Banking: Open for the future

Published on the 20/06/2017 | Written by Newsdesk

World banking report

Incumbents must embrace and lead the evolution into ‘open banking’ or risk disintermediation…

News in today from consulting outfit Capgemini that ‘the Open Banking evolution continues to unfold’. It’s released the World Retail Banking Report 2017 (WRBR 2017) along with Efma, which begged the most obvious question of them all. What’s open banking?

That, dear reader, is an emerging term in financial technology which refers to the use of open APIs that enable third party developers to build applications and services around the financial institution. In other words, it is the secret sauce which will empower the fintech community to do awesome things either with, to, or for ye olde banks.

Capgemini said in a statement that banks risk disintermediation (being sidestepped) if they do not carefully choose their customer-interaction business model role, and use APIs. It added that in collaboration with fintechs, banks can lead the open banking movement by offering innovative and personalised services that create new revenue streams and provide more value to customers.

Banks are in position where they are largely obliged to work with fintechs – and vice versa. While there is every possibility that these upstarts can undermine or even replace the value propositions of traditional financial services providers, there is also the reality that the new kids on the block lack a fundamental quality which has people handing over their money with confidence: trust. The banks have that.

And in today’s ‘consumer-experience’ driven environment, banks are under competitive pressure to deliver funky, clever solutions. The fintechs have that.

Which is why, last week, Capgemini pointed out that collaboration and not competition with fintechs is likely the best way forward – something confirmed by this year’s WRBR. It quantified the appetite for closer partnerships between fintechs and banks going forward with most banks (91.3 percent) and most fintechs (75.3 percent) saying they expect to collaborate in the future, with banks providing access to their broad resources, experience and expertise, and fintechs offering agility, speed to market and a fresh take on customer-centricity.

“Fintechs are now earning higher positive customer experience scores than traditional banks, and banks are openly seeking to collaborate with fintechs. Open banking offers banks an opportunity to retain and grow their customer base as they add the varied services of third parties to personalise and customise products and services. For banks that don’t think strategically and establish a role in Open Banking, there is a chance they will be disintermediated from their customers,” said Capgemini’s Anirban Bose. “It is imperative that banks consider business transformation approaches now, to establish and solidify their long-term base in open banking.”

The WRBR 2017 details how APIs offer a pathway toward open banking, where FinTechs and financial institutions collaborate rather than compete to create customer-centric solutions. Though APIs raise some security and privacy concerns, they are seen as crucial in allowing banks to take advantage of fintech ingenuity without having to make major changes to existing infrastructures.

“The most successful banks will use open APIs to generate new customer insights and revenue streams, while also improving customer experience,” said Vincent Bastid, Secretary General, Efma. “Many banks currently use APIs internally to improve information flow between legacy systems. In fact, we are already seeing early adopter banks asserting their role in open banking by proactively making their systems and data available to third parties and creating new revenue streams.”

Exactly how the evolution toward open banking will play out is far from clear. A majority of fintech respondents (53.8 percent) and banks (43.5 percent) envision a future in which banks and fintechs work together to build cross-industry platforms with bundled, complementary services that benefit customers.

A less likely but still plausible outcome, is that banks will continue to provide products and services but leave distribution to fintechs or other new open platforms. This has the potential to lower customer acquisition costs but raises issues related to disintermediation branding and customer ownership. Nearly half (47.8 percent) of fintechs predict this future scenario compared to only 28.8 percent of banks.

“We work with clients every day who tell us that they are looking to better understand the roles they should play as these new business models take shape; everything from the investment necessary to how to engage with these new players. Many understand that open banking is the new normal, but they are still unclear about how to proceed,” said Bose.

The report is available here.

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