High street banks must grasp open banking opportunity

Open banking, as it’s called, is designed to give consumers more control over their money – where they put it, how they track it and even what they spend it on.

The new initiative means improving customer service by opening up banks’ APIs (application programming interfaces) to third parties in the financial technology (fintech) space. By putting their information to work, customers can do anything from seeking independent financial advice to paying bills and arranging overdrafts through user-friendly apps.

These third parties are often platform businesses, which provide better interfaces and improved user-experience without direct access to private data. They can offer complementary non-banking services to help people organise what they do and get more out of their everyday lives, by syncing financial and non-financial activities effortlessly.

The measures are enshrined in the Revised Payment Services Directive (PSD2), approved by the European Parliament in 2015. The rules apply to the UK before it formally leaves the European Union and, due to the global nature of banking, they will almost certainly apply afterwards as well.

It’s a brave new era for the industry. A fresh banking environment is about to take shape and financial institutions across Europe are working to comply with the EU standards. But according to Stéphane Berger, head of innovation and digital at Sopra Banking Software, not enough of these institutions have grasped the full opportunity.

“In recent years, we have seen a huge amount of innovation in fintech companies,” he says. “They have the potential to revolutionise personal finance and we have partnered with them to offer services to high street banks.

“But the response in the banking sector is mixed. Some institutions understand that this is a chance to improve customer relationships and drive revenue, whereas others see it as red tape; something they must comply with, but not necessarily take advantage of.”

Institutions that hesitate could be in for a shock. According to Mr Berger, the industry has entered a period of flux in which there is more choice and customers are gaining new controls.

Historically speaking, banking has been a slow-moving sector. For years, young people would sign up for a standard current account, perhaps a savings product too, and then stick with the same provider their whole lives.

Switching banks was time consuming and people worried about taking what they perceived as a bold step. The risk seemed to outweigh the reward, but things have changed. Competition in the marketplace is hotting up with challenger banks and fintech companies grabbing market share.

In the UK, millions of customers have changed banks in the four years since new rules made the process easier. With more competition and new entrants, this trend is likely to increase in the short-term future.

“Some banks underestimate how quickly industries can change,” explains Mr Berger. “They think ‘I’m OK today’ and fail to grasp the speed at which innovation is happening. Customers are asking for new services; the banks can help, or someone else will.

“There are many precedents across industry sectors in retail with Amazon, hospitality with Airbnb, transport with Uber and television with Netflix. Banking is the new focus and big technology brands like Google or Amazon could disrupt the market quickly because of their sheer scale and customer base.”

Mr Berger cites the example of National Australian Bank – a customer – which was losing market share and saw the opportunity to grow by partnering with fintech companies.

In a matter of months, he says, the bank revolutionised its customer journey with a range of new services, both financial and non-financial, that provided added value to its existing line of products.

Fintech is the future and, by creating partnerships, banks can ensure they stay relevant and useful

This changed the bank’s image, bringing it into the 21st century, and provided new revenue streams as the bank monetised its API. Turnover increased as a result and the bank has successfully managed its reputation as a traditional yet forward-thinking outfit.

This was a coup for the bank and good news for customers too. According to Mr Berger, it is this kind of innovation that can set businesses apart from each other.

Banks are putting a new focus on customer service to encourage loyalty, while giving fresh incentives for new accounts. But an increasingly competitive market means customers are demanding even more from their providers.

He says: “We have seen a gradual change in advertising campaigns, from ads looking to attract new customers at the beginning of their careers to a focus on loyalty among existing account holders. Traditional banks are not digital natives, so they have to work harder in the face of competition from newer players.”

Banks have taken note of the threat from startups in the fintech space and, for some, the response has been to acquire these fast-growing firms or acquire large stakes in them to mitigate a perceived risk. But Mr Berger sees this as a short-sighted approach because in some cases the deals are struck to remove a threat, rather than grab an opportunity.

“There are a few examples of banks buying fintech startups to remove them from the competitive landscape,” he explains. “The smaller business gets absorbed into the larger business’s infrastructure, but it doesn’t affect change. Innovation slows down, the strategy stays the same and the startup is swallowed up.”

This, clearly, is not a sustainable approach to maintaining market position. But it also misses the point of the fintech revolution. Banks must grasp the opportunity of partnering with fintech in a mutually beneficial way. Banks that ignore it risk being surpassed by rivals and Sopra Banking Software helps them avoid being bypassed.

“Banks need to move quickly,” says Mr Berger. “Fintech is the future and, by creating partnerships, banks can ensure they stay relevant and useful. It’s a huge opportunity for the market.

“Open banking may be a tough transition, but the rewards will be significant. Innovation is happening right now, so it’s vital that banks get on board.”

For more information please visit www.soprabanking.com/