Banks have a long-standing reputation as somewhere you can safely store your money. But let's say they could also become a haven for the data? Application Programming Interface (API) technology gives financial institutions the power to share customer data with other firms offering new services. If banks actively pursue e-commerce model, it would open a whole new industry, creating value for both the companies and the customers while strengthening the relationship between the two.
The passing of GDPR and the Payment Services Directive (PSD2) were the first steps in this process of banks modernising how they handled their customer data. However, incumbent institutions have to date not engaged enthusiastically. Rather, it had been only after growing pressure from fintech challengers and government regulation that they are forced to open up and share their data. This should not be treated as a regulatory challenge, but instead a way to grasp the unique opportunities that banks have to reposition themselves as the most trusted resource for their customers.
Beyond traditional finance
It is hard to overestimate the breadth of possibilities arising from open banking, should banks take advantage of this evolution. While the public rarely holds bankers in high regard, still it puts a high level of trust in banking institutions. People are more willing to hand over their sensitive data than they would be to almost any other private entity. Furthermore, banks have a unique perspective into their customers' behaviours, desires and needs. Spending habits, income streams and risk appetites are just a few examples of the data that not one other institution can tap directly into.
There is certainly appetite to expand offerings. Within our recent study of business banking customers, over 68% of respondents indicated that they were open to their lender providing digital non-banking services. This includes services such as tax support, managing payroll, or invoicing to help them with their day-to-day businesses.
More banks should consider how open banking can maximise their digital capabilities and create a greater range of services for customers to enjoy. Such offerings could be tailored according to each bank and their particular customer audience. For instance, banks could offer everyday services for many users, such as insurance for individuals or business management tools for business accounts. Alternatively, banks could offer more exclusive and specialised services for top net worth individuals to meet their specific needs, for example art appraisal and investment management.
The idea that a firm can expand its offering into new verticals is hardly new. Most of the world's largest tech companies, for example Apple and Amazon, already offer diverse products including hardware, software, entertainment and cloud services. They could do this thanks to the vast quantities of data they have gathered, which offer invaluable insights into consumer behaviour and demand. Banks are in prime position to follow the example of these top tier tech companies because of their monopoly on key financial data.
The incumbents are going nowhere
The business model described above is already being adopted by numerous challenger banks. These lenders have led the innovative charge so far, thanks largely to their agility afforded by their smaller size. Indeed, some fintech banks already give a range of non-banking services to their customers. Revolut, for instance, offers users several types of travel insurance as well as access to airport lounges included in its premium service for any monthly subscription.
These offerings are not a sign that the challenger banks are going to topple the large incumbents. Rather, these disruptors usually have flagged the gaps in the market that larger institutions have been too slow to fill. It is now up to the established banks to learn from their example.
While challenger banks may have a first-mover advantage for these services, the incumbents have two key advantages: capital and credibility. Firstly, the top banks have enough cash to fund this overhaul of their business models. While the challengers have been able to afford to do so in recent years, they don't have the reserves to tide on them during economic downturns such as the current pandemic.
Secondly, even though challenger banks are regarded as more convenient and are less vilified than traditional banks, the general public still trusts the latter. Many of these large banks can point to their extended histories and long-term investment success – accolades young challengers just can't match. In short, people don't have to like their bank to trust them with their cash and their data. Both of these advantages strongly suggest that large banks be more effective positioned to take advantage of the open banking business model in the long term, despite being slower to consider and adapt.
A leap of faith
Perhaps the most exciting part is that the API technology need to underpin this data sharing industry already exists. The only obstacle to this evolution may be the banks' inertia. Large incumbent banks haven't been the most agile of institutions, but this opportunity is simply too important for them to ignore.
Rather than moving only when forced to by regulators, they must take the seize the opportunity with open arms. In a world where many the market share has become increasingly concentrated in many industries, it has never been more important not receiving left behind. The future is there to take, banks need only take the leap of faith.