An open letter on open banking from Louise Beaumont
In less than four months, the competitive environment in which your bank operates will undergo a massive transformation and your dividend is at serious risk. It’s already obvious that customers’ expectations are shifting and competition to offer them better, faster, more personalised experiences is emerging everywhere – led by innovative fintechs in financial services. But what you as a shareholder must realise is that the nature of competition in banking is also changing and with it the way that banks will create value in future. This is because they are entering the era of open banking.
Open banking is mandated by regulators in the UK and Europe, who now require banks to create digital gateways (Application Programme Interfaces, APIs) that enable data to flow freely in real time between separate organisations.
For a business used to hoarding confidential customer information, this is a rude awakening. And it is unavoidable.
The key point about APIs is that they are inherently tools to enable collaboration between different data owners – once my data can combine with your data, we have a richer set of information to analyse for new insights that can lead to new services and experiences. This is the world in which companies such as Amazon, Google and Facebook have always operated – one in which they draw together ever larger pools of data as the raw material for new and better services. This is also the world in which banks will now have to operate.
The risk for a bank that does not engage fully in this new way of working is that it will end up as a provider of back-end infrastructure – a dumb pipe – on which others will build the high-value services that become essential, daily fixtures in customers’ lives. What are the five major signs that your bank is in danger of becoming a high-cost utility?
TREATING IT AS AN INCONVENIENCE
If the bank you’ve invested in seems to regard open banking as an inconvenience or a threat to be grudgingly complied with, rather than the essential nature of its market from now on, you should be worried.
LOSING VISIBILITY, NOT CUSTOMERS
Check your own bank statement. If it shows entry after entry that says Apple Pay or PayPal, or it consists of some direct debits and a monthly payment to Visa or Mastercard, you should be worried. One of the first signs that your bank is turning into a back end utility is that it is losing visibility of what its customers are doing – once someone else has created a layer of service that sits on top of the banking utility and doesn’t feed valuable customer data back into the bank, the bank’s own data becomes generic and its value starts to degrade. How can it then create value from that data? Who owns the truly valuable data and therefore has the right to monetise it? And not only that: how can the bank feed its fraud detection and credit algorithms properly without detailed, high quality information?
This is not a threat that will show up in the customer numbers – just because the customer hasn’t closed their account doesn’t mean that your bank hasn’t lost them. All it means is that the customer may be carrying out all their high- value activity with someone else and using your bank as the plumbing provider. No one who has opened a Monzo account has left their bank: it just can’t see what they’re doing any more.
If your bank talks more about the number of customers it has than what it knows about each of them individually, as a shareholder you should be worried.
ME TOO PRODUCTS, MISSING THE POINT
Look at the digital products your bank is developing. If its response to innovative products and services from other providers is to build a near-identical in-house replica, you should be worried. One of the biggest risks is that incumbents misunderstand the nature of the threat they face from data-driven entrants. Uber is not a taxi-hailing app, it’s a data company redefining the way people connect with services. To try to compete with Uber by building a me-too taxi-hailing app is to misunderstand the seismic change in the nature of the competitive environment.
For banks, this means that “jumping straight to product” in response to a competitor’s innovation is a cause for concern. In the era of open data, banks must find partners with whom they can combine their pools of data to gain fresh insights into their customers’ needs, and ultimately create new services. The value of those services will be shared between data owners and service innovators – in a world where data flows freely, no bank is an island.
NOT PRIORITISING TECH TALENT
It is no coincidence that the most successful and highly valued technology companies have open data at their core. This is the environment in which the most talented technologists want to work and therefore this is how companies attract the best minds. If your bank is struggling to hire high calibre data scientists at volume – or is not even attempting to do so – as a shareholder you should be worried.
NO DATA PARTNERSHIPS
In the open data era that is beginning, your bank will gain competitive advantage by collaborating more effectively with other organisations – large and small – to understand and release the value of the information it holds on its customers. This represents a new way for banks to create value. Whether or not the bank you have invested in decides to follow this approach, someone else certainly will.
And you can bet that whoever does, their goal will be to get as close to the customer’s day-to-day experience as possible – not to manage the utility bank plumbing on which their service is built.
Co-chair, techUK Open Bank Working Group & strategic advisor to SapientRazorfish