by Costas Liassides, Managing Director, TORI Global
Industry View from
The future of banking
How fintechs and open banking are changing the game as the sector moves towards a bright new future.
As challenger banks and fintechs gain greater traction, the initial indifference with which established banks viewed their prospects of disrupting the market has shifted – they are now very credible threats. Attracted by eye-catching payment cards, delightful user interfaces and radically more positive customer experiences, retail customers are embracing fintechs in ever increasing numbers. At the heart of this disruption is open banking, which has drastically changed the status quo. Incumbent banks can no longer enjoy the exclusive right to directly serve their customers – this privilege is now being shared by fintechs too, and they’re eager to snap up any and all takers.
Historically, incumbent banks have not been associated with triggering the transformation that disrupts other markets. But banking customers now have greater expectations, with many prepared to move their business elsewhere if their bank does not offer more up-to-date, technology-supported services. Many other organisations are now able to gain competitive advantage by entering the market without being hamstrung by overbearing compliance, regulation and technology debt.
While telephone and online banking have caused customers to migrate from the “in-branch” banking experience to new channels, the traditional banking model arguably remains broadly unchanged. Retail banks are still doing pretty much what they have always done and continue to retain custody of customer relationships and, more importantly, customer data. As a result, fintechs have yet to make significant inroads into the mainstream UK banking space. Based on the thus-far limited impact by fintechs, it would be easy to dismiss the talk of disruption brought about by open banking and new technology.
However, open banking is more than just open APIs and access to data. It’s also a shift from a very close and restrictive model to one where data can be shared by different members of the banking ecosystem with authorisation from the data owner – in other words, the customer. This requires a fundamental review and rethink of the traditional business model, moving away from an insular bank-centric framework towards a more customer-centric model. The ability to exchange customer data will therefore level the playing field and increase competition.
The extent to which this competition represents advantage or disadvantage for the traditional banks will depend on the way that these institutions embrace the changes and seriously evaluate the risks to their traditional revenue streams. Those who ignore the challenge will undoubtedly come unstuck, while those who are prepared to innovate will enjoy leveraging new business models and opportunities.
The issue for incumbents in maintaining pace with the fintechs here is agility. They are unable to introduce new technology at the speed (and cost) that customers have come to expect, and are encumbered by regulations, technology debt and size. New technology, and the innovative application of it, is the forte of fintechs. Conversely, incumbents often maintain the upper hand when it comes to organisational maturity, operational governance and inherent customer trust – all factors that have prevented fintechs from making the bigger market impacts some might have foreseen. The large banks must leverage these factors while working hard to adopt the new technology, in order to keep up with their bold new counterparts.
One way in which the big banks have addressed their shortfalls is by developing open banking partnerships with fintechs. This enables them to enjoy the best of both worlds, combining their operational governance and organisational maturity, while offering a previously unavailable level of freedom and innovative products to their customers.
It is worth noting here, though, that incumbents and fintechs are two very different beasts. For the partnership model to succeed, the relationship needs to be symbiotic to ensure it leverages the strengths of each party. The fintech must be allowed to maintain its core identity of innovation, agility, and technology relevance. It must also be allowed to continue pushing the boundaries and drive continuous change. Meanwhile, the incumbent must do what it does best: provide a trusted, customer-centric service in a highly regulated and controlled environment.
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