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What is Open-Banking? (Part 2/3)
In my last post I discussed the nature of open banking and some of the successful industry examples in the market today. But to fully leverage the potential of open banking, incumbents will need to affirm how to stay hyper-relevant for their existing customers and to outcompete new disruptor companies. This means broadening their position and orchestrating open banking partners to encourage cross-selling of financial services and generate new revenue streams in traditionally non-banking areas.
Research “indicates that, over the next three years, most banks expect more than 10 percent of their incremental revenues to be generated by ecosystem plays.” But for these new revenue streams to work, banks need to ensure their partnerships, products and offerings are highly customer focused and exceptionally relevant to be accepted.
So how can growth be encouraged through open banking? A recent article from the Harvard Business Review suggests it is imperative to first offer a seamless value proposition and secondly broker attractive partnership arrangements to ensure value capture. These two together are what the article refers to as the “Yin and Yang” of ecosystems, coalescing to form uniquely valuable and relevant customer experiences. The article cites the example of how Tencent setup WeChatGo in Europe by partnering with the Dutch teleco operator KPN to obtain prepaid SIMs for its Chinese customers before they travelled. It then built an entire platform around KPN and hammered out deals with European retailers and attractions to make their offering truly valuable for both the customer and the sellers.
Banks can acquire key learnings from super apps like WeChat and Alipay that have created highly intricate ecosystems that permeate many aspects of customer online experiences. The chief takeaways from such ecosystems is to ensure that highly relevant customer experiences are catered for through strategic partnerships with seamless technology. Building on such learnings, it was suggested in a recent Accenture article that there are a number of ways through which companies can broadly pursue open banking development to derive the most value, through one or a combination of the following based on their specific business circumstances:
- Expanding primary relationships - by offering hyper relevant experiences through ecosystem channels, and extending customer relationships through new offerings
- Generating new revenue streams - through third party access to their customer base and data in exchange for fees, ecosystem orchestration or infrastructure solutions
- Reducing customer churn - by orchestrating or joining third party ecosystems
In the pursuit of this, Accenture research estimates there could be a staggering £8.5bn to gain in new revenue streams by 2020 for offering improved digital bank-led services to SMEs that would help them run their businesses better. Further research from Barclays indicates there could potentially be a total market revenue of as much as £6.7 billion a year across personal current accounts, business current accounts and personal savings accounts. More impressive still, as a recent 2019 OBIE report highlights, are the different retail customer segments within the UK such as individuals and SMEs that could stand to gain upwards of £12bn and £6bn respectively per annum from open banking enabled services.
Clearly the transformational potential of open banking is already known within the industry. A 2018 Accenture survey for instance indicates 46% European banks expect open banking for corporates to drive 5-10% of their revenue growth in the next 3 to 5 years, with a further 43% expecting this to be between 10 – 20%. Banks can capitalise on their position as the preferred partner of choice for businesses and individuals, built on a heritage of data security and privacy to help corporates improve and manage their business and provide new value offerings to individuals. But in ensuring value maximisation, it will be important to know who those individual customers are and how they can benefit most from ecosystem banking.
The value of open banking of course will take time to fully realise. Banks will need to build their strategies based on their own circumstances, forge partnerships and ensure that they are delivering products and services that customers will use in line with their expectations. These are critical factors that must be considered when implementing the most appropriate strategy for each institution as we will examine below.
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Implementation Considerations
Open banking will provide banks access to information that was previously unattainable and will allow much greater insight into customer data and will yield higher value propositions. In a 2018 Accenture survey focusing on open banking for corporates and SMEs, in Europe nearly 50% of respondents stated they believed open banking ecosystems will benefits them most by:
- Enabling access to convenient and innovative banking services (27%)
- Allow banks to reach more clients and partners (22%)
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The same survey showed that for 2019 “Banks in Europe (77%), North America (72%) and Asia (61%) planned to invest up to USD$20 million each to undertake Open Banking initiatives for commercial customers.” With this investment must come real consideration as to what retail and corporate customers want and expect from open banking. The same 2018 Accenture survey indicates there is a gap between what areas of their business SMEs expect could be improved by open banking and what banks cite as the benefits they can offer. SMEs cited payments, cash management and finance as the top areas for improvement while only ~10% of banks surveyed noted these same areas in their development priorities.
The survey also showed that SMEs would be interested in joining an open banking ecosystem platform with banks (65%) and 60% would prefer their bank to provide this service above other offerings. As SMEs are a critical customer segment for Irish banks, bridging the gap between what banks think open banking can provide versus what their customers expect, needs to be a key consideration in implementation any open banking solution in a small open economy like Ireland.
What must be recognised is that open banking is fundamentally a different type of business to banking as we know it. With many institutions providing open access to banking data there will need to be robust partner management, as described in Accenture research “One bank interviewed has a dedicated team to manage 20 strategic partners and has another team responsible for more than one hundred tactical partners.” Banks will need to ensure that while enabling third parties to create new offerings, they avoid becoming a commodity themselves and disappearing behind a commercial curtain. Opening up of data to third parties also carries some risk which banks will need to mitigate against though appropriate governance models that protect internal environments without discouraging collaboration and innovation. While there are remarkable financial and social gains to be capitalised on, implementing careful management of external partners must be at the forefront of planning and design considerations as the distinction between bank product and third-party products will blur.
How then can banks in Ireland ensure they are ready to best capitalise on the value of open banking? This will be the subject of my next post.