Open banking: The quiet revolution

The face of banking, and indeed, that of the financial world has changed dramatically in the last five years but not in a way that you might have expected. That small device in your pocket, your smartphone, has had a profound effect on how we, as consumers, have helped to drive innovation in banking like never before.   

The ways in which we manage our finances has changed beyond all recognition. How often do you drop into a branch to pay in money, withdraw cash, re-negotiate your current or savings account, mortgage, insurance and loan agreements? We’re used to getting what we want, faster and cheaper than ever before all through a simple click on our handheld devices. Our expectations of all providers in our lives, be it ISPs, utility companies or indeed supermarkets, have soared exponentially and so, unsurprisingly it is now the turn of the banking community to step up and meet our demands. Would this have happened without a banking crisis? Of course, but perhaps not as quickly. However, it’s not just high customer expectations that are the driving force behind this innovation in banking.   

The rise of FinTech and start-ups over the last decade means that people are able to launch products and services to the market at such a fast pace that they have and continue to dramatically shift the market. The game changers such as Metro Bank and Mondo recognise that people are happy to do all their banking online and/or via their devices. That they want to do it when convenient to them and not have to wait for a branch to open. Time is of the essence for consumers and the market alike. The range of services and availability of skilled consultants means that new offerings are hitting the market at an incredible pace.   

In addition, the combination of technological advances alongside new regulations from the Financial Conduct Authority (FCA) and Competitions and Market Authority (CMA) means that banks are now able to move from reactive to predictive behaviour and services, enabling them to better serve their customers. By 2019 if a customer wants to switch accounts, a particular product, their bank, (or perhaps we should say service provider), they can. With a simple click. It’s no longer about loyalty it’s about what works best for me as a consumer and how smart I can be with my money. 

This phenomena that many of us are calling Open Banking is fantastic news for the customer, it’s great news for the FinTech start-ups who have agility on their side and it’s challenging for the traditional big banks who have years upon years of legacy data and an infrastructure meshed together through a variety of mergers and acquisitions. 

What is Open banking?

In early August this year the CMA’s retail banking market investigation, concluded “that older and larger banks do not have to compete hard enough for customers’ business”, and that smaller and newer banks find it difficult to grow as a result. In turn that also means that people “are paying more than they should and are not benefiting from new services”. 

In the report ‘Making banks work harder for you’ the CMA lists a number of reforms that will need to be adhered to. By early 2018 personal customers and small businesses will be able to manage their accounts with multiple providers through a single digital ‘app’, enabling them to take more control of their funds and to compare products on the basis of their own requirements. 

Customers will also be able to search and switch. At the moment only 3 per cent of personal and 4 per cent of business customers switch to a different bank in any year despite being able to save £92 on average per year by switching provider on personal accounts, and make savings of around £80 a year on average on small business accounts.    

As a consumer these sound like great steps but as someone who works with traditional banks the changes are monumental. The banks have spent years building up trust and confidence amongst their customer base and in just over 18 months they face the challenge that their customers can simply switch accounts without having to wade through hours of form filling and bureaucracy. For the traditional bank this is not just a bad dream, it’s real and it’s happening now so what do they need to do to keep pace with their younger, faster counterparts?   

They can embrace this time of change. Lessons can be learnt from looking at other industries that have been shaken up by rapid developments thanks to innovative deployments of technology. For example, who could have predicted that an unknown company by the name of Uber six years ago would now be valued at $60bn, be available in over 400 cities and have dramatically changed the traditional business of taxis journeys around the world? What’s more as we become increasingly accepting of technology the company will push further. 

Automation through driverless cars, once the reserve of sci-fi films will soon become a reality, with tests already taking place in Pennsylvania last month. If you can do this with a 400-year-old industry why can’t it be done with banking? 

Embracing innovation - The quiet revolution

The lessons are there, the regulations will soon be in force and now is the time for banking to be smart. So how do we go about it? How do we embrace this time of innovation?   

As the recent McKinsey paper “The value in digital transforming credit risk management” highlighted, automation is key. “The automation of credit processes and the digitisation of the key steps of the value chain can yield savings of up to 50 per cent.” It’s all about speed and driving operations at a much lower cost to income ratios. According to the report’s authors FinTech companies are able to do this at below 40 per cent of the incumbents.   

Banks will need to introduce new systems and work-flow tools as ways to better manage data in order to be successful. Some processes are going to cause some serious head scratching and that means that with these changes the skills set of people required to work against the clock to meet this challenge are changing too. But these are smart people and there will be quick wins by adopting the appropriate tools, as McKinsey highlights, “Back office and loan- administration tools such as straight through processing and automated collateral valuation are also cross cutting improvements, as are the automation and interactivity of risk reporting.”

Banks can benefit from the advances in technology just as much as their FinTech counterparts while being ever mindful of meeting customer expectations. Component based technology means that they can take smaller tools, tech and data and integrate them to create a compatible workflow that works across the bank. For example, The McKinsey paper reports on one European bank that achieved significant revenue uplift, cost reduction and risk mitigation by fully automating mortgage-loan decisions. This was achieved thanks to higher data quality obtained through exchange to exchange systems and work-flow tools.   

The developments in technology are not a threat but a huge opportunity. Automation, integration, the availability of data are all merging to give us greater transparency and the opportunity to be more effective with our time in making critical decisions with more accuracy than ever before.   

As with anything this ground breaking the risks can be high. The shape of organisations is changing dramatically and so are the skill sets they’re using. 

Data scientists, risk management consultants and services are in high demand. It’s about getting the right tools and right people with the right expertise in the right place to manage the change. Open banking is here, it promises to shake up the very core of what has gone before but as many are discovering the change from reactive to proactive banking is a welcome one.

Tim Elliott, consultant, CoreStream
Image source: Shutterstock/MaximP