By Sarah Maber, Managing Consultant at World Wide Technology
Our world today is entirely unlike the fantasy world of Harry Potter, where a goblin-controlled cart takes you through miles of tunnels under the City of London to your personal vault. No, we’re in a far more complex place now.
The banking system is now based around services and digital connections. Recognising this, our laws are also changing. Open Banking and the Second Payment Services Directive (PSD2) are upending the culture of financial services. While consumer choice in banking has never been better, traditional banks are scrambling to keep pace. Established banks operating with legacy infrastructure must essentially transform into software-based service providers. It’s no small task for the banks, and one which is leading to some uneasy alliances with their challengers.
The Open Banking opportunity
Open Banking compels banks to make customers’ financial data shareable with trusted third parties via secure application programming interfaces (APIs). While it’s easy for fintechs to realise the benefits of Open Banking on their businesses, there’s a tendency for more established banks to view it as an inconvenience – yet another regulation to comply with. However, rather than posing a threat to traditional banking, PSD2 is an opportunity for longer-established banks to provide customers a wider portfolio of complimentary services, opening up partnership opportunities with fintechs like Yolt and Viber.
In order to make this a reality, bank needs to set themselves up to be tapped into as and when consumers want to access their financial data.
The fintech advantage
Consumers desire to adopt challenger banks and apps usually comes down to three simple reasons: functionality, a focus on mobile and branchless banking, and a certain ineffable cool factor. The way fintechs are able to operate free from the weight of legacy systems is the key to delivering such in-demand features, building new processes and products by rapidly iterating on their APIs. Open Banking has enabled a proliferation of apps, start-up banks, insurance policies, mortgages and more throughout the established financial ecosystem.
For example, digital-first banks have leveraged open APIs to build their products and are growing rapidly. Monzo built its own architecture from the ground up and is able to develop platform updates at a rapid pace. Ultimately the fleet-footedness of these fintechs allows them to quickly adapt to customer demand, pushing out more regular product feature updates and slicker user experiences.
However, relatively few people are completely switching over from their larger, legacy banks. Consumers still recognise the value of mainstream banks and still keep most of their funds out of the challenger banks. With greater resources, trust built over decades, a broader range of services and higher-tiered banking licenses, the established banks offer a sense of security and stability which fintechs do not.
Instead, most consumers run multiple bank accounts alongside each other, attempting to have the best of both worlds. This is an opportunity for both cohorts: for agile platforms to rapidly deliver new features and tools based on what consumers want, and for established institutions to deliver longer-term, higher-value financial products such as mortgages and investments.
With Open Banking it is not necessary to see these businesses as in direct competition with each other, but rather forming part of a larger, more collaborative ecosystem.
For example, a new app called VibePay allows friends to pay each other in a simple way rather than dealing with complex payee details. This leverages APIs across multiple banks, but it is not in direct competition with banks, and the app facilitates the easier flow of money.
A clash of cultures
Collaboration and close working relationships between banks and fintechs is clearly the future, but with their divergent operating models, it is no surprise there is a culture clash. Frictions can arise when changes that may take fintechs a week take incumbents six to eight months.
New working cultures cannot be created overnight, and tensions are likely to crop up while banks transform internally. Consumers’ expectations are also now heightened, piling more pressure on the banks struggling to keep up.
The introduction of Open Banking was intended to increase collaboration, competition and innovation. Ultimately, this way of working will allow fintechs to tap into traditional banks’ loyal customer bases, while traditional banks will be equipped to provide better customer experiences.
The way forward
With Open Banking and PSD2, banks are becoming software-based service providers. To truly ensure that the legislation is a success, banks’ employee culture must become more like fintechs’ – agile and collaborative. It is essential that banks, financial institutions, and fintechs invest in the right people, development teams, and partnerships.
Moreover, all legacy applications need to be refactored to fit with the new agile API infrastructure. Many banks currently use private APIs to improve internal communications between legacy systems, so they already have experience of this kind of development work. But the technology and security implications of open APIs are far greater, and they must meet the highest standards of consumer and developer trust.
This confidence and trust is a foundational part of the banks’ appeal, so they must be more cautious than their challengers, and ensure that all technology that they deploy is done so securely, seamlessly, and in a way that doesn’t negatively impact their customers.
Established banks are unlikely to become as nimble as a start-up, and nor should they seek to be. However, leaders should look to set tangible objectives which will be achieved as a result of compliance with PSD2, such as increasing their customer base of 24-35 year-olds. This will help banking CIOs create a real business case for adopting new technology, which will ultimately foster the gradual cultural and technological change needed to ensure a successful, collaborative future.