A STRATEGIC RESPONSE TO OPEN BANKING

Open Banking has the potential to be a game-changer for the banking industry. The gatekeepers (banks) are being forced to share their single most prized possession – customer data – in order to create a more vibrant ecosystem that promises to maximise consumer welfare.

Banks can be thought of as companies that use information (credit scores, cash flows histories, payment trends and asset prices) to make decisions (granting credit, deciding level of interest rates and fees) through the use of complex technological systems (payments infrastructure, trading systems and customer databases).

Since bank behaviour is so similar to Big-Data tech firms, opening the database to other services providers will be transformative. What makes it even trickier for banks is the fact that the onus on ensuring data security will most likely be placed on the banks themselves.

Open Banking’s Impact on Banking

Gianluca Corradi, banking specialist at pricing strategy consultants Simon-Kucher & Partners (www.simon-Kucher.com)

An often quoted statistic is that the average bank customer is more likely to stay with their bank than remain loyal to their husband or wife. Stickiness of banking customers works heavily in favour of incumbents and strong initiatives like ‘current account switching’ have not changed the statistics dramatically. However, Open Banking has all the prerequisites to change the old rules of the game. Simon-Kucher & Partners sees at least three potential consequences that should be considered by incumbent banks in their strategic response to Open Banking.

Competitors: the emergence of Fintech-Fintech collaboration

So far, the prevalent business model has seen incumbent banks collaborating with Fintechs to leverage each other’s strengths: a wide client base meets better technology, for instance.Open Banking has the potential of creating collaborations among leaders in the fintech space and crowding out incumbent banks from the latest innovation. Marketplaces for banking products are already emerging parallel to traditional channels, championed by the most successful disruptors. The collective approach will get more common as Payment Services Directive 2 (EU-wide) unlocks customer data and the ability to make payments on behalf of someone else’s ‘customer’.

Customers: the dawn of planet of the millennials

Fintechs are attracting mostly technology-savvy millennials who over the coming decade will be the most powerful consumers (if they aren’t already). Fighting for a share-of-wallet of these consumers could be the differentiator for a bank’s long-term profitability.As more millennials start to occupy centre stage in the economy, banking services will be channeled more through non-traditional players. Banking will remain an intergenerational industry, with parents opening accounts for children before they even understand the basic concepts of finance, but millennials have proven much more likely to challenge the status quo, to try new experiences, even in financial services. For banks, Open Banking could mean the loss of an exclusive relationship with their customers. The risk is that they become pure back-office servicers while new players capture more of the value chain.

Products: commoditisation and margin erosion

As the barriers to entry fall due to the sharing of customer data and new players enter the market, the industry runs a risk of price wars being triggered to grab additional market share. Pressure on margins and profitability is common in industries that went through a shakeup of competition rules and saw the entry of innovative competitors, the airline industry being a prime example. Also, considering the stickiness of the average bank customer, new disruptors will necessarily compete on price as well as quality of service to convince customers to move. This will likely result in further battles for the last basis point. Open Banking will definitely put pressure on the profits generated by traditional banking products by making them more comparable and more easily accessible.

Crystal Ball 2027

The threat to the traditional banking business model as it stands today is real. It is entirely likely that the bank of 2027 will look very different from today’s version – just as today’s banks differ quite significantly from their 2007 iteration.

Banks will need to create moats in order to ensure that their core business remains intact.In order for banks (High-street, Challengers and everyone in between) to get their Open Banking strategy right, they need to fully understand their customer needs and expectations in a digitally-banked world.

Traditional banks have a high-value proposition which they should not neglect as part of their future customer retention and acquisition strategies:

• Access to central banking infrastructure means that banks are guardians as well as beneficiaries of the people’s trust in the financial system
• The ability to offer a full financial product suite through the use of financial leverage
• An often under-appreciated presence on the high-street
• Years of insights into customer behaviour

However, banks have been hamstrung by legacy issues. They have yet failed to capitalise on their core advantages. The threat and the opportunity of Open Banking is hard to ignore anymore. High street and Challenger banks both need to press home their advantages at this critical inflection point.

