“Banking is necessary, banks are not.” In 1994, when Bill Gates made this statement, little did he know that his prophecy would ring true more than two decades later.
So what made the legendary business guru so precise in his prediction? Well, this could be attributed largely to the tech disruption that’s sweeping the banking landscape today. An increasing level of alignment of the consumer’s interest, regulatory authorities and industry forces towards the inclusive form of banking might lead to the emergence of over-the-top players in the future. Consequently, banks in India will have to equip themselves for this tectonic shift. In fact, UK market watchdog Competition and Market Authority has taken the lead in stipulating time-bound adherence to open banking by early 2018. Regulators in the US and Asia are expected to follow suit, considering the high stakes involved – protection of consumers’ interest.
Open Banking has the potential to transform the way people manage their money, go shopping and purchase things. Simply put, it’s all about putting the consumer at the center stage. It involves opening up APIs (Application Program Interfaces) to 3rd parties who can use the shared consumer data to create innovative products and services that can add real value to the consumer’s finances. API, a technology that allows seamless data exchange between parties, has already made life convenient for businesses and consumers alike. A case in point: Uber integrates APIs belonging to Google maps, payments and telephony in one app that delivers a seamless mobility solution to its customers.
How will Open APIs change the face of banking?
• The consumer will be in control: Open APIs will put more power in the consumer’s hands. Sharing data with third parties will help them avail personalized financial solutions. For instance, instead of banking through one or two banks, customers could have their current account with one provider. They can then add on other financial services like an insurance policy, individual savings account, and investments through other providers – all under their preferred user interface.
A 2016 Confederation of Indian Industry (CII) report Fintech: Redefining banking for customers reveals that consumer banking, funds transfers and payments will be the most disrupted sectors by 2020 – implicitly driven by open banking. It also held out that 75% of financial institutions felt the advent of FinTech players will make them more consumer-centric.
• Banks need to rethink their business models: The times they are a-changin’. In an era when customers are reluctant to pay fees for banking services, and banks are being relegated to the background, technology companies are leveraging consumer data to ease the consumer’s financial life through innovative products. Think of a financial management tool that brings together the consumer’s bank account, credit card, loan, pension, and also provides insights based on their income and spending habits. Naturally, banks need to explore new ways to promote their products:
o Account portability: Regulatory authorities favor banking portability – the ability of customers to retain their account numbers at the time of switching banks. This spells huge benefits for the customer who will have the freedom to choose a service provider offering maximum value
o Free movement of money: Expect seamless movement of money among accounts at various institutions. Third parties will be able to initiate payments directly from the consumer’s account bypassing credit or debit card payments.
How can open banking be an opportunity for banks?
Today banks fear the sustainability of their business model thanks to fintech companies and disruption in consumer banking and payments. However, they can ride out the storm by putting consumer centricity to the core of their strategy. Consumers are going to reward players who are above board in all their dealings and committed to maximizing value. So how do banks stay ahead in the game?
• Strategic partnerships and use of consumer data: Banks need to come up with innovative products and services aimed at maximizing value for consumers and regaining their trust. Established banks need to continue with their efforts in developing innovation labs and incubating FinTech companies. Banks can tap into consumer data they already have access to, and use that data wisely to plan new products and services. A sharp focus on analytics would help them target consumers with relevant and effective marketing messages.
• Enhance digital experience: Today’s always-on consumers not only expect an enhanced customer experience from their banks, but demand it. Therefore, it’s imperative for banks to continuously explore ways of delivering a better experience every time the customer interacts with them. A few big players have already initiated steps to provide value-added services to their consumers other than traditional services. For instance, Goldman Sachs gives its customers an option to view and even buy the competitors’ products on its portal. Citibank offers an app that unifies mobile experience to its Citigold card members.
• Rejig distribution network: Banks are staring at a situation where third party forces would own customer relationship through an aggregator website or intuitive apps. Their margins are likely to take a hit when consumers start adopting third party products. All the more reasons for banks to wear their innovative hats while promoting products and bonding with consumers.
In the evolving open banking scenario, rewards will be reaped by entities owning the customer experience. So it’s high time banks started thinking about agile technology, working on robust mobile platforms and building a strong partner network to ease their transition to the open banking world. Take for example a solution we built – Synapse, which provides banks a single environment to manage their data requirements, enabling quick integration and access to key data through the use of open APIs.
So what’s next?
In the foreseeable future, the bank that offers the most widely accepted platform for lending, investing and payments, is going to rule the market. Beyond saving and lending cash, the bank of tomorrow will match financial incentives and enable direct financial transactions between customers. The world’s largest taxi company doesn’t own any vehicles. The world’s most eminent media owner doesn’t create any content. Maybe, just maybe, in the future, the world’s largest bank will not even hold deposits. Perhaps Bill Gates can tell.