By Ed Whitehead, MD EMEA, Signifyd
In an ideal world, ‘2020’ is when open banking flourishes in Europe. The dream is that consumers can effortlessly manage all personal finances via one app, 100 percent confident their data is protected and in their control. Sadly, we do not live in ‘banking utopia’. The reality is that achieving the open banking dream is going to take an immense amount of effort and work to get right.
That is not to say that 2020 won’t be noteworthy for open banking’s future, because it will. Additionally, with PSD2 and its related SCA firmly in place, European consumers are naturally going to become more familiar with the new frontier of banking as we know it.
Consumers will benefit but so will the value chain
For consumers the compelling prospect of being able to easily access their full financial profile in one place, to compare terms, fees and interest earned on multiple accounts, loans and investments is within reach and very exciting. Being able to easily budget and accurately examine every expenditure will be right there in front of them.
What makes this possible is the fact that various regulations and rules allow data to be shared among banks, third-party service providers and businesses. This includes retailers and other parties selling services. This makes a whole new kind of commerce possible too.
New technology, alliances and incentives
This new open banking model is complex though. It needs the financial sector to not only construct the right technology to facilitate the ‘dream’, but it also requires effective alliances and incentives. For now, unfortunately, the truth is that banks are ill prepared to offer all that is needed to seamlessly provide this new form of commerce. Equally, consumers are not ready either.
This mismatch between open banking’s potential and the readiness to be able to use, or benefit from it, means there will inevitably be problems. Within this landscape, user experience will become a crucial differentiator. It will differ from bank to bank and by each third-party provider. The differences will be largely driven by what consumers demand and need.
Bringing the unbanked with us
Another conceptual challenge that comes with open banking is that it has largely been designed to support the ‘haves’— meaning people who have enough money to benefit from apps that track and manage their finances. These are usually people with access to smartphones, connectivity and a natural familiarity with using technology and apps that deliver the value provided by third-party applications. In contrast, the idea of open banking is somewhat of a non sequitur and a non-starter for the unbanked. So, this aspect needs to be further considered during the year too.
IT and cyber security challenges
As open banking starts to take off, the convenience that comes with sharing data will be accompanied by new cyber security risks, as criminals strive to attack the framework.
Additionally, open banking will put pressure on IT teams. Their expertise will be needed because, while some financial accounts integrate seamlessly through banks with third-party providers, others will fall short and result in consumers not truly benefitting from the so-called benefits of open banking.
Consequently, rather than 2020 being the year when open banking truly flourishes, 2020 is the year that banks, fintech and regulators need to sell consumers on a new model of conducting commerce more effectively — a model that more than likely will get off to a shaky start.
Educating and listening to customers is crucial
Aside from dealing with the various IT challenges, banks will need to develop sophisticated communication campaigns that explain how open banking works and benefits customers. These communication campaigns must involve two-way dialogue between banks and customers too. Banks need to listen to, and ask, what their customers’ experiences with open banking are? What works? What doesn’t? What new services and possibilities would make banking more valuable? As they do this, banks – and the wider fintech community – will need to practice humility, compassion and customer obsession, because they have some catching up to do.
The relationship between PSD2 and open banking
Alongside open banking sits PSD2. Both aim to provide better security, experiences and more choice to consumers. However, regulators and open banking architects moved ahead without consulting the end-users of their model.
Now consider open banking’s vision of building meaningful online portfolios for consumers through sharing data across banks, businesses and institutions. Sharing data requires consumer consent, which is good and necessary. But public opinion polls reveal that consumers are reluctant to allow their banks to share data. To emphasize this point, Accenture Research found in late 2017 that 69% of consumers in the UK said that they would not share data with third-party service providers. And 53% said they’d would never make use of open banking options, instead sticking with the way they’ve always banked.
Consumer perception needs to change
Over time the public perception and receptiveness towards open banking will naturally change. Already some businesses are making progress toward demonstrating the added convenience open banking can bring. HSBC enables consumers to access all their accounts, including competitors, through an app that they developed. Chip allows people to work out how much they can save each month and automatically deposits savings into an account. Credit Kudos analyses a user’s finances and establishes creditworthiness for financial services. Equally, some firms in the mortgage market generate spending reports, automate loyalty programs and more.
As more companies build convenience into their business models, people who were closed to the idea of open banking at first might decide to give it a try. Although, at the moment, the idea is hardly being rapidly adopted. The Financial Times recently reported only 25% of people polled by the banking technology firm, Splendid Unlimited, had heard of open banking; and only 20 percent of those said they actually knew what open banking meant.
As you can see, the inevitable bumps in the road during the early part of the open banking journey will increase consumer skepticism. People require education and convincing. It’s hard for consumers to trust banks and other parties with their data – especially personal financial information they hold dear – when organizations can’t even manage everyday digital transactions.
So, the fintech sector has a big task ahead. It not only needs to keep up with the technological and regulatory changes required to successfully deliver open banking. But, it needs to bring consumers along with it by evangelizing the benefits that open banking provides; and target the early adopters, who have the potential to become advocates. The potential rewards for those who can lead the pack in 2020 are there to be taken.