April 25, 2018
TL;DR: It has been a slow, fragmented start to open banking, but the pace will accelerate. Fintechs are forging ahead with innovation, and a new set of intermediary service providers is growing. Banks need to become outside-in fast to thrive with open banking, building operating model competence for an externally oriented business.
Few Banks Place Open Banking At The Heart Of Their Strategy
Monday marked the first 100 days since the launch of open banking and the second phase of the Payment Services Directive (PSD2) in Europe, which compelled banks to open up their customer data and payment networks to third-party innovators. With delightful understatement, the UK government briefing paper on open banking refers to its arrival as “rather quiet.” Six out of the nine UK banks missed the deadline, as did entire countries elsewhere in Europe.
A lot of work remains for PSD2 and open banking to overcome the fragmented, sporadic start we have seen so far, but it is not all bleak; even these initial clouds prove to have a silver lining for some. Already there are bright spots, with trends and patterns emerging — as we expected, we see adjacent sectors such as the airline industry mulling entering the payments arena.
For banks, open banking is taking time to make its way to the heart of strategy. This is not by choice — banks know there is opportunity — but is partially borne out by the resources they can muster, other regulatory challenges they must meet (such as GDPR), and frequently because the path to open banking started in compliance and technology teams.
Customers Sit At The Heart Of Differentiation
One of the early positives is that banks recognize the need to place the customer at the heart of differentiation efforts. Account aggregation will rapidly become table stakes for Europe’s banks, and differentiation lies in going beyond a dashboard and overlaying capabilities to drive customer value and appeal. ING was early to market in 2017 with Yolt, a graduate of its accelerator program, which offers account aggregation, digital money management, and the added benefit of easy utility provider switching. HSBC meanwhile leveraged the Bud platform for its Connected Money app, offering transaction analysis, with a “roundup” savings tool and digital assistant planned. Further afield, Goldman Sachs acquired Clarity Money to provide money management tools, including using AI to lower (or cancel) bills, broadening its appeal through its Marcus brand in the US.
Open Banking Service Providers Form A New Subcategory
Elsewhere, fintechs are fast to innovate, often deploying AI and natural language processing in the interfaces that customers frequent: integrating with Facebook Messenger, Alexa, and Google Home, as Cleo does. The startup community is also embracing the opportunities presented by open banking, developing new integration products for banks or fintechs and rapidly creating a new intermediary segment in financial services. Other fintechs are pivoting their business model to make the most of open banking and to modify their go-to-market strategy; the UK comparison site GoCompare now offers machine-learning-as-a-service on the back of open banking APIs.
Open Banking Is Not Something To Run As A Bolt-On To Your Strategy
My upcoming report will provide a deeper perspective on the future of open banking, both within Europe and in the many countries that are pursuing an open financial market; however, the first 100 days since the start of PSD2 should not pass without comment. Our original advice remains: If you are in financial services, open banking is core to your strategy and part of all go-to-market decisions, as it will define your presence in the ecosystem and, by extension, relevance in your customers’ lives. How you collaborate (and protect) within an ecosystem environment will dictate success from now on.