Banks will need to implement several-to-all of the following 10 strategies to remain competitive in the ‘new world’ of a post-Open Banking era:

10 strategies for banks to remain competitive in the post-Open Banking environment

• Enhanced approach customer segmentation: Understand customers’ real needs and address these through strong segmentation strategies. Young tech-savvy consumers need to be pursued and retained aggressively in the immediate future. However, as more people start to adapt to managing their finances digitally, longer-term segmentation strategies need to address these customers through differentiated and targeted offerings. 

• Advanced analytics to aid customer segmentation: Identify the business units most vulnerable to Open Banking. Develop analytics to identify customers within those business units most likely to be unprofitable in a range of (pessimistic, realistic, optimistic) post-Open Banking scenarios. Banks will need to decide whether they can offer incentives to these customers to stay and increase profitability through cross-selling initiatives or decide on alternative low-cost ways to service this segment in the future.

• Optimised digital customer journeys: Equally fundamental is to ensure that digital experiences align with customer expectations. As more and more banking relationships evolve into‘digital-only’, they need to become simpler, yet flexible enough to guide customers to suitable product and service configurations. The digital journey needs to promote customer confidence.Banks need to convey that customers’ financial interest are top priority even with reduced human interactions. Banks have failed at this fundamental task over recent years but digitisation offers a golden opportunity for them.

• Solution-oriented approach to innovation: Product and service design need to accurately align to divergent demands. The purpose of a solid customer journey is to aim to solve a consumer problem, not just offer a fancy financial product. Banks need to be vary of customers becoming uncomfortable with feature-heavy Open-Banking solutions and communicate effectively how their offering solves specific problems and makes lives simpler.

• Improved loyalty strategies: Reduce customers’incentive to act (e.g.: move money to a different bank) for short term gains. Loyalty schemes and reward structures need to be dynamic – able to react to tail-risk events such as an abnormally large number of outbound payments made by an Open Banking-related API. The value proposition also needs to be tailored to convey the bank as a “pair of safe hands” that provides a “hassle free” service.

• Enhanced pricing models: R eview the pricing strategy and product architecture to generate more fee-based income through innovative services. A good digital product offering will be vital here to increase customers’ willingness to pay. A simple example is a Good / Better / Best solution that offers a no-frills account, a premium account that incorporates a degree of advisory services and a tech-heavy all-inclusive package.Such a comprehensive product offering presents increased monetisation opportunities and needs to replace the one-size-fits-all Internet Banking model that is prevalent today. 

• A coherent customer communications strategy: A new product roll-out is toothless without a strong sales communications strategy. Sales teams need to be trained in the basics of behavioural economics and incentivised suitably for maximum impact. Communicating value to the client will be crucial in an Open Banking world with a hyper-fragmented product suite. 

• Heavy investment in technology infrastructure: The core objective of Open Banking is to unlock the closed ecosystem in which banks operate. Ignoring the quality of the technology infrastructure will leave banks vulnerable to inestimable operational risks. 

• Develop a Fintech strategy: Banks may choose to acquire or incubate the Fintech start-ups most likely to eat into their core business, run them initially as independent subsidiaries with a view to integrating them at a future date. Another option can be collaborating with established Fintechs. Smaller banks will want to collaborate early with large Fintechs to offer bundled products that can help compete with big banks. Developing a strong pricing configuration and roll-out strategy before going to the market will be key for the Challenger banks.

• Leverage high-street presence: Finally, banks need to make effective use of the one advantage that other players will never have. Physical presence must not be wasted and needs to be used to be augmented with a more fleet-footed sales process in-branch. Banks will need to provide tailored advisory services that clients are asking to cope with an increasingly complex and uncertain world. Branch numbers and sizes will be reduced but customers will still want them at least in the medium term. These will be captive customers for banks whose willingness to pay needs to be optimally captured.

Conclusion

Banks are effectively information technology companies.It is inevitable – by design – that their business will be affected by the Open Banking initiative. A range of impacts will be felt through changing behaviours displayed by customers and by competition. Banks will need to respond early and decisively in order to thrive.Big banks that do well will be the ones that focus on innovating their core business, invest in technology and monetise their digital propositions.

Small banks have the opportunity to innovate too, use their systemic vantage-point and couple it with newer technology to truly challenge big banks. They may choose to fend off or collaborate with Fintechs depending on their proposition. The Challenger bank of today that ends up as a digital leader in the Open Banking era will be the one that acts like a Fintech while optimally utilising the access it has to the same infrastructure available to the big banks.

