Author: Matt Phillips, VP Sales and Systems, Diebold Nixdorf UK/I 

It’s no secret that the UK’s banking industry has been shaken up by open banking this year. The initiative has been introduced as a way to drive innovation and competition, with the aim of improving the quality and range of services that UK consumers can access.

Consisting of the CMA’s remedies and PSD2, the initiative will allow financial transactional data to be shared by financial institutions online with third parties. Open banking will make it easier for customers to switch banks and compare products. And, in turn, it is expected to improve people’s overall banking experiences.

While open banking has clear advantages for consumers, whether it will be a beneficial opportunity for banks, or if it should be seen as a threat, is yet to be decided. This is a topic which, at present, is being debated by financial institutions around the country.   

Open banking’s potential

With open banking facilitating data sharing, established banks will be able to more easily incubate new fintech companies into their services.  This will allow them to launch more initiatives quickly, and develop new technologies to please their customers. PwC has found that 82 per cent of banks, insurers and asset managers intend to increasethe number of partnerships they have with fintech firms over the next three to five years, and we can expect these partnerships to fuel new ways to drive change and deliver a more customer centric experience.

For example, by working with new start-up propositions and communities of developers, a major UK bank might be able to launch a new money-management app or new facial recognition authentication service more seamlessly than before. Almost every bank in Europe is currently nurturing its own incubator scheme to put this sort of innovation into practice – often because emerging fintechs have the agility needed to build, test and implement, without being slowed down by the legacy infrastructure restraints or processes banks otherwise have to work with.

Open banking brings with it an inevitable focus on customer service – something which small businesses crave just as much as the public consumer. Time poor SMEs want easy banking, so that they can concentrate on running their businesses effectively. And, if banks can capture their interest and offer them personalised services, there could be £8.5bn for banks to gain in new revenue streams by 2020. Crucial to success here is a bank’s ability to leverage data and customer insight in order to improve the digital bank services they offer to this audience, and open banking is, of course, at the heart of getting the most out of data.

The issues banks could face

With new data at their fingertips, and with the chance to integrate even more easily with innovative third parties, it sounds simple for the traditional banks to embrace open banking as a chance to enhance their services, encourage customer loyalty and even attract new customers by differentiating or personalising their offer and making services more relevant to the customer.

However, the reality is that competition is tough, and some fintechs – like pension manger PensionBee or savings app Chip have been going it alone for a while. They have been able to move and launch more quickly than the traditional banks, and have built a loyal following among their own customers.

Banks will have to work hard to get customers to use their own new services, if they are already happy with technology that they have found elsewhere. In this sense, banks cannot get away with ‘jumping on the fintech bandwagon’ – and they will need to do more than simply replicate the offering of existing firms if they are to be successful.

As well as those apps designed specifically for pensions or savings, open banking arguably also plays into the hands of digital comparison tools and other personal financial management apps like Bud or Moneyhub. These tools are so effective because of their ability to bring information from multiple bank accounts, loans or credit cards all into one place, putting the customer first, and showing a personalised and easy-to-use interface. Open banking makes their work even easier, and there is a danger that traditional banks may therefore end up surrendering their customer relationships to these tools, if they can’t compete effectively.

Consumer banking and payments is arguably one of the areas most likely to be disrupted by open banking, with banks estimating that they could lose up to 24% of their business here. The fact is that smartphone-based consumer banks like Monzo (which describes itself as ‘the bank of the future’) are talented at making the customer central to every interaction or payment, and this allows them to reap rewards. There are currently over 260,000Monzo bank accounts and according to figures from 2017, the business is estimated to be experiencing a customer growth rate of 5% per week.

Is embracing open banking such a bad idea?

But that’s not to say that traditional banks can’t put open banking to work for their own gain. Yes, there are third parties that are aggressively making changes in the industry, and yes, open banking will add fuel to their fire. But, by embracing fintechs instead of working against them, banks will be able to fend off the threats.

Some consumers, no doubt, will continue to stay loyal to the financial institution they have used for years and this provides a huge opportunity for banks. This unprecedented initiative should encourage the industry as a whole to put customer experience at the heart of financial services.

This is undoubtedly something financial institutions can achieve if the focus remains on introducing new, relevant customer journeys, and bringing together physical and digital strategies. The time is now to revolutionise financial services.