Despite Open Banking Potential Banks Face Familiar Decision; Build, Partner or Buy

22. December 2017.

This Information Age article suggests that banks should embrace the spirit of PSD2 to gain first mover advantage. It argues that consumers have had to settle for services that don’t meet their needs and must settle for what they have due to complexity of evaluating banking services. So let’s evaluate the vision before we look at the friction associated with achieving that vision. The vision:

“Until now, the retail banking market has had little impetus for competition or transparency, and has handed banks a monopoly over their customers data. For consumers, this has meant settling for financial services that do not necessarily meet their needs, with only those who are able to navigate complexity finding the best deals. Equally, this closed market has stifled innovation in the banking sector and has encouraged the development of competitive bank products that would win over new customers and create loyalty amongst existing ones.

In January next year, PSD2 will put ownership of data in the hands of the individual and enable customers to compel banks to share this data with third parties. Banks that embrace this new landscape and its challenges will be rewarded with their customers’ loyalty.”

The article continues in this vein after a short discussion of loyalty which we will look at momentarily:

“These bonds of loyalty are starting to fray as a result of fintechs developing platforms that remove the complexity from money management.

PSD2 will break down the barriers between consumers and their data, giving them even more control of their finances, providing simpler mechanisms to transfer from one provider to another and offering a smorgasbord of banking products that suit their needs.

Equally, banks that embrace the new landscape can offer a more personalised range of products that puts the customer at the centre, ensuring that they remain competitive in the new open banking landscape.

Fintechs are ahead of the game, developing apps which bring all of a consumer’s financial data together in one place and use powerful analytics to offer advice tailored to their spending and saving habits. These apps will become the main platform for personal money management, regardless of who the consumer actually banks with.”

There are three primary inhibitors to this Fintech takeover; existing consumer loyalty and trust in their bank, convincing consumers to trust a new entity with their data and money, and the investment required to build a general API service that can support multiple undefined use cases. The first two were discussed in the article combined with opinions as to why these obstacles will no longer matter. First up, loyalty to existing banks:

“According to a recent survey from Accenture, more than half of UK consumers would never change how they bank. These feelings of loyalty and trust are born out of familiarity. We have instinctively entrusted our finances to ‘our bank’, without considering if we’re getting the best possible deal for our circumstances as the market has been tainted with a lack of transparency.

These bonds of loyalty are starting to fray as a result of fintechs developing platforms that remove the complexity from money management.”

Next, the article looks at the fear that holds consumer’s back from releasing their money and data to a new suppliers and again offers an opinion regarding why this fear will be overcome:

“Understandably, the potential misuse or loss of customer data is a concern for many as the market opens up to new players. According to Accenture’s survey 69% of consumers wouldn’t share their banking data, with 74% citing data protection risks as their reason for this.

With constant stories of data hacks hitting the headlines, it is no surprise that some consumers are feeling a little nervous about sharing their banking data with third parties. But the reality is that any third party wanting to participate in open banking will need to be authorised to do so by the FCA.

Consent is key. With PSD2 and stringent new rules for data protection in the form of GDPR, the consumer stands at the centre and is in control of exactly what data is shared, with who and for what purpose.”

The bottom line here is that competition and regulations are shifting the market, yet in reality this is nothing new and the response to this shift has also been implemented many times in the past. The options haven’t changed; banks can buy, partner, or build.

It is likely many will start off down a path that proves fruitless, such as attempting to build an API platform that supports any and every business and application and data access requirement – which is an impossible task. Regardless of any initial missteps, over time solutions that are compelling will appear and APIs can be created that enable low cost partnering; assuming the bank decides to take a pass on build or buy.

Overview by Tim Sloane, VP, Payments Innovation and Director of the Emerging Technologies Advisory Service at Mercator Advisory Group

Read the quoted story here

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