Open banking – build it and they will come?

When open banking began on January 13, 2018, with the launch of PSD2, the fintech twitterati were abuzz with predictions of the radical disruption of financial services. Industry pundits spoke about customers walking through a promised land of meaningful financial insights and competitive products.

Designed to allow customers to give their bank permission to share their data with other businesses, apps, and online services, the new rules make it easier for them to compare services and switch to get better deals and more personalized products.

With the younger generation's willingness to switch to an online-only bank (40%, according to Genpact research), surely challengers would try to snap up customers. In turn, it was an opportunity for traditional banks to play to the advantages they already hold over their digital rivals. Yet the big day came and went with less than a whimper. Only three large banks were ready to go on January 13, 2018, and a few banks didn't even manage to get their changes done in time. The disinterest of the general populace was palpable.

Not much has happened since, other than a few small enhancements from the big banks and the release of several fintech apps. For example, Commerzbank has used open banking to tap into the Internet of things (IoT) data to adjust loan repayments for capital equipment based on usage. Lloyds Banking Group is developing an account aggregation service for its retail banking customers and working with iwoca to bring business owners the ability to instantly provide up to five years of transaction history.

The nine largest banks have all made their application programming interfaces (APIs) live to facilitate improved customer experience and engagement, and enhance service offerings through consistent accessible customer data, which, in turn, will identify ways to increase digital revenue. Banks have spent huge amounts of money in the background, building their APIs, but this appears to have been driven in most part to meet regulatory requirements rather than truly transforming services to optimize benefits of open banking for their customers. Most customers are not yet reaping significant benefits from open banking.

The challenger banks were not required by regulation to provide open-banking APIs; however, Starling, Monzo, and Metro Bank are a few that have jumped on the opportunity to provide an optimized customer experience and enhance their product offerings. Activity from fintechs includes such initiatives as TrueLayer's "banking via an API" and Bud's open banking as a service, which lets customers securely link their bank accounts, provide tailored insights and notifications, and use enriched bank data to create more personalized user journeys. solarisBank and Railsbank are two other notable examples in this space.

Several aggregators, such as Emma, Yolt (from ING Bank), and Moneybox, have emerged and could be poised to do something interesting with exposed API data.

Yet despite this initial activity, there has been no flood of competitive products powered by free-flowing data, no surge of customers following the best deals. So did the banking traditionalists call it right? Are customers going to remain as sticky as ever? Or could we be at the beginning of a revolution not just an evolution?

The answers may lie in building innovative networks that use the access to data that open banking provides to link services for customers. Financial institutions can now deliver added value to their customers from connected ecosystems, a benefit that smart companies are already realizing in other ways outside of open banking. Let's build on a real-world example of Grab, which started as a ride-sharing app in Malaysia with the intent to make taxis safer. After launching, the company realized that most of its customers did not have credit cards or even bank accounts, so it started Grab Wallet to enable drivers to store the money they were earning. GrabPay followed suit to allow drivers to pay for things with the money they earned driving. In 2017, Grab purchased Uber in Malaysia and now operates in 168 cities across eight countries with many millions of customers. From a financial perspective, Grab has used the data it gathers to power partners such as China's ZhongAn Online P&C Insurance to launch digital insurance services for its users and drivers. This ride-sharing company instinctively built the ecosystem, up and down the value chain, to encourage more ride sharing.

Similarly, open banking offers the gateway to build a powerful ecosystem servicing previously inaccessible customers and businesses. For example, imagine an account aggregator with a hyper-personalized interface based on an individual's own data. Easier access to data helps maximize areas where banks often struggled; for example, finding better deals on utilities and regular purchases, developing robust loyalty programs, and predicting product needs. In fact, if supplemented by alternative data from IoT devices, this new relationship hub could deliver personalized savings directly to customer's home assistant, like Amazon's Echo or Google's Home.

Similar to retail, the benefits of open banking and IoT data can create opportunities in corporate banking with a relationship aggregator for small- and medium-size enterprises. Such a relationship aggregator for corporates can create an ecosystem with access to multiple services for which they may not have previously considered at their existing bank.

Perhaps instead of a home assistant, it is an “office assistant." A central aggregating hub, fused with transactional data and actual financials, can advise companies on the best time to refinance a loan by monitoring favorable interest rates. Or access to external data can improve supply-chain management by analyzing shipping costs of clients' competitors to advise on market rates and when they may be overpaying.

In fact, Swoop is blazing a trail with services for small businesses. Customers have the ability to compare and switch current accounts and easily choose among 400 lenders, including peer-to-peer (P2P) platforms such as Funding Circle and Growth Street, and can use APIs to integrate their accounts with accounting software like Xero. Swoop even integrates with the current account switching service to execute the move to another financial institution.

Truly embracing the benefits of opening banking in these types of ecosystem models will create real value for customers. Open banking has the potential to deliver on its initial promise by fusing banking and non-banking data in a connected ecosystem and applying innovative human-centric algorithms. This will deliver hyper-personalization, widen the services net, and ultimately make banking, open. Whether a fintech, a techfin, a challenger, or an established player drives this change is irrelevant because, after all, it is the innovative data wranglers that will decide the success of open banking.

The article was authored by Alex Bray, assistant vice-president, consumer banking, and Peter Heywood, digital partner, banking and capital markets, Genpact, and was first published by FinTech Futures on March 5, 2019.