The Global Wave of Open Banking relationships

For many bankers distracted by operational and structural challenges, a regulator driven attack on one of their strongest moats is low down the list of issues they would like to be dealing with. Unfortunately for them, open-banking is a wedge that threatens to do just that.

One of the most significant policy responses to the 2008 financial crisis was a push to increase competition in the banking industry, which regulators took too with gusto. Across Europe this was partly met with PSD2, a successor to the European Payment Services Directive (PSD). Originally designed to harmonise a fragmented payments market, protect consumers and support increased competition, PSD2 goes further in enabling the explicit deconstruction one of the banking industry’s strongest moats – its previously intimate client relationships, and the data that supports them.

Historically data about your account and transactions inside a bank belonged to the bank. They would provide access on their terms, in their format, and when combined with their access to capital and the high regulatory barriers to entry this provided enough of a barrier to entry to slow innovation in the sector. Open Banking is the end of this paradigm by forcing banks to open up programmatic access to bank accounts.  

The UK implementation has gone further and the regulators have enforced a set of technical standards that banks must use to allow approved third-party access to account data and actions without having to use the bank’s own services. The first phase of this has gone live, with 13 banks providing API access to data about their own services, and by January 18th a new set of services enabling transactions to be carried out on the part of the customer. 

Although Europe has taken the lead in the space of transforming the ownership of data from corporations to individuals; the growth of Open Banking is reaching beyond its borders. In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act provided for consumer rights to access financial account and account-related data in usable electronic form. Whilst regulation has not developed as far as Europe, there is a clear movement towards open banking, with many of the more sophisticated institutions having begun to develop strategies to address this. The Australian government has pushed an open-banking approach similar to the UK in its 2017 budget, Singapore based OCBC has launched a full set of APIs, and companies in India Turkey and many other locations are delivering equivalent capabilities.

The general trend of adoption combined with the ability of third party aggregators to offer best of breed services is a material threat to bank’s ability to simply increase wallet share with customers by cross-selling opaque and uncompetitive services.

As regulations move forward, and liability and cross-party authentication rule standardise, consumer trust in open-banking based aggregation – a major cause of non-usage - should be expected to disappear, accelerating adoption further.

Is resistance futile?

For a long-time, non-bank technology players that focused on providing better consumer experiences around financial services have struggled to work with the banks. Leveraging screen scraping – in essence deconstructing bank web pages to extract relevant data and reconstruct that data on the other side - is not only highly inefficient; banks were opposed to it for technology, security and competitive reasons, and in many cases actively discouraged their customers from using them, and blocked services. to stall widespread acceptance and deployment of these capabilities. Cross-selling is valuable to banks, and an enforced layer of abstraction creates a strategic challenge by enabling data to leak to the aggregators who are positioned to both present and transact with the client through a new interface.

Figure 1 - Financial Product Ownership excluding Checking account (Source: Kicking it up a notch: Taking retail bank cross-selling to the next level)

As part of the banking response, there is a strategic push by the banking industry in Europe to block screen scraping– which by default will return some control to banks and restrict the types of innovation that takes place to those enabled by their APIs. If this change goes through, then it will provide a mechanism for banks to retain more control despite the opening up of data.  

It will also be a blow to many companies that have invested in this technology by forcing them to upgrade all of their systems to deal with the new API based approach. This fight remains in the political realm at the moment, but will have a significant impact on the evolution of open-banking.

It’s important to note this is not all stone-walling. Many of the banking industries claims have much merit. Trust underpins the financial industry and institutions are rightly concerned about security and privacy issues. Who is accessing your data and what they are doing it presents significant risks that consumers are not aware of and have difficulty controlling, and unregulated FinTechs are not always going to be the most reliable partners.

As these new architectures have emerged, the infrastructure to support the diversity of solutions has similarly grown. Companies such as Yodlee, Xignite and Plaid in the US and Unnax, Figo and Kontomatic have carved out an infrastructure position as aggregators by building APIs that aggregate access to these services making it easier for startups to integrate with banks and leverage these capabilities, however they are not always willing to restrict their revenue to pure infrastructure piping as demonstrated by

Yodlee’s selling of anonymised transaction data as a source of insight to third parties.

Figure 2: The growing list of Open Banking providers

Europe is addressing some of the data related concerns through their privacy focused GDPR regulation, but the complexity of coordinating the discrete moving parts requires both political and regulatory focus. Regulators need to work with financial institutions, data aggregators and intermediaries to facilitate methods of account data sharing that avoid security and privacy risk. This legislative pillar is a key dependency for the success of open-banking.

How are banks rising to the challenge?

There has been a split between the approaches banks are taking to open-banking. At one extreme, the emerging standards are treated as part of the cost of doing business and banks will provide the capabilities under regulatory duress. The other end of the spectrum, whilst not necessarily welcoming, understand the need to engage. They have teams focused on reorganising their capabilities and relationships around the potential of new distribution channels – whether it is acting as a regulated utility behind new propositions, using third parties for customer acquisition or as new distribution channels for existing or new products. In Europe, Companies like BBVA and Santander are embracing Open Banking with gusto and are well positioned to benefit from the business opportunities it creates. Even challenger banks, such as Starling, are leading with an open API offering.

The strategy of embracing change has driven different behaviours dependent on the scale and type of institution. Smaller banks have offered market-place based approaches where a careful selection of third-party capabilities are built alongside a bank’s own offering. Some banks are also being highly strategic and building future competitive levers – for example Yolt, part of ING, is a cross-platform money management tool that integrates with banks in the UK and could eventually provide a foot print to offer their own products, as well as having the potential to build up highly valuable market information.

Figure 3: Banks like ING are leveraging a consumer finance management application to build a competitor disintermediation platform

How to win

FinTech companies are highly execution focused with limited bandwidth and rapid execution cycles. From a customer acquisition perspective, banks that engage with them more effectively stand to benefit the most from consumption of their competitor’s client relationships. In order to succeed in these relationships, banks have to adopt a client-focused strategy towards the FinTech players including investment in support, partner success managers and on-boarding assistance, as well as investing in building out mutually beneficial commercial models that ensure both the bank and the FinTech gain over the long-term.

For banks that want to engage successfully in open-banking they have a choice. They can engage the change and leverage FinTech players to increase their distribution and product choice, and provide consumers with a wider range of capabilities, or they can risk losing customers to those that do.

Open Banking will open up a wide range of new customer experiences, improve transparency and increase consumer choice. Industry adoption has been slow, but with the political will and regulatory force behind it in specific major markets, the momentum has made this unstoppable and consumers will be the real winners. For banks, the choice is becoming increasingly stark either embrace open-banking, or risk being consumed by it.