The financial services industry is on the cusp of a major revolution, with ‘open banking’ creating waves across the world in what many industry analysts and academics believe is a necessary move in the digital age.
Essentially, the idea of open banking is to securely unlock the ‘black box’ of consumer data held by banks, and allow fintech and other technology companies access to that information.
This will enable the consumer to benefit from the power of their data, through a wider set of available services, customisable experiences and ultimately offer greater value and choice. Open banking will also better enable consumers to compare and save on their financial transactions, while having access to more personalised services to make better decisions.
For example, they could get more desirable loan terms as third-party lenders have a better grasp of historic transactional data to determine a borrower’s risk level.
The European Union’s PSD2 directive came into effect in January, 2018, acting as a catalyst for other global markets and kickstarting competition among financial services institutions to get ahead of the curve.
PSD2 aims to drive increased competition, innovation and transparency across the European payments market, while also enhancing the security of internet payments and account access.
At the core of this is the requirement for banks to grant third-party providers access to a customer’s online account/payment services in a regulated and secure way.
In Australia, the government has commissioned a review to expand consumers’ access and control of their banking data, recommending that banks provide open access to customer and small business data by July, 2018.
Macquarie Bank has already rolled out an open banking platform, allowing its customers to be the very first ones in Australia that can share the information with third parties.
The financial services and wealth management industries are facing one of the greatest threats, and opportunities – so what can those who are in it for the long ride expect from an inevitable future where open banking is the norm?
The case for being open
Open banking could revolutionise how banks create value and new sources of revenue by giving access to data, algorithms and processes through application programming interfaces (APIs).
According to research carried out by Accenture, two-thirds (66 per cent) of banking executives believe that open banking will help create new revenue streams, with 90 per cent expecting it to drive incremental revenue growth of up to 10 per cent.
Being an open bank means operating like a platform company, with a core business model that intertwines people and processes with assets and technology.
Outside of the banking domain, tech industry leaders like Google, Apple, Facebook, Amazon and Alibaba (GAFAA) are already developing platform-based business models by offering consumers seamless digital experiences.
And while there is still a degree of scepticism surrounding open banking, the Australian Government’s commitment to the introduction of open banking will likely lead to banks leveraging open platforms, in the same way as today’s successful tech giants.
A new type of banking consumer
Open banking has also spawned a new type of banking consumer – the nomad – who have low levels of loyalty when it comes to financial institutions.
Nomads represent one in three Australians with a collective wealth of $2 trillion (and they aren’t exclusively Millennials).
Anyone in the banking industry is aware of the nomadic tendencies of banking consumers aged 37 years and under, who are willing to be in multiple provider relationships depending on their needs and circumstances.
They demand convenience, insist on being able to access services wherever they are, whenever they need them, and open banking will allow financial firms to easily enable the multi provider relationship the nomads demand.
Similarly, one-third of Gen Z say they’ll be likely to take advantage of open banking services instead of usual payment methods, in stark contrast to only six percent of baby boomers that might feel the same way.
Forty-two per cent of Millennials and 52 per cent of Gen Z say they will give online retailers permission to initiate payments directly from their bank accounts using mobile app websites.
In Australia, more than three-quarters (77 per cent) of surveyed nomads would be willing to open an account with Facebook, Google or other online service providers if there was an option to do so, evidencing that traditional loyalty to a single brand or style of institution is not a prominent attribute for the nomads.
Overcoming resistance to change
Savvy wealth management and banking institutions will need to invest the time and money necessary in continuous innovation to keep pace with the competition.
Open banking gives financial institutions the opportunity to own the customer relationship, and provide the seamless digital experience all consumers want.
The onus is now on banks to implement open banking services and strategies without alienating their traditional customers.
This will enable these companies to gain a better understanding of evolving customer needs, together with an appreciation of what prospective banking technologies will need to look like in order to meet consumer expectations in the long term.
Wealth management also goes hand in hand with open banking making it possible for consumers to more easily transfer funds, compare investment products and manage their own data.
Whilst the landscape is evolving rapidly for financial firms, changes like open banking are creating new opportunities for both individuals and businesses through the democratisation of data.
Opportunity or threat?
Most bank executives believe that open banking provides more of an opportunity than a threat and will make it easier for consumers to access products, particularly for younger consumers who want technology at their fingertips.
Financial institutions must acknowledge that the future wealth management workforce will likely consist of professionals who see technology as a trusted co-worker, where open banking is perceived as a future mainstay of global business.
Success will come from understanding open banking and quickly taking advantage of it. This will be particularly true in Australia, where the sharing of transactional data will give impetus to other markets and re-shape businesses’ experience of financial services.
Alex Trott is a managing director in Accenture’s Financial Services business.
