It’s nearly 18 months since open banking arrived to transform the UK’s banking landscape. And – while it’s clear how newcomers can use open banking to develop new offerings to consumers – existing banks are still struggling to monetise opportunities. Renier Lemens takes a look at open banking, the opportunities it presents and how to develop a solid open banking strategy.
Since the start of 2018, the nine largest retail and small- and medium-sized business (SMB) account providers have been required to share their customers’ data. They must give qualified third-party providers (TPPs) access to customer-permitted data – and allow them to facilitate payments on behalf of customers.
The nine banks – dubbed the ‘CMA 9’ – are:
- Allied Irish Bank (AIB)
- Bank of Ireland
- Danske Bank
- Lloyds Banking Group
- RBS Group
They were supposed to implement data-sharing requirements by 13 January 2018. But only four — AIB, Danske, Lloyds, and Nationwide — met that deadline.
What is open banking and why does it matter?
The driving principle behind open banking is that transactional data belongs to customers instead of their financial institutions.
A number of neobanks have volunteered to sign up for open banking, primarily because it's simpler for more modern, tech-savvy banks to meet the requirements.
Giving TPPs access to customer data can displace incumbent banks with poor offerings, but it rewards forward-looking ones. Accenture estimates that already by next year open-banking enabled business will account for €60 billion of European banking revenue.
PWC estimates the potential revenue from open banking-enabled retail and SMB initiatives at more than £72bn. If anything, this underestimates the potential as vast profit pools are at risk of moving.
Open banking is in various stages of development all over the world. It will change retail and SMB banking by loosening the grip of incumbent banks on their customers. And it is throwing up opportunities for new competition, including from fintechs.
Opportunities from open banking
It’s very clear how attackers can leverage open banking to develop compelling propositions. But it’s not so obvious how incumbents can monetise opportunities.
In the first instance, it might appear as if their best bet is to hope for the best and minimise the bleeding.
In a recent Fiserv survey, more than 40% of UK bankers did not know whether they had opportunities to monetise open banking. To them, open banking just sounds like lowering the drawbridge and inviting the barbarians at the gate to pilfer the city.
So what can they do?
I see broadly three viable strategies:
- Charge for premium access through high-spec APIs
- Develop pro-active referral and subscription offers
- Offer banking-as-a-service to niche players who cannot efficiently offer their own
These strategies offer different potential in terms of customer retention, life-time value, new revenue streams, or cost reduction.
Traditional bankers need to collaborate across product siloes if they are to stand a chance of creating a level playing field with their fintech competitors. They need to articulate their open banking strategy holistically from the customer’s viewpoint.
How to develop a successful open banking strategy
The ‘open’ in open banking gives it away.
A successful open banking strategy requires an outwardly focused and collaborative organisation. Partnerships, revenue sharing agreements, collaborative ventures – all need to feature.
Their absence would be a major warning sign of the viability and profitability of the open-banking strategy. This ‘open’ mindset does not come naturally to incumbent banks that emerge from decades of proprietary closed systems and thinking.
A number of incumbents and fintechs – both in the UK and beyond – have made significant strides on open banking. But it is also useful to widen the competitive lens beyond direct competitors, either within the industry or beyond.
PayPal, for instance, has long deployed application programming interfaces (APIs) to a vast network of developers who have created additional use cases and applications.
Banks could do a lot worse than benchmarking the leaders of the pack.
Find out more about our Centre for Digital Banking
Renier is Visiting Professor of Fintech and Innovation at The London Institute of Banking & Finance. He has held leadership roles in a variety of financial institutions in Europe and the USA including GE Capital, Barclays and PayPal. Renier has also held a number of non-executive and advisory positions in fintech start-ups.