Open Banking, which comes into place January 2018, is a landmark development for the banking industry.
It will force banks to open up their Advanced Programming Interface (API).
This may sound like a dry compliance point, but the reality is far from it. With customer permission, competitors will be able to access banks’ enormous – practically unused – data repositories.
Working with Callcredit, the consumer data company, we conducted in-depth research into how the sector is approaching the regulation.
We found a mix of hungry challenger banks and new competitors, eyeing up a complacent banking establishment.
Banks, for now, are protected. Their data is creaking, complex, and largely unusable due to universally unwieldy technology. No big bank is doing much with big data, meaning that the entire banking establishment has been able to rest easy.
Thanks to Open Banking, new competitors will pose a greater threat. Often born online, brimming with fresh talent and with systems that were built last year and not last century, these competitors will be able to make the data sweat.
They will use it to build and launch new, customer insight-led services that will tear away at the money-making parts of banks.
As anyone with a passing interest in banking will know, this provides an immense challenge to the business model. Banks make most of their money from a few products, which are bundled with less profitable services to attract customers. Now, banks risk becoming disintermediated from their customer base. They could be stuck providing only unprofitable services, like current accounts.
What’s more, Open Banking will not just open the market up to challenger banks and other finance-industry competitors. It will also be a gateway for the world’s digital giants to enter UK retail banking.
Expect Google, Amazon, Facebook, Apple and even Alibaba, Tencent and Baidu to enter the market, either by providing payment support services or acquiring a challenger bank.
However, great ideas tend to come in the face of a crisis. Banks will use Open Banking to modernise and create new services.
Already, the sector has begun to improve its innovation. HSBC’s launch of Nudge in September showed the way. The app is a life management service, enabling users to better understand their spending habits and plan where savings can be made.
This is an area where banks will need to grow. Challengers, like Monzo and Starling, are leading the way by making finance exciting.
To a growing number of fans, these firms operate as life management services, giving customers control over both their data and budget. They understand that holidays, cars and weddings aren’t boring, and that none of these would happen without budgeting and banking. They make saving easy and fun.
Banks will need to follow suit and look at how finance helps people live their lives, creating a whole new role for themselves with consumers.
Banks may also look to develop “lifeboats”. These are new financial startups that are funded by old banks. They gain from deep pockets, but do not suffer from a banks’ old, potentially stale brand and technology. As an example, think First Direct’s creation by the late, not-great Midland.
Yet all this change needs to come fast. It tends to take large corporates a decade or more to change culture. Banks barely have three years.
To start, they should treat Open Banking as an existential threat, not just a tick box. If they don’t, we could see a bank forced into a government bail-out in near future, for failing to keep up.