Open banking; non-majors’ opportunity to liberate hostages of major banks

By Giuseppe Porcelli, CEO at Lakeba Group

Banks are known for thick, impenetrable walls. Originally, physically fortified to keep bank robbers out. Now, in the digital banking era, figurative walls are built to keep customers from leaving.

Banks have invested millions, if not billions, in building walled gardens. Once signed up to their first bank account – most likely in school – customers face onerous processes when wanting to switch to alternative services offered by other financial institutions.

The harsh reality is banks vie to win children over as customers, intending to hold them hostage for a few decades, eventually converting them into highly profitable mortgage and credit customers.

This figurative kidnap is orchestrated through addictive loyalty schemes; bundled offers – where signing up to several products results in better rates; customer’s inability to substantiate their exemplary financial standing to other banks; and, now, banks’ mobile apps conveniently offering a plethora of banking services.

Many of these aspects are dressed up as added values for customers but are effective means of entangling customers to their bank.  They help the major banks heighten and strengthen their walls from competitors.

Before open banking, this left smaller banks with only four very costly ways to compete. Each designed to entice customers to find the motivation to scramble over the walls their banks have built.

They could invest (heavily) in their walled gardens, offering customers a different financial landscape to their current bank. However, this often involved a hefty investment in developing a competing garden. Then they needed to spend even more to attract people to it. Expenses which typically proved to be prohibitive.

Instead of upgrading the garden, some took to shouting over the walls – more commonly known as marketing. A strategy implemented by several of the neobanks, with the hope that bringing as many digital natives onboard as possible would mean some would stay for the long haul.

Others have taken an approach where they target niche audiences with a compelling offering – but this often lacks the scale required to keep the lights on in the digital era, a problem many mutual banks and credit unions currently face.

Or, as a desperate resort, grabbing customers with compelling interest rates. But these customers often proved themselves to be disloyal deal hunters who were flipped by the next shiny offer.

Open banking creates an entirely new competitive approach. Simply burrowing through the thickest of walls, mandated to now be penetrable through legislation.

Liberating customers through open banking

Open banking legislation the world over means major banks can no longer keep customers behind their walls. The legislation aims to give customers more control over their data, making it easier to find better deals, securely share data or switch products. Essentially, non-major banks can now drill holes into walled gardens and liberate customers by matching non-customer financial goals with their products.

Regulatory changes, technology-enabled innovation and shifting consumer behaviour now threaten to topple the walled gardens of the majors. In retaliation, the major banks are continuing to invest in strengthening their walls. While inventing tools to start drilling holes in the walls of others.

HSBC’s head of open banking and PSD2, Hetal Popat, said that the regulation has “cost a fortune and soaked up a huge amount of technical capacity”. These sentiments were also reflected by Lloyds and TSB, who had to increase expenditure due to innovation by enforcement.

If the major banks are concerned about the financial investment required to implement and leverage open banking, the rest of the banking world could be in trouble. Open banking could exacerbate the financial canyon between those that can afford to innovate versus those who can just afford to upgrade their core banking platform—reduced to only being able to shout over the tops of the walls to convince customers to switch. While the majors siphon off customers using their purpose-built tools with digital precision.

Taking a trip to the fintech hardware store

Non-majors do not have to go it alone. As it happens, technology players with interest in the financial sector – also known as fintechs – have been building the tools to penetrate these walled gardens for several years. This has led to the development of tools that utilise ‘screen scraping’ to access customer data, whereby the customer discloses their access ID and password to a third party to gain access to a financial service.

In our walled garden scenario, this is essentially like taking a chisel and hammer to break into the wall—a crude, rudimentary and painstaking undertaking. However, with open banking, the hammer and chisel have essentially been upgraded to a pneumatic drill. A drill that banks can use to create holes in legacy walled gardens and liberate customers to greener pastures.

The beauty is, there is now a raft of different fintech providers, offering various drills or drill bits depending on customer needs and banking products. Planning a trip, here is a holiday loan offer. Just signed up to a renewable energy provider, here are our ESG investment offers. Preparing for a family, here’s a car loan to upgrade to a family car.

The fintech hardware store will enable smaller banks to drill down to find precisely where these customers are, their current financial position and allow for the distribution of personalised offers to meet their unique needs.

There is no need to invest in inventing and building new drills. They exist. Can be bought or even leased. Helping overcome technological financial barriers.

The ability to target the right customer, with the right offer, at the right time, with the right tools is going to have a transformative effect in the financial sector. Niche, specialist banks will now have the opportunity to scale beyond the local communities they could only previously serve, both nationally and even internationally. Customers will be liberated from cumbersome switching mechanisations, enabling them to choose solutions that meet their financial goals freely.

Financial sector has an open banking advantage

The financial sector is the first sector to go through such transformative change. But it won’t be the last. As we enter the Fourth Industrial Age, there will continue to be a merging of the physical, digital and biological worlds. Connectivity between people, things and digital identities will be commonplace. This requires other sectors to become open and walled gardens to be accessible. In Australia, the Government has already stated telecommunications and energy are next on the list, for instance.

With the financial sector being first to adopt open platforms, it gains a first-mover advantage. It knows what tools are needed and where to look to find customers. As such, when other walls become penetrable, they’ll drill straight in and plumb these different connections together—making banks the central piece in a customer’s digital services ecosystem.

Being the first industry to be retooled in this digital age will bring considerable benefits to both the banks and the customers they serve.

Now is the time to select the right drills. Pick the best walls. And liberate customers with the very best banking services for their situations.

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