Rachel Hunt: Mark, we have already discussed how to prepare for Open Banking, but how do we get moving with real projects? What are the opportunities for Open Banking? Why should banks get excited by them and how could they use them to launch new, differentiated services?
Mark Ranta: Let me answer this from a US perspective; the basis of core consumer banking services is FREE. Free checking, free debit and so on. The banks too often treat the “free” foundation services as loss leaders, the cost of which can be recouped as customers’ financial life-cycle progresses and they add credit, mortgages or investment portfolios. Some of the new services that open banking will enable can help to readdress the balance. Although foundation services can continue to be free, there are many new services, which offer real value to the user, that could be charged for. These can be elective, pay per use or part of premium accounts, but the difference is the variety of services that could be offered outside of the traditional financial life-cycle.
For example, if a customer would like the ability to connect his account directly to big-brand online store X, for ease of use and a better experience, then he may not think twice if his bank charges 10 cents for this service. Banks shouldn’t over-charge, but neither should they go to the default position of NOT charging. This is, after all, a net new service. These new value propositions can not only improve the customer experience, but also create new monetary streams for banks.
Lu Zurawski: Europe has slightly different dynamics. We have regulation and government initiatives like PSD2, which forces banks to open access to individual service components to new Third Party Providers (TPPs) free of charge – with those same TPPs able to introduce new paid services resulting from that access. Although banks could see this as disintermediation, and creation of a more competitive ecosystem, there isn’t anything to stop these banks from becoming TPPs themselves; reinventing their business to provide new holistic services and generate new revenue streams. They can also start thinking about monetizing additional services. One example could be balance enquiries. This is typically a free service, and should be part of the foundation services that Mark has mentioned. However, a predictive balance enquiry that can calculate a position against incoming payments or that could be called against, could result in better credit decisioning. This may be of interest to the customer, and could be part of a premium account service fee or a pay-to-use menu. Many standard bank services can be enhanced either by the bank alone, or through co-innovation with fintech partners using an open banking philosophy.
MR: The use case possibilities are endless within an open ecosystem. It forces us to challenge every process and workflow. It also simplifies activities that are possible today, but are complex to implement. We can build greater trust in the system by improving confirmation of payee, and reducing misdirected payments with account validation. Banks could offer single sign-on services across the payment ecosystem, and remove friction in the Know Your Customer (KYC) process, a little bit like your Facebook or Google sign-in credentials, but for your financial services.
LZ: Yes, and with the Internet of Things (IoT), this will be increasingly important, as micro-payments are predicted to grow exponentially. Analysts predict that we could have 20.4 billion connected devices by 2020. Not all will be doing machine-to-machine payments, but this is a new ecosystem that banks need to prepare for!
RH: OK, so now the million-dollar question: What will a bank look like in five years’ time?
MR: That is actually a long time for the fintech world, and not such a long time for the banks! What is clear is that many banks will be at one stage of production with open banking. Depending on the geographic location, some are likely to be at a live stage, with first iterations of open strategies, fine-tuning and possibly exploring versions 2.0. They will have built their first partner ecosystems. For others, especially where there is less of a regulatory push, the uptake will be slower. However, the new value propositions will be live, and there will be many new use cases, with or without the banks. Open and immediate payments will have converged and direct and instant connections between bank accounts and merchants will be increasingly prevalent. If anything, Open is an opportunity for the banks to create more value for themselves from the fintechs.
LZ: Let’s also not forget the impact of other trends. Mark mentioned Instant Payments, but regulation such as the General Data Protection Regulation (GDPR) will have a broad reach, beyond Europe. It will create a world where data belongs with the consumer. This will be a world where protecting data, identities and credentials of individuals will be a new value proposition. It’s imaginable that banks in this new world could be not only the custodian of customers’ money, but also of their identity and credentials. People still trust their bank more than any other third party when it comes to information, and could be a key differentiator if used wisely.
RH: Banks as data vaults and not just dollar vaults then! Or should I say… cryptocurrency?