings by niche players, Open Banking will allow these new products to become available and accessible through existing interactions with major financial institutions.
• Credit — The ability to easily partner and white-label products from other vendors means that banks can easily expand their portfolio to include new forms of credit products, such as short-term loans, point of purchase loans and P2P loans. For FinTech’s creating new loans products, it means easily being able to distribute the products they’ve created through established customer channels.
• Saving/Investing — With the enhanced, secure access to customer data provided by open banking, and the maturity of robo-advisory services there is an opportunity for banks to offer competitive digital investment services alongside the traditional wealth management services. The challenge for banks will be to weave a customer journey where savings and investing are two sides of the same coin, and customers are educated about what they can do with their financial assets. Existing institutions can choose to either build their own capability, or partner with Fintech’s to provide new digital advisory and investment services. In either case, there is an opportunity to begin building relationships with younger customers who have fewer assets.
• Payments — Open banking enables a range of improvements to payments that we are already starting to see enter the mainstream. Customers should expect mobile banking platforms to be providing options for easy transferring invisible bank account retrieval, as well as the ability to securely integrate payments with social and messaging platforms.
• Insurance — Open banking creates a range of possibilities for insurance products by providing secure access to personal financial data, allowing providers to improve the accuracy of underwriting and the relevancy of their product offerings. Not only can insurance providers be more accurate in their risk assessment, but they can also help assess customers insurance needs on a one-to-one basis.
Example — Imagine an insurance provider that automatically estimated the value of your home and contents policy based on your purchases? Or a health policy that automatically identified spending at eligible health practices as a claim?
Opportunities in Value Added Services
The unprecedented access to both customer and product data enforced through Open Banking protocols also creates opportunities for value-added services that sit across many financial services providers. Unlike banking products which make their revenue through fees and other traditional banking mechanisms, value-added services create or expand revenue streams by providing additional value to customers through enhanced experience, access, information or tools. These services do not actually provide any financial services in the traditional sense, but rather give customers of financial services providers more control and understanding of their finances.
Overseas, we have already seen the two major types of value-added services that are going to change the way customers experience financial services.
• Aggregation — There are opportunities for banks and third-party products alike to create value for customers through financial asset aggregation and insight. Existing services that help manage spending, bills and budgeting can combine with a holistic financial overview of products from a range of different service providers.
• Comparison and Recommendations — The requirement of Open Banking to publish product information will bring about unparalleled access to product comparison, allowing customers to move from navigating a chaos of products and providers, to comparing relevant products side by side. In addition, the ability to use personal financial data enables the ability to provide a layer of recommendation on these products so that customers not only get the best deal, but the product that is right for them.
• Third Party Financial Management — Although the Australian Open Banking plan current only includes “read” rather than “write” access to personal financial data, were Australia to eventually follow in the footsteps of the UK there may be the ability to initiate payments outside of bank owned properties. The ability to initiate payments and transactions in 3rd party applications allows finances to be managed on behalf of the customer — not just in financial focused applications but in use cases like travel, health, energy etc.
Example — HSBC Connected Money is a great example of a financial product aggregator. It allows customers to connect financial products from other providers into their app and provides a layer of visibility for a customer’s entire portfolio of financial assets and obligations. While it is owned by a bank, it is non-discriminatory in terms of the other assets that can be connected. On the flip side, Yolt is a great example of a stand-alone product that provides Open Banking powered aggregation services.
The Open Banking regime has opened up new opportunities and possibilities in a way like no other legislative change over the past couple decades. However for traditional integrated banks, many of these opportunities will require a hunger and ambition to do something radically new.
While the discourse around Open Banking currently focuses on security concerns and the sheer enormity of the task itself, particular the financial services sector should be considering the cost of doing nothing, which in this case is doing the bare minimum required to be compliant.
If banks choose to protect their integrated E2E model, they run the risk of coming up against significant competitive pressures. This may work for a time, but in order to truly thrive in a post Open Banking world, they will have to eventually transition to playing a different role — potentially one with a business model very different to the net interest margin model of today.
At Design Farm, we have the skills and ambition to help your business seize these opportunities. Learn more about us here, and get in touch!