The global push for open banking is gaining momentum, with regulators in key jurisdictions keen to promote a secure regime that increases competition and reduces costs for consumers. While promoted as a “game-changer” for the industry and a challenge to incumbents, open banking will offer ample reward for firms that are quick to innovate and produce data-driven services to meet customer needs.
Key insights
- By having to share data, banks face the prospect of losing market share to tech rivals as millennials shift to more digitized banking solutions
- As the European Union (EU) and other markets push for open banking, the US struggles with inconsistent standards, which could impact its competitiveness
- Incumbents that can leverage their data to produce innovative products and services will be best positioned to manage the open banking transition
Are banks ready to hand over customer data?
Traditional banks and financial institutions solidified their customer relationships with reputations built on trust, strength, reliability, and data security. While this offered a competitive advantage over new entrants, regulators across the globe are now pushing for an end to the closed model and are looking for banks to share data, which has grown exponentially in quantity and value in recent years.
Open banking, defined as the opening of internal bank data and processes to external parties through digital channels, is expected to provide greater competition, improved efficiency, and act as a catalyst for new products and services. Historically, external parties have required users to provide account login and password information to access bank transaction data through data-scraping techniques, a mechanism that is inefficient, unstable, and carries potential risk. Technologies such as application programming interfaces (APIs) are now enabling banks to share access to data in a secure and transparent manner, resulting in potentially new business models for unbundled and recombined bank services.1
Tech giants move into financial services as millennials question need for banks
The quantity of client information stored in bank databases is expected to grow in value particularly as technology becomes more advanced and adept at gleaning insights into customers' financial profiles and behaviours. The liberation of this data has the potential to facilitate greater competition within the financial industry, allowing customers to efficiently seek out more cost-effective and streamlined services.
The liberation of data has the potential to facilitate greater competition within the financial industry
Millennials are looking beyond traditional banking to more digitally-enabled service offerings that feature low or no fees, integrated products, more timely processing, and exceptionally responsive 24/7 service. As a result, incumbents face the risk of losing market share to more nimble third-party providers that that can better leverage customer data to assess the suitability of products and services, and then target customers accordingly. One in three US millennials believe they will have no need for a bank in future, while 73 percent would be more excited about a new financial service offering from Google and Amazon rather than from their bank, according to a recent McKinsey report.2 Tech giants are putting pressure on banks to proactively share data as they seek to broaden their marketing platforms for goods and services.3 Many, such as Alibaba and Amazon, are already offering basic asset management and lending services to their hundreds of millions of users and are expected to continue to expand their products to include other segments.
A number of banks are pursuing a variety of solutions and opportunities to stay ahead of the curve to both preserve and grow market share. For example:
- South African bank Investec teamed up with British online lender MarketInvoice to manage underwriting for Investec customers
- UK’s Lloyds Bank recently introduced an open banking solution – an app that provides customers with the ability to securely view accounts from six other providers, without requiring multiple logins
- RBC Ventures, launched by Royal Bank of Canada in June 2018, is reimagining how it attracts customers by building businesses and interfaces that reach users before they consider their banking needs, with a view to converting those users to customers at the end of the process
EU leads the open banking charge
While very much a global movement, the pace of open banking development varies, along with contrasting models in different jurisdictions. Consumer protection and alignment of payment systems are driving development in the EU, where the Payment Services Directive is pushing banks to share APIs with developers by early 2019. Open banking in Australia is also being driven by consumer protection through the drafting of the new Consumer Data Right legislation, which will allow consumers to require their bank to share their data with accredited service providers. Australia's largest banks will need to make credit and debit card, deposit and transaction account data available by July 2019, with mortgage data to follow by February 2020. Personal loans and all other banking data will be included from July 2020.5
By contrast, the United States, which operates under a complex patchwork of regulatory agencies, is seen as playing catch-up. Despite industry-led efforts to provide guidance and uniformity of standards, no regulator has yet issued prescriptive requirements, which could put US-based financial institutions at a disadvantage compared to their EU counterparts.6
Firms must reinforce security defenses and instill trust to retain customers
The pace of open banking development varies, along with contrasting models in different jurisdictions
Conflicting standards across jurisdictions may have implications for banks with global operations, particularly in the field of data security. While APIs offer a more secure method of sharing data than screen-scraping, banks will also need to be aware of potential exposure to cyber threats.7 Banks have warned that open banking could spur a wave of phishing attacks and have asked for more time to boost their security protocols ahead of regulatory deadlines in the EU and Australia. The security upgrades are likely to be costly, with Australia’s Westpac bank estimating that it will need to spend more than AUD 200 million to be ready for open banking.8
From a broader viewpoint, however, open banking may act as a welcome spur for the rapid development of cybersecurity technologies, including ‘know your customer’ applications, digital identity and fraud detection.9 While bolstering their security arsenal, firms will also need to manage the critical task of how to educate their clients about the benefits of open banking, as well as potential threats, without creating undue confusion or alarm.10 Those capable of maintaining trust with clients through the implementation phase will likely be in a stronger position for longer-term retention. Firms that can leverage their data riches and deliver innovative products and services may be best-positioned to weather the forces of change.11