Open banking regulations: What do big banks need to do to disrupt the disruptors?

Old models are crumbling while new models, powered by emergent technology, are replacing them. Uber, Airbnb, Deliveroo – each provides a recognizable service in a new way. Financial Services are not immune.

The UK’s Open Banking legislation came into force on January 13, 2018. This was the second phase of a ‘managed rollout’ which aims to facilitate innovation, competition, and efficiency in banking. Open Banking puts everything up for grabs - including savings and transactional accounts, mortgages, personal loans, debt collection, debit cards, and credit cards.

The new regulations in the UK mirror a global shift. Across the world, customers are demanding flexibility and accessibility in all services and the democratization of service comes a potential hit to the bottom line. A recent report by McKinsey titled A Brave New World for Global Banking estimates that banks in Europe and the UK currently have $35 billion (31%) of profits at risk because of digitization. The report reads: "A more severe digital disruption could further cut their profits from $110 billion today to $50 billion in 2020, and reduce returns on equity in half to one to two percent by 2020, even after some mitigation efforts.

" With a tidal wave of disruptors about to flood the market, how do big banks go about disrupting themselves?

In the UK, only 3% of personal banking customers switch accounts in any given year, according to research by the Competition and Markets Authority (CMI). With an influx of new, more flexible, and accessible ways for customers to handle money, that looks set to increase.

Recent reports from PwC back this up. They found “39% of bank customers would share their financial data with other banks and third parties (such as Amazon, Apple, Tesco and so on) if in return they received benefits such as an overall view of their accounts in a single app.” Rather than the bank being their go-to for transactions, loans, repayments, or debt recovery, almost half of the UK populace would go elsewhere - if it made their lives easier.

So how have banks reacted thus far? Generally, badly. Natwest has been on the attack, ramping up security fears among consumers. Meanwhile, six big high-street banks, including Barclays and HSBC, managed to miss their deadlines for opening up their APIs. These missed deadlines send a message that openness is not top of the banks’ priorities, encouraging customers to start looking elsewhere.

US banks have been similarly reticent. America has had open banking regulations for years - although they are not mandated - only a few large banks, such as Wells Fargo and JPMorgan Chase, have made bilateral agreements with data aggregators and accounting software providers. A small number of banks — Capital One, BBVA Compass, Silicon Valley Bank, Citi, for instance — have embraced open banking and offer APIs to almost anyone. The rest have mostly opted out.

This hasn’t stopped a steady influx of startups entering the US fintech space, however. “There are fewer and fewer moats banks have to protect their legacy business,” Lex Sokolin, global director of fintech strategy at Autonomous Research told American Banker. “Those moats are regulatory access and capture, internal data on clients and client references, and customer acquisition — banks have spent millions on customer acquisition and it will take the SoFis [Social Finance] many more millions to scale up to that.”

In the US, these moats are shrinking because new tech startups - designed around AI - can infer your financial position anyway, without data from the banks. In the UK, regulators are filling the moats with concrete - allowing easy access for disruptors.

Either way, banks closing ranks are fighting the wrong fight.

When Uber launched in Europe, there were protests in London, France, Spain, Italy, and more - the established organizations rallying against the incumbent. But Uber ultimately succeeds because it gives the public what they want: convenience.

In banking, the established corporates have held customer data closely, and slowly developed services around their existing systems rather than adopting a customer-focused approach. Internet and Mobile banking have been successful, but compare that to the mobile-first approach of a financial startup-like Monzo and the sluggishness of the old systems becomes apparent.

As CEO Tom Blomfield told The Guardian: “[The Monzo experience] is much more emotional. A lot of young people feel anxious and stressed about money. They lose track of their spending, with some payments taking three or four days to appear, so they exceed their overdraft. What Monzo does is auto-budget for you. It tells you how much you’re spending, say, on eating out. It’s really easy to send and receive money – so if four of you are in a restaurant it splits the bill instantly.”

The account had captured the imagination of hundreds of thousands of customers (and counting). Why? It understands it is their needs entirely. The virtual ‘pots’ are a particularly nice touch - ring-fenced savings for particular purposes, presented in language the public uses and understands.

Monzo is just the tip of the banking-as-a-platform (BaaP) iceberg. Once APIs are open across the board, customers can have a current account with one provider, and bolt-on other financial services (such as insurance policy, mortgage, investments, ISAs, etc.) through other providers, all under one user interface of their choosing.  

Anne Boden, of mobile-only Starling Bank, told the BBC customers will be able to see exactly what they bought for lunch each day in an app that could analyze the calorie levels, and then cross-check it with how much exercise that person is doing. These little innovations, enabled by open banking, can connect banks with customers on a much deeper level.

Internationally, a number of revolutions showcase the changes in the wider banking landscape. In East Africa, new underwriting models like M-Shwari, Tala, and Branch are emerging because of access to other data sources like mobile phone data. Chinese businesses like WeChat and AliPay have grown unstoppably thanks to the increased availability of customer financial data.

To keep up, banks have to swim with the tide, using their existing customer base to vastly improve the way they work.

Open Banking changes in the UK are headed by the Competition and Markets Authority (CMA): their strapline for the new regulations is ‘Making banks work harder for you.’ This isn’t simply a catchy logo. It should act as a call to arms for large high street banks who want to retain their customer base.

Big banks can disrupt the disruptors by leveraging the data they already   hold on customers to improve services across the board.

In the UK, over 80 percent of the public banks with Barclays, HSBC, Lloyds, Santander, or Royal Bank of Scotland. These big players need to use insights from their customers to find out what they want and use their financial clout to provide it. Intelligent use of technology relies on capital and data - the big banks have both.

Banks are at a significant advantage to startups in one other area: they have trusted names. While trust in banking has been a hot topic post-2008, it looks like consumers are still reluctant to give  their personal financial information to an unknown third party. Recent research by consultants Accenture found that 85% of respondents would be put off sharing data by the fear of fraud; 69% said they would not share financial data with businesses that were not banks.

In this dynamic, open banking is an opportunity and not an obstacle. Banks hold significant customer loyalty - all they have to do is keep it. The same Accenture study offers four ways for banks to embrace this open future:

• Design engaging API experiences
• Develop new operating models
• Adopt a new mindset and culture
• Create new business processes

What it doesn’t say, but should, is that all of these changes should have the customer at their core. The G20’s Anti-Corruption Working Group has identified open data as a priority to advance public sector transparency and integrity: banks now have an opportunity to shift focus and attack these issues.

Customer-first should be the mantra: banks need to use their customer data wisely to find out exactly what customers want and give it to them. If they don’t act and act fast, they’ll be left behind.