Open Banking has the potential to be a game-changer for the banking industry. The gatekeepers (banks) are being forced to share their single most prized possession – customer data – in order to create a more vibrant ecosystem that promises to maximise consumer welfare.

Banks can be thought of as companies that use information (credit scores, cash flows histories, payment trends and asset prices) to make decisions (granting credit, deciding level of interest rates and fees) through the use of complex technological systems (payments infrastructure, trading systems and customer databases).

Since bank behaviour is so similar to Big-Data tech firms, opening the database to other services providers will be transformative. What makes it even trickier for banks is the fact that the onus on ensuring data security will most likely be placed on the banks themselves.

Open Banking’s Impact on Banking

Gianluca Corradi, banking specialist at pricing strategy consultants Simon-Kucher & Partners (www.simon-Kucher.com)

An often quoted statistic is that the average bank customer is more likely to stay with their bank than remain loyal to their husband or wife. Stickiness of banking customers works heavily in favour of incumbents and strong initiatives like ‘current account switching’ have not changed the statistics dramatically. However, Open Banking has all the prerequisites to change the old rules of the game. Simon-Kucher & Partners sees at least three potential consequences that should be considered by incumbent banks in their strategic response to Open Banking.

Competitors: the emergence of Fintech-Fintech collaboration

So far, the prevalent business model has seen incumbent banks collaborating with Fintechs to leverage each other’s strengths: a wide client base meets better technology, for instance.Open Banking has the potential of creating collaborations among leaders in the fintech space and crowding out incumbent banks from the latest innovation. Marketplaces for banking products are already emerging parallel to traditional channels, championed by the most successful disruptors. The collective approach will get more common as Payment Services Directive 2 (EU-wide) unlocks customer data and the ability to make payments on behalf of someone else’s ‘customer’.

Customers: the dawn of planet of the millennials

Fintechs are attracting mostly technology-savvy millennials who over the coming decade will be the most powerful consumers (if they aren’t already). Fighting for a share-of-wallet of these consumers could be the differentiator for a bank’s long-term profitability.As more millennials start to occupy centre stage in the economy, banking services will be channeled more through non-traditional players. Banking will remain an intergenerational industry, with parents opening accounts for children before they even understand the basic concepts of finance, but millennials have proven much more likely to challenge the status quo, to try new experiences, even in financial services. For banks, Open Banking could mean the loss of an exclusive relationship with their customers. The risk is that they become pure back-office servicers while new players capture more of the value chain.

Products: commoditisation and margin erosion

As the barriers to entry fall due to the sharing of customer data and new players enter the market, the industry runs a risk of price wars being triggered to grab additional market share. Pressure on margins and profitability is common in industries that went through a shakeup of competition rules and saw the entry of innovative competitors, the airline industry being a prime example. Also, considering the stickiness of the average bank customer, new disruptors will necessarily compete on price as well as quality of service to convince customers to move. This will likely result in further battles for the last basis point. Open Banking will definitely put pressure on the profits generated by traditional banking products by making them more comparable and more easily accessible.

Crystal Ball 2027

The threat to the traditional banking business model as it stands today is real. It is entirely likely that the bank of 2027 will look very different from today’s version – just as today’s banks differ quite significantly from their 2007 iteration.

Banks will need to create moats in order to ensure that their core business remains intact.In order for banks (High-street, Challengers and everyone in between) to get their Open Banking strategy right, they need to fully understand their customer needs and expectations in a digitally-banked world.

Traditional banks have a high-value proposition which they should not neglect as part of their future customer retention and acquisition strategies:

• Access to central banking infrastructure means that banks are guardians as well as beneficiaries of the people’s trust in the financial system
• The ability to offer a full financial product suite through the use of financial leverage
• An often under-appreciated presence on the high-street
• Years of insights into customer behaviour

However, banks have been hamstrung by legacy issues. They have yet failed to capitalise on their core advantages. The threat and the opportunity of Open Banking is hard to ignore anymore. High street and Challenger banks both need to press home their advantages at this critical inflection point.

Banks will need to implement several-to-all of the following 10 strategies to remain competitive in the ‘new world’ of a post-Open Banking era:

10 strategies for banks to remain competitive in the post-Open Banking environment

• Enhanced approach customer segmentation: Understand customers’ real needs and address these through strong segmentation strategies. Young tech-savvy consumers need to be pursued and retained aggressively in the immediate future. However, as more people start to adapt to managing their finances digitally, longer-term segmentation strategies need to address these customers through differentiated and targeted offerings. 

• Advanced analytics to aid customer segmentation: Identify the business units most vulnerable to Open Banking. Develop analytics to identify customers within those business units most likely to be unprofitable in a range of (pessimistic, realistic, optimistic) post-Open Banking scenarios. Banks will need to decide whether they can offer incentives to these customers to stay and increase profitability through cross-selling initiatives or decide on alternative low-cost ways to service this segment in the future.

• Optimised digital customer journeys: Equally fundamental is to ensure that digital experiences align with customer expectations. As more and more banking relationships evolve into‘digital-only’, they need to become simpler, yet flexible enough to guide customers to suitable product and service configurations. The digital journey needs to promote customer confidence.Banks need to convey that customers’ financial interest are top priority even with reduced human interactions. Banks have failed at this fundamental task over recent years but digitisation offers a golden opportunity for them.

• Solution-oriented approach to innovation: Product and service design need to accurately align to divergent demands. The purpose of a solid customer journey is to aim to solve a consumer problem, not just offer a fancy financial product. Banks need to be vary of customers becoming uncomfortable with feature-heavy Open-Banking solutions and communicate effectively how their offering solves specific problems and makes lives simpler.

• Improved loyalty strategies: Reduce customers’incentive to act (e.g.: move money to a different bank) for short term gains. Loyalty schemes and reward structures need to be dynamic – able to react to tail-risk events such as an abnormally large number of outbound payments made by an Open Banking-related API. The value proposition also needs to be tailored to convey the bank as a “pair of safe hands” that provides a “hassle free” service.

• Enhanced pricing models: R eview the pricing strategy and product architecture to generate more fee-based income through innovative services. A good digital product offering will be vital here to increase customers’ willingness to pay. A simple example is a Good / Better / Best solution that offers a no-frills account, a premium account that incorporates a degree of advisory services and a tech-heavy all-inclusive package.Such a comprehensive product offering presents increased monetisation opportunities and needs to replace the one-size-fits-all Internet Banking model that is prevalent today. 

• A coherent customer communications strategy: A new product roll-out is toothless without a strong sales communications strategy. Sales teams need to be trained in the basics of behavioural economics and incentivised suitably for maximum impact. Communicating value to the client will be crucial in an Open Banking world with a hyper-fragmented product suite. 

• Heavy investment in technology infrastructure: The core objective of Open Banking is to unlock the closed ecosystem in which banks operate. Ignoring the quality of the technology infrastructure will leave banks vulnerable to inestimable operational risks. 

• Develop a Fintech strategy: Banks may choose to acquire or incubate the Fintech start-ups most likely to eat into their core business, run them initially as independent subsidiaries with a view to integrating them at a future date. Another option can be collaborating with established Fintechs. Smaller banks will want to collaborate early with large Fintechs to offer bundled products that can help compete with big banks. Developing a strong pricing configuration and roll-out strategy before going to the market will be key for the Challenger banks.

• Leverage high-street presence: Finally, banks need to make effective use of the one advantage that other players will never have. Physical presence must not be wasted and needs to be used to be augmented with a more fleet-footed sales process in-branch. Banks will need to provide tailored advisory services that clients are asking to cope with an increasingly complex and uncertain world. Branch numbers and sizes will be reduced but customers will still want them at least in the medium term. These will be captive customers for banks whose willingness to pay needs to be optimally captured.

Conclusion

Banks are effectively information technology companies.It is inevitable – by design – that their business will be affected by the Open Banking initiative. A range of impacts will be felt through changing behaviours displayed by customers and by competition. Banks will need to respond early and decisively in order to thrive.Big banks that do well will be the ones that focus on innovating their core business, invest in technology and monetise their digital propositions.

Small banks have the opportunity to innovate too, use their systemic vantage-point and couple it with newer technology to truly challenge big banks. They may choose to fend off or collaborate with Fintechs depending on their proposition. The Challenger bank of today that ends up as a digital leader in the Open Banking era will be the one that acts like a Fintech while optimally utilising the access it has to the same infrastructure available to the big banks.