Open banking is the result of industrial and regulatory reforms that are driving competition and innovation in the financial industry. Banks and payment providers must share financial data with other institutions. This creates a holistic view for the customer of their financial health and their trends in spending in their various accounts. There is also, however, the opportunity for technology companies to provide seamless connectivity with applications through APIs.
Transparency and ease of use are the core elements of digital challenger banks, giving them a competitive edge in open banking. Technology driven banks such as Revolut, Starling, Atom and Monzo are providing more for customers through their user-centric banking experiences. Transparency and connectivity are enabling these banks to disrupt a market which was the stronghold of the pillar banks. With the dawn of open banking, these challenger banks are set to disrupt the market further and grow their customer base.
Unfortunately for the Pillar banks, it is difficult to compete with the speed of innovation from challenger banks. They may not have the technology or innovations in-house. Open banking is allowing competitors to enter and disrupt the market – providing consumers with more choice and options.
Regulatory moves from the EU and UK Competition & Markets Authority such as the PSD2 will increase competition in the payments sector. These regulations ensure that banks and payment businesses must provide APIs that will allow third parties to access data and process payments. These application programming interfaces (APIs) allow the back and forth connectivity of applications and the sharing of data. They safely expose your banking data to build new technologies. APIs allow banks to build a full rounded view of the customer and their financial health, through networking their accounts. It also creates an opportunity for technology companies to create better services for consumers, whether through their native applications or challenger banks. Seamless connectivity will fuel customer focused innovation.
Further to the regulations and technological developments, an opportunity is the rising expectations of customers. Although digital banking competition has only begun in recent years, customer expectations have been rising due to popular apps that are outside of the financial industry. With successfully connected customer experiences provided by apps such as Uber and technological ecosystems such as the Google Suite of products, the banking consumer now has very high expectations of service. In 2015 Heather Cox, Former Chief of Client Experience at CitiBank shared that “People need banking, not banks”. Consumers do not care about the bank, but about how seamless and easy their experience is, meaning banks need to innovate now more than ever.
As a result of these shifts in expectation and the changes in regulation, there is an opening for technology companies to provide alternative options. Not only app banks are competitors to Pillar banks but beloved tech companies such as Facebook have financial licences. An online ecosystem where consumers do not need to leave their preferred apps is the future of open banking.
Opportunities within regulations, customer experience and the exposure of APIs are allowing the entrance of competitors to the market. In the 2017 PWC YouGov findings which surveyed 2,000 British consumers, 32% of those surveyed now “multi-bank”, choosing different options for different services. Market concentration was a huge reason for this shift. With Open Banking providing more options for consumers, I expect that this number is to rise exponentially. Even surveying my own team many have adopted a digital bank for daily expenditure, a credit union for savings and a traditional pillar bank for their mortgage.
Challenger banks are answering the expectations of customers, developing and focusing on a strong customer-led USP. Many of these digital bank CEOs see themselves as providers of brilliant experiences, rather than banks.
Challenger banks are not afraid of competition from other institutions, and instead, will use open banking to provide more for customers. The future of banking includes financial services marketplaces where connectivity leads to easy transfer of funds for consumers between their applications, friends, businesses and financial providers. Also, these banks are expanding their products and connectivity with other banks.
Although fintech and open banking is the future of banking, there is still a high market concentration with 86% of UK current accounts concentrated in the top 5 banking players. However, as innovation grows and the connectivity through APIs flows I expect numbers like this to change dramatically.
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