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  1. Analysis
March 29, 2018

Is open banking all it is cracked up to be?

By Patrick Brusnahan

Plenty has been written, in this publication and others, on the open banking revolution. Compliments have been made to how it will aid customers and improve experience, but little has been said on how incumbents will be affected. Are the big financial institutions even ready? Patrick Brusnahan reports

Is open banking the opportunity that many have stated it will be? Gabriel Schild, executive director for business transformation at Verizon, thinks it will have a great impact.

Speaking to EPI, he says: “Time will tell. I think PSD2 and directives in local legislation will ahve a profound effect on the way banks think about customer experience.”

One crucial aspect that will change is customer relationships. With open banking potentially giving third parties access to customer data, with the customer’s consent, eyes could be drawn elsewhere.

Schild expands: “Imagine if you’re a banking client. I can tell a local bank that I have a fantastic app that can do all of my banking needs, but I want to keep my bank account. That means piping in the data in an as-needed basis. That means my local bank may lose customer intimacy.

“The average digital banking client uses 45 hours of banking apps a year and that could be the only meaningful way to build a relationship with the customer where the average customer only spends 19 minutes a year in a branch. Banks have to fully invest their future into the mobile banking app.

“However, people may like your app, but they might like another app better. PSD2 will have a vat impact on customer intimacy that high street banks on the continent have with their clients if they’re not careful. That’s why a lot of them are working with or buying these players rather than being relegated.”

It is a big change to the market. Some even say that this could be the beginning of the end for banks’ dominance of consumer finance.

Ian Bradbury, chief technology officer, financial services business at Fujitsu, says: “Half of UK financial sector leaders believe banks will not exist in their current form in a decade, which emphasises that we’re on the brink of major change.

“Open banking will help build a very different financial services sector, meeting the needs of the digital consumer – but only if we are able to overcome the cybersecurity barrier.”

Not everybody feels that open banking will have the massive impact on banks that is expected.

Jens Bader, one of the founders of payment app MuchBetter, believes that open banking will take much longer than predicted to fulfil its potential.

“The financial world is very complicated,” he tells EPI. “The IT systems have grown over many years and we’re looking at a convoluted and complex layered IT structure. To provide a secure and open interface in that is quite a challenge in itself. Open banking is a nice idea but it is a huge challenge to get it implemented and executed. There are many challenges.”

He adds: “One is to build the interfaces and APIs. The standards are not yet clear. The security around it will be a big challenge, not just from a hardware perspective, but opening yourselves up leads to multiple sources of exposure.

“This will all take time. We’re looking at a very long timeframe for an open banking reality. I don’t think this is a short term opportunity for companies to make money. It’s more of a short term headache.”

Banks’ response

Banks have historically been the port of call for customers to deal with their financial life. This sector is not ready to let go of that.

Schild says: “If I was a bank, I would prefer to be the preferred customer gateway. It’s not all doom and gloom for high street banks if they play their cards right, but you need to move fast and the infrastructure needs to be able to cope with that.”

HSBC has stated its aim to launch an open banking app by the first week of May 2018. ‘Connected Money’ will centralise information on a customer’s accounts. Its features include spending analysis and purchase round-ups to transfer small amounts of money to a savings account when customers make purchases.

Bader states: “Someone within HSBC must have come up with the idea to be proactive and take the lead before someone tells them what to do.

“What I’ve seen from the banking initiative from the UK in the past is a lot of failure. If you look at past initiatives from the banking world, where you could sense they wanted to break out of their traditional frameworks and use modern technology, a lot failed. That’s why you see a lot of challengers in the market such as Monzo and TransferWise.”

Why are banks so far behind? Legacy infrastructure issues are often cited, as well as regulation holding banks back more compared to newer players. Schild claims “banks are catching up, but slowly”.

“If you look at the latest results from some of the largest high street banks, they’re making ample money,” Schild adds.

“The imperative to change something from a cost point of view is not there because things are going okay. From an investment point of view, they have money as well and can spend money on innovation, in house or otherwise.

“It’s more of a case of whether they realise what’s happening. Do they really understand that there is a changing customer demands, all sorts of start-ups and challenger banks who provide a different experience? Do they understand the compulsion to change?”

Open banking risk

Considering how vital security is to the financial sector, opening up the playing field and letting newer players enter is a huge risk.

Incumbent banks are under heavy regulation while fintechs and third-parties are scrutinised less. In some cases, the tech firms can change so quickly as to stay ahead of the regulator. This means that risk is firmly in play.

“At the moment, I see more risk than opportunity,” Bader purports. “For the first time, the customer is in the driving seat. They can now give individual companies access to their data and we all know how careless people can be.”

He adds: “When I download an app, I don’t look at the terms and conditions, I just click on it and then six weeks later, I’ve deleted the app. In six months, I can’t even remember that I ever tried that service, but they still have access to my data. Customers will be a bit overwhelmed with keeping track and managing all the decisions they’ve taken with sensitive data.

“In terms of opportunities, there are some if done sensitively, but not in the short term. We will probably hear some horror stories first.”

Sharing personal data is also against everything that consumers have been taught over the past decade. Whether it was by their bank or by marketing campaigns or government, consumers have been told to share as little as possible.

Ciaran Dynes, SVP of products at Talend, says: “For years, consumers have been told to be careful with their financial information, to be astute and aware of who has access to it, and to guard it at all costs. The message of open banking seems to go against this mentality which can be confusing for consumers.

“While open banking is allowing third parties to access consumers’ bank account and transactional information, there are many checks and balances in place to protect consumers and prevent fraud.”

To combat this fear, Dynes states the solution is “education. Pure and simple. If consumers understand, they will use the services”.

The security aspect may be what gives banks the edge in the upcoming battle for market share.

Schild says: “You need to protect from a security point of view and I think that’s where banks can play their cards right. If you use a different app for your banking needs and it gets hacked, I’m probably not going to go to a fintech. I’ll go to my bank.  The fintech is just a conduit. Banks need to use the trusted function that they have as well as innovation.”

“What I think is that the traditional high street banks grapple with innovation,” Schild concludes.

“It’s something they have had to become used to, but many of these companies were used to working in a closed environment. It was waiting for someone else to innovate and then you would do it as well. You cannot afford to wait anymore, these things need to be done instantly.”

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