You take out your smartphone and log onto Amazon to make a credit card payment, transfer some money into your ISA savings account and, as a small business owner, check your current cashflow.
Markos Zachariadis, Associate Professor of Information Systems & Management, and Pinar Ozcan, Associate Professor of Strategic Management explains that while you are there, you are offered better terms on your business loan, kept up to date on your current remortaging application, and reminded about a new IPO investment opportunity.
It may not be reality just yet, but a revolution is underway in Europe’s retail banking sector. The innocuously named second Payment Services Directive (PSD2), that came into effect in the EU earlier this year and in the UK at the same time under the name “open banking” has laid the foundations for a dramatic reshaping of retail banking.
After spending well over a year interviewing the various players involved, and researching the mechanisms and market, we are able to outline some of the more important effects of this initiative, ways in which open banking will impact retail banking, financial services and the business world beyond.
Consumer convenience
A Third Party Provider (TPP) can aggregate and integrate customer data from multiple banks, present that information in an easy to understand way, and use that to provide a single point access to a range of suggested products, services, and expert advice, based on analysis of that aggregated information.
The convenience of one-stop visibility on their finances will help to improve the performance of SMEs’ finance function – by enabling better liquidity management, for example.
As open banking develops, TPPs will integrate other applications into their platforms. Just as a property search application might seamlessly include Google maps to enhance the app’s utility without leaving that application, so new financial platforms will integrate a range of additional services that may not directly relate to financial services but create additional value.
Consumer choice
As well as convenience consumers will benefit from better product and service choice as well as pricing. Previously, traditional banks captured customers, cloistering customer data, and offering the customer proprietary services.
But a TPP might provide a lending platform that, using sophisticated technology to analyse customer data and make customer behaviour predictions, can offer more competitive terms, while achieving lower default rates.
Or with investments a customer could give permission to access their data to a TPP, which could then make investment suggestions based on the risk profile that the customer indicates. Pensions and mortgages are other obvious services that will be affected.
The democratisation of banking services
Open banking enables many people to have a bank account who would normally be unable to access bank services via a traditional bank.
For numerous reasons – no permanent address, poor credit rating scores, international students who come to the UK for a limited period – there are many people in the UK unable to access banking services.
Democratising access to financial services in this way has huge implications for the wider economy. It economically empowers segments of society who were limited in the extent to which they could actively participate in the economy.
Data control
Open banking proceeds from the principle that the individual customer should have power over and control of their personal data, including that currently held by the banks they deal with. Customers can, therefore, provide or withdraw consent for access to personal data whenever they wish.
This may appear a trivial detail but its impact is huge. Data is the oil that lubricates the financial services market. Without customer data TPPs cannot provide competitive services. Customer permission becomes currency.
Rethinking business models
The banks should no longer be thinking about selling everything to the customer themselves but instead about sharing with others. They should be thinking of competing through platforms, creating an ecosystem of reliable strategic partners – and sharing revenues on the products and services that those partners push to the customer. This is a move from traditional vertically integrated banking to a far more modular and networked architecture.
It is not only the traditional banks that will be threatened. Traditional service providers such as accountants, business consultants, pensions advisors, and many others, that obtain business through recommendation or tie-ups with banks, must find their place in the re-oriented value ecosystem, alongside new service providers.
The march of the tech giants
Combine the huge amount of personal data that the digital behemoths such as Facebook, Amazon, and Google possess, with their data analysis capabilities, and the personal customer data that the banks hold, and the tech giants are well positioned to dominate financial services.
They already have a customer base of hundreds of millions of users. Even if they do not move directly to play a role as TPPs, they can easily tie-up partnerships with fintech TPPs or acquire them.
