Open banking – is data the new currency?
Banks across the globe are anxiously looking