By Henri Wajsblat, Director, Financial Services – Anaplan
August’s banking report from the Competition and Markets Authority (CMA), calling for banks to open up and allow more competition, received a mixed reaction. Some hailed it as a game changer, however, many labelled it as just one of a long line of reports calling for change in an industry that has remained static for decades despite numerous attempts to disrupt it.
With customers still only switching accounts less than once every 10 years and the Big Four banks owning 77% of the current account market, it is easy to justify this pessimism. However, with the rise of big data and customer expectations changing rapidly – including their attitudes towards transparency – the CMA report has the potential to really shift the way banking works and make it a fairer sector. What’s more, the dominant names stand to gain far more by getting on board with such reforms, than they would lose through the increased competition it might bring.
Expanding the ecosystem
As per the CMA report, banks will be required to share accurate and impartial information about their services as well as customer information via the use of open APIs. Forcing banks to open up their data sets would allow for the growth of a third-party ecosystem, as companies from around the FS and technology sectors begin providing new apps and services.
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Although the CMA is pushing for a 2018 deadline for changes to be made, it remains to be seen whether banks will play the game. A larger financial services ecosystem would inevitably weaken the grip of the big major banks, as new rivals would find it easier to gain traction and grow.
Various key issues need to be worked out and clarified. For example, what data sets can a bank be forced to give out, and which constitutes private information rightfully belonging to the bank? Security will also play a part – many, including customers themselves, will no doubt be hesitant to start handing financial credentials out beyond the walls of the bank. Lastly, regulators may choose to take advantage of the volume of information shared by banks and increase the regulatory pressure.
Rather than seeing initiatives like those proposed by the CMA as a threat, banks can in fact benefit from the increased transparency.
Within the new financial services ecosystem will be new companies (or internal teams) that provide greater visibility in to an organisation’s processes and data. This visibility will enable banks to gain a firmer grip on its operations, making potential malpractice easier to spot. A more open banking sector could make scandals a thing of the past, as well as the heavy fines and reputation loss that come with it.
Just ask the powers that be at the various large banks involved in scandals over the past few years, ranging from cross industry illegalities to individual companies being exposed for indulging in illicit practices.
It’s not inconceivable that a more open culture would have prevented these scandals happening, or at least growing to the size they did.
Rise of the self-service customer
Of course, banks shouldn’t just be looking at what’s in it for them. Ultimately, the CMA report (and arguably the primary role of banks in general) is about the customer and improving how they manage their finances.
If implemented, the open banking reforms will put customers in the driving seat, giving them the ability to compare and use services from a number of organisations. This has begun to be termed as ‘banking as a platform’, where consumers are no longer locked into a single bank. Instead, customers might hold a current account with one provider, but add on other financial services – such as an ISA, mortgage or investment portfolio – through other companies, all in the same end user application.
Swimming against the stream?
Big banks will no doubt spend the next few years squabbling over the finer details and working out where they can push back. They would do well to remember that where there is customer demand, change is ultimately inevitable. This is symptomatic of the larger, cross-industry, shift towards the more technologically able, empowered customer.
If the major players of today’s financial sector spend too long digging their heels in, a new player will eventually come along and offer customers the speed, simplicity and flexibility they want. This might not even come from within the banking sector, with the world’s tech giants challenging banks in the area of payment services. Similarly, if robot advisors are still processing a marginal part of the wealth management transactions today, they could fully disintermediate this business segment in a few years.Interestingly, we’ve seen large banks investing in shared data management platforms addressing the customer acquisition or regulatory requirement areas for the sake of operational efficiencies.
The banks that accept the winds of change and reshape their banking model to compete in the new open era will stand the best chance of maintaining customer loyalty, via a better service, optimizing costs and increased transparency and, in turn, a reduced risk of costly scandals.