That is the real question banks should be asking with the introduction of Open Banking. The big issue is not security – banks are used to dealing with security issues – it is banks’ disintermediation from customers, writes Abe Smith
If customers can choose to access their bank accounts via any Third-Party Provider (TPP) – Amazon, Apple, or Facebook for example – rather than direct, banks could end up as factories for financial products.
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In the worst-case scenario for the banks, TPPs could own the entire relationship with the end customer. Adding insult to injury, the bank would still own the risk of the product.
Losing control of the direct relationship with the customer could impact the bank hugely – from losing brand trust, to losing the ability to leverage relationships to drive profit.
Customers, on the other hand, will be able to choose between keeping their relationship with a bank despite the comparatively poor customer experience, or interacting with a TPP, which offers a better customer experience but with arguably higher security risk.
With fintech adoption rates on the rise, it is not hard to predict which route most Generation Z, millennial and Generation X customers will choose.
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By GlobalDataOf course, some legacy customers will never switch banks, but over time significant numbers will seek change. In 2016, an EY study found that 40% of customers expressed “both decreased dependence on their bank and increased excitement about what alternative companies can provide”.
EY’s 2017 Fintech Adoption Index predicted that the generation of people aged 18-24, and those younger, “will mature without developing the strong relationships with incumbent financial services providers that are characteristic of current older generations.”
The question is not whether customers will start to move away from traditional banks in the future, but how banks will address this new challenge.
Innovation and control
The answer for banks lies in innovation and control. Banks not only need to take control of onboarding processes, but also innovate on customer experience.
While all banks will step up their technology and security in the wake of Open Banking, we will see the emergence of three types of response:
- Willing factory banks
These banks will step up security and compliance, but not the customer experience. They will accept a loss of control but will insist on compliant on-boarding standards to reduce risk for the bank.
- Super-provider banks
A few extraordinary banks will invest heavily in the customer experience and take the time to invest in market-changing value propositions.
Rather than focusing on financial products, they will think more in terms of innovations to help customers achieve goals, such as ‘long-time savings’.
The product will be the way to help them meet those goals – whether a financial or technological product or both.
- Unwilling factory banks
These banks will lose control of the customer relationship, but will not insist on onboarding standards with TPPs, and therefore they will carry unnecessary operational risk.
Onboarding is critical
In the new world where every customer touch counts, the initial experience – the onboarding process – is critical not just for customer experience, but also for managing risk.
We believe there should be a set of approved standards, set by banks, to control how new customers are brought on board – whether that is by a bank or by a TPP – in the future. This would ensure the application of consistent best practice in key areas such as digital identity verification, anti-impersonation, AML, fraud checks, bank account and document verification, affordability, and electronic signature.
All these factors will combine to help manage the banks’ onboarding risk – whether handled directly or through a TPP.
Radical change
At the same time as taking control of onboarding standards to mitigate risk, traditional banks need to embrace radical change and improve their digital offering. In this new world, everything is up for reinvention.
Traditional banks need to become more digital and responsive to their customers’ demands. Often that entails the simplification and rationalisation of a current messy offering which has grown incrementally over a period of many years.
They need to deliver a great customer experience across the board, and place customer convenience at the heart of everything they do.
Some will achieve this. Despite the bad press they have received in the past, banks have some brilliant people working for them – people who are innovative and visionary and could conceivably imagine how to compete with Amazon on customer experience.
The big question is whether these people hold the influence or the budget within the banks to effect complex cultural change. Banks will need to embrace the inventors and the mavericks within, to help them reshape and prepare for a future that is radically different.
