5 min read

Open banking: are we there yet?

Joanne Kumire

A popular topic among commentators and the media, incumbents have been slow to act on open banking. A recent Tink survey shed further light on the issues.

Open banking has become one of the most discussed topics as it ushers a new era of financial services. I won’t bore you with all the details on what open banking is, you can find that here.

Tink, an open banking platform provider, recently conducted a study that explores the threats, challenges and opportunities posed by open banking – from the perspective of financial executives in various EU countries. It revealed some obvious trends but also uncovered some interesting attitudes towards PSD2, innovation and technology.

It should be noted that perceptions varied greatly and no general consensus appears. Of the 269 participants, 55% expressed a somewhat positive view on open banking. This was higher in the Nordics, which is unsurprising as these initiatives are in line with their overall desire to deliver fully digital services to citizens.

Regulation, the biggest threat

A recurring talking point has been how regulation is threatening the incumbents’ business banking model by forcing more collaboration and unlocking customer data.

This was reflected in Tink’s study whereby in comparison to other factors, such as fintechs and big tech, regulation was viewed by almost 40% as the biggest threat to their business model.

The lack of clarity and the debates around how to comply are being blamed for this resistance towards regulation. It could, however, be argued that banks are resisting as they feel it is not in their best interests to actively engage in something that offers new challenger services the opportunity to disintermediate them.

The study also reveals that the UK and Germany as not as proactive in embracing new technologies, corroborates what we saw earlier this year when some of the CMA9 were issued with warnings after failing to meet deadlines regarding open banking and mobile apps.

Banks will, eventually, be forced to adapt in the face of competition with PSD2 introducing the marketplace and ecosystem models to banking. However, it is apparent that many of the incumbents still have a long way to go in implementing such models. Instead, many are viewing the changes as compliance projects, rather than opportunities to rethink to their businesses.

Partnerships filling the technology and talent gap

In addition to the obvious compliance issues, over a third of bankers surveyed expressed the main challenges of open banking as the lack of modern IT infrastructure and finding the right talent.

Incumbents hold a relatively strong position, for now, given that they have a large customer base and, generally, a high level of rational trust. The problem is that most of their core technology platforms are not fit for purpose in the digitally-native age. Interfaces are not intuitive; open banking APIs creates real opportunities to deliver innovation internally.

Creating partnerships to try and access talent is a short-term response to a more fundamental shift in the banking landscape

On the other hand, connectivity and agility of this nature are the foundation upon which the fintechs and challengers are built; they are selling themselves on their technology and the ability to provide integrated, on-demand and highly tailored services.

Despite the threat open banking poses to traditional banks and the risk that it turns them into commodity providers of financial products, it is also a huge opportunity. The combination of both worlds is one potential strategy, creating a breeding ground for partnerships.

Although initially reluctant to give fintechs access to the source of what they view as their competitive advantage – customer data – banks have been increasingly partnering with fintechs, which is probably why they were only viewed as the third largest threat by the banks Tink surveyed.

Furthermore, 74% of financial institutions in the study said they are in a fintech partnership, or looking for one in the next 12 months, in a bid to develop better digital services. Perhaps a case of if you can’t beat them, join them?

The UK respondents in particular stated the lack of modern IT infrastructure as a challenge. This could explain why more incumbents are now open to working with, or acquiring start-ups, with the UK also highlighted as having the second highest number of incumbent-fintech partnerships of all countries surveyed.

More bankers should be concerned about how and why loyalty is changing

Partnerships, when done well, can also bring in talent, which banks struggle to attract or gain access to, as many of the UK respondents highlighted. This is where having the right culture comes into play because although the UK seems to be thriving with tech talent, it’s not heading to the banks. So, perhaps the fault lies with them for not creating the right environment to attract and retain the talent needed to deliver digitally native financial services.

Creating partnerships to try and access talent is a short-term response to a more fundamental shift in the banking landscape. It requires a change in strategy and mindset, embracing a culture of innovation and learning that the fintechs excel at, and rethinking the skills that you hire for.

Relentlessly focused on the customer

As banking shifts towards a customer-centric culture, partnerships can aid banks in delivering personalised experiences. Meeting the minimum compliance threshold will not suffice.

This is reflected in Tink’s report, which showed that 56% of bankers believe consumer loyalty towards banks will be significantly reduced. Honestly, that number feels a little low. More bankers should be concerned about how and why loyalty is changing and what that means for their business.

The demand for aggregators, such as Tink, and PFMs such as Yolt are viewed as becoming the norm in customer banking. However, faster on-boarding was rightly seen as the number one priority for banks who want to follow the likes of Monzo and allows customers to entirely onboard in less than 2 minutes.

74% of financial institutions are in a fintech partnership, or looking for one in the next 12 months, in a bid to develop better digital services

Digital banking is only 1% finished and open banking is one of the many steps towards the remaining 99%.

We see signs of incumbents shifting their attitudes and increasingly viewing open banking as an opportunity as opposed to a threat. But that change is slow in coming and, meanwhile, the newer market entrants are gaining customers and mindshare.

A change in consumer attitudes is already taking place and the fintech sector is leading the way. The likes of Monzo, OakNorth and Transferwise are showing how to build a successful service, establish trust, and offer reassurances around security of data by communicating in a more transparent and open manner.

More insights including how banks are readying for the upcoming open banking deadlines, obstacles in their paths and aspects of customer experience that they will be looking to prioritise can be found in the Tink report.

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About the author

Joanne Kumire

Joanne is a research analyst at 11:FS, examining the biggest trends in the industry.

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