By Peter Veash, CEO at The BIO Agency

The open banking revolution is imminent. But what does it mean for the sector, for customers and their cash?

From January next year, the UK’s Open Banking initiative will kick in, forcing banks to open up their data so that customers will have more control, it will mean big changes for the sector. The sharing of data via API is a big step towards transforming banking into a customer centric sector, giving customers much more freedom to move, mix and match the services they want. If it is done right, there’s enormous scope for banks to create positive and transformational products.

Much of the impetus for this has come from the Competition & Markets Authority (CMA), and the clue’s in the name. It’s going to open the market up to new players, and will present opportunities for the startups who have already made their mark in the fintech scene, like Monzo (who fed into the Working Group tasked with delivering the initiative), Moneybox and Starling.

But despite being cool, disruptive and massively hyped, it’s actually rather difficult for the tech-first challenger banks to be profitable. The cost of acquiring, retaining and selling to customers must be exceeded by the total profit they make on individual customers in order to remain financially viable. Although current account customers are relatively cheap to acquire, lower average balances mean that they are also usually unprofitable, making it hard to make money on each customer.

Open Banking may be an opportunity for the challenger banks to broaden out their offering.  We are already seeing signs of this developing as brands like Starling and Monzo diversify into ‘cross-selling’ other products to consumers, such as foreign exchange services and energy-switching advice. However, in the long term this isn’t sustainable either because the numbers of customers who are likely to sign up for such services is simply too small to ensure the banks remain profitable.

In coming years, the likelihood is that large traditional banks or big fintech companies will buy out the challengers, with the long-term upshot being the ability to develop a host of new digital banking products which will become genuinely indispensable to customers. This is further helped due to the democratisation of data heralded by Open Banking.

Whilst there will be plenty of early adopters, there’s a general reluctance amongst consumers to share data. A recent survey by Accenture found that 53% of consumers said they would never change their banking habits and adopt open banking. The challenge for banks and other financial services is to build both the tech and the trust; a focus on customer-led design can – we believe – make consumers more receptive to sharing their data.

At BIO, we’ve found that building a strategy with the customer firmly front-of-mind is the only way to guarantee a solid foundation in terms of loyalty, long-term profitability and innovative services which become embedded in customers’ everyday routines. Open Banking is certainly no exception: this revolution is going to pave the way for services which will significantly improve people’s lives. Consider tailored financial advice, a privilege previously reserved for those who could afford to pay a financial advisor, which could now benefit those really in need of support.

But before any of this can become a reality, an environment of trust needs to be nurtured; full consumer buy-in to the idea of freedom of data is crucial if the system is to work.

One initiative that looks to be stepping up to the plate is Nesta’s Open Up Challenge – Nesta is calling for entrants who can bring a combination of insight into the problems small businesses face regarding Open Banking – lack of trust being a major one – and has a £5m prize fund to help support and reward at least 20 winning teams developing next-generation services, apps and tools. Programmes such as this can ensure the opportunities presented by Open Banking deliver real, far-reaching benefits for UK businesses.

Whether we’re working with a bank, or any other highly regulated industry, such as health or air travel, our approach is to help them reimagine a future state focused on customer needs. Understanding how to build innovative solutions to deliver that future state means taking account of regulatory pressures and opportunities. Often, by doing this, you can expose what’s actually operational legacy rather than legally mandated barriers to change.

In the UK, we are leading the pack globally when it comes to openness in the banking sector – nobody else is pushing for accessible data-sharing in the way that we are – and it’s helping to cement this country’s reputation for fintech innovation. If the financial sector can educate, reassure and innovate enough to prove that Open Banking is a huge step towards making the industry truly customer-centric, we’re on the right track to stay ahead of the game.