This week has seen the inaugural Open Banking Expo conference in London. The event was attended by a mixture of major banking brands, FinTechs and policymakers, with 40 high profile industry speakers. There is no doubt that Open Banking is a strategic issue for the established banking community, which has led us to reflect on what established organisations do when a potentially disruptive change arrives in their market.
Ex-Google MD Dan Cobley (now MD, FinTech at Blenheim Chalcot) delivered a thought-provoking opening address at the Open Banking Expo, sharing his thoughts on the ingredients required for successful mass-adoption of a product or service and suggesting that Open Banking ticks all the boxes. This is in stark contrast to some previous innovations such as Google Glass, which amongst other things failed to become socially acceptable, leading to its wearers to be bestowed with the unfortunate tag of ‘Glassholes.’
Throughout the day, a consistent theme was the view that convenience and user experience will trump price in banking, while at the same time collaboration will prevail over competition. Interesting prospects for what has traditionally been a highly competitive industry where price has always been a key driver. But whilst there was agreement that the advent of the marketplace / aggregator opportunity, driven by open APIs, has the potential to transform the banking industry, there was no common consensus on the timing or speed at which we can expect to see consumer adoption of this model. Irrespective of the speed of adoption, there are serious strategic considerations for banking and financial services organisations, and a change of direction may be required.
What causes a shift in strategy?
A change in strategy, or the review of an organisation’s strategy, can be triggered by one of several factors: a change in leadership, ownership, parental company / investor pressure and / or significant changes in the external environment, and many others.
In the case of Open Banking, the strategy of UK retail banks has been materially impacted by regulation. In August 2016, the Competitions and Markets Authority (CMA) announced their intent to drive innovation and competition into the retail banking market by ordered the UK’s largest nine banks to develop and adopt an Open Banking API interface for customer data sharing.
This came in to force in early 2018 with the aim of transforming retail banking for customers and SMEs with innovative and secure apps to provide personalised services and information to cover all financial needs in one place and make it easy for people to find out what bank account is best for them.
At that time, consumers reported varying degrees of customer satisfaction with their banking provider; however there remained a low volume of switching, a trend which has also been prevalent in the business banking market.
Initially, the retail banks and other financial institutions viewed Open Banking and its evolution from a predominately regulatory and compliance perspective, as this coincided with changes in PSD2. However, today, it is clear that a broad range of financial organisations are using the principles and practice of Open Banking as a platform for change and developing new aspects of competitive advantage and differentiation.
Take up of Open Banking
A recent Open Banking Report published by Bristol-based law firm, TLT, revealed how Open Banking is bedding in, where companies are investing, who they’re collaborating with, what the issues and opportunities are and who are the biggest perceived competitors.
The report also looked at how customer trust and understanding of Open Banking is affected by high profile data breaches, how this is changing and how companies are planning to address this in their Open Banking strategies.
Some of the key findings include:
– 84% of companies are investing in Open Banking products and services
– Coming up with an Open Banking strategy and understanding the requirements is the biggest challenge faced by financial services companies
– Collaboration will be critical, with popular approaches including banks partnering with payment service providers and non-banks partnering with banks or building societies
– Tech giants are the biggest perceived threat – despite them not currently having a foothold in the market
Building on the insight in relation to the challenges associated with developing a strategy in a rapidly changing market, the report found:
“When it comes to their own organisations, 44% of banks – which face the dual challenge of complying with new regulatory obligations and determining how to compete – admit they have found it difficult to adapt. They are not alone, with a quarter (25%) of non-bank respondents – many of whom are in the process of launching new Open Banking products and partnerships – also citing difficulties in keeping up with a rapidly changing environment.
For banks and non-banks alike, it is a challenge to determine the best strategy in a new market where practice, products and technical standards are still being created. In this context, it is not surprising that determining strategy and understanding requirements is the biggest issue that financial services companies point to with Open Banking (33%).
The approach varies dramatically from one organisation to the next but in a market that will become increasingly competitive and segmented, developing an Open Banking strategy is a key step that many have not yet taken. Two thirds (62%) of respondents say they do not yet have a comprehensive strategy for investing in Open Banking. As many as a quarter admit they only have a limited strategy (25%) or that they are currently reactive to market developments (24%), while 13% have no investment strategy in place.
For larger banks and financial institutions, the first priority has been to ensure compliance and complete internal projects within the deadlines. This has meant a slower pace of engagement with customers and potential commercial partners. Challenger banks and fintechs generally have a clearer strategy and market position but have less critical mass and generally modest adoption rates. In this context, potential banking customers are not yet hearing much about the benefits of Open Banking and mass adoption of Open Banking has not yet happened.”
The strategic issues for established organisations
The issues captured here reflect our experiences in helping established clients within financial services and also across a range of sectors analyse, develop and implement growth strategies; in particular during periods of high disruption and change on multiple fronts.
One of the biggest challenges for established corporates and organisations is creating the space and time to assess and prioritise strategies and actions whilst also addressing critical business as usual issues at the same time. We recently wrote about the challenges of strategy and digital transformation, where we looked at this topic in more detail.
The rapidly growing FinTechs often have the benefit of clarity and focus in pursuit of their aims; although increasingly many require the collaboration and engagement with corporates to realise these ambitions and grow their customer base.
There are early indications that a focus on Open Banking may pay dividends for all involved. For example, TransUnion’s latest research has found that 100% of businesses think OB will help them better serve their customers, while Unisys recently found that businesses who understand Open Banking are 3.6 times more likely to switch bank in the next 12 months.
It is certainly the case that Open Banking has fuelled innovation across established corporates, service providers and FinTechs, both start-ups and scale-ups; although it will be interesting to see to what extent it creates material competition in core retail banking, which was one of the CMA’s objectives. In the words of the CMA’s Bill Roberts at the Open Banking Expo, the original objective was to “make banks work harder to keep their customers”.
Competition is clearly being delivered in part from new banking entrants including digital banks, aggregators, and other FinTech disruptors. And over the next couple of years it will be interesting to see how these new entrants have challenged and grown, and also to see how the established retail banks perform in the Open Banking environment. Specifically, we watch with interest to see if scale and deeper resources will deliver superior performance or if the new entrants with nimble systems and focused customer propositions will win.
Could it be the case that Open Banking will strengthen the position of the dominant retail banks, rather than drive switching as they occupy a more significant role customer engagement and co-ordination of personal financial information? This remains one viable outcome, and if this came to pass as a result of the banks delivering a more valuable and engaging experience to their customers, then it could be viewed as a positive one.
There a lot of debate but at the moment the hard truth is that nobody really knows which way things will go. It will be interesting to see how the landscape has evolved by the time next year’s Open Banking Expo conference takes place.
Dan Cobley reminded us that the CEO of BlackBerry’s reaction to the first iPhone was “We’ll be fine”. The presence of all the major banks at the conference suggests the incumbents in the banking sector are treating the advent of Open Banking and the army of new competitors / collaborators with rather more respect.
Hopefully you’ve found this article useful. If you feel that your strategy would benefit from independent review and challenge, please get in touch.
Established in 2012, Whitecap Consulting is a regional strategy consultancy headquartered in Leeds, with offices in Manchester, Milton Keynes, Bristol and Newcastle. We typically work with boards, executives and investors of predominantly mid-sized organisations with a turnover of c£10m-£300m, helping clients analyse, develop and implement growth strategies. Also, we work with clients across a range of sectors including Financial Services, Technology, FinTech, Outsourcing, Consumer and Retail, Property, Healthcare, Higher Education and Professional Services, including Corporate Finance and PE.