It’s an often repeated truism that more people get divorced than change bank account, but with the advent of Open Banking this may be less true now. Modern customers, especially tech-literate millennials, are increasingly likely to run multiple banking services in concert with each other. For example, Monzo is gaining roughly 200,000 new customers a month, but relatively few people completely switch over, according to CASS; they instead run it in conjunction with other banks and services. It is therefore no surprise that competition between these banking service providers has intensified. As a result, it’s easy to understand why banks like Monzo, Starling and Revolut have seen such success with this audience by creating a banking experience akin to the other online services people are accustomed to using.
The larger, traditional banks have a different proposition as they are held back by regulation, legacy technology, and a customer base with hugely divergent levels of ability with technology. Open Banking has increased the pressure on these differing institutions to work together. However, with their wildly different approaches, it is no surprise there’s a culture clash.
Why can’t we be friends
Fintechs, as newer organisations, are able to operate free from the weight of legacy systems, building their processes and products from the ground up, based on ‘new IT’ such as the cloud. This enables them to be truly agile, compared to the traditional, monolithic banks. The fleetness of these fintechs allows them to quickly adapt to customer demand, reacting to shifts in the market and iterating quickly to deliver new products to their demanding, tech-savvy customer base. Traditional banks have a much more diverse customer base than the millennial focused challengers, this makes iteration and innovation much more difficult as they have much more to consider when taking risks.
It is not the case that fintechs are intrinsically more risk taking, nor banks naturally risk averse. It’s that their differing customer bases and IT structures create, by necessity, vastly different approaches. This can lead to a tension between these two entities as their market shares are very different. Current market pressures are forcing them to collaborate more closely, with traditional banks leveraging their gravitas in terms of customer base and fintechs their millennial sheen. This tension can be elevated as retail banks take an ‘if you can’t beat them, join them’ position in regard to fintech, as they seek to adopt some of the innovations into their own products.
The impact of Open Banking
The level of change brought about by Open Banking can be over exaggerated by those in the industry, so it is important to remember that the public’s awareness of this change remains relatively low. That said, the introduction of Open Banking has brought about much more collaboration in the industry, which has been necessary to drive innovation and increase competition. Fundamentally Open Banking was intended to create a better marketplace for consumers. With the increased level of competition, they need to look to operate with a culture that can help drive more innovation, or they face the risk of losing market share as their customer base ages and they fail to attract the younger, more demanding, customer.
In an ideal environment both would look to view the increased levels of collaboration as mutually beneficial: banks have the market and fintechs have the technology. In reality, however, friction can arise as changes that may take fintechs a week often take banks six to eight months.
Open Banking can be more
Banks should view the approaching the September PSD2 deadline as an opportunity to really deliver on the true promise of Open Banking. For it to provide the true sea-change it is capable of, it needs to deliver more than the level of innovation we have witnessed so far. Easy to use ISA investment apps and the ability to round pennies into savings are nice services, but they are not truly transformative.
Limited APIs undermine the potential of Open Banking. Cohesive collaboration between banks and fintechs cannot take place until proper APIs are developed. If banks continue to do the bare minimum to comply with regulation while keeping the lights on, an opportunity will be missed. Viewing compliance as a cost limiting exercise may be enough to beat the regulator but it will deprive consumers of proper breakthroughs. Changing to a more open culture, and viewing developing a real API as an opportunity can be transformative.
Before pivoting to streaming, Netflix was a struggling DVD postal company. The company spotted an opportunity and transformed to deliver on it. Underpinned by proper APIs and cohesive working between banks and fintechs Open Banking has the potential to create its own version of Netflix; and serve customers in a genuinely new manner – delivering something they didn’t know they want but now can’t live without.
Future working relationship
The introduction of Open Banking has made the direction of travel clear; collaboration and close working relationships are the future as these companies have to work together to meet the rising demands of their customers.
Cultures do not stand still, and it is likely that collaboration will increase in the future as the culture of banks moves towards that of fintechs. The customer base of the banks will naturally evolve over time, and banks will need to seek younger customers. To do that they will have to ape the offerings of the challengers and fintechs. However, this will take time: fintechs are born with a mindset to move quickly, while established banks are naturally more cautious. With the hiring of new development and applications talent, the culture of the banks will naturally change. They will never be as nimble as a startup, nor should they seek to be, but a quicker and more innovative culture will eventually emerge – which will help to create an environment for closer collaboration.
Ultimately all change and innovation will need to serve customer need. The companies that can evolve the fastest to deliver the most painless and seamless customer experiences are those that are likely to thrive in the future. The industry should look to ensure that it is always striving to meet that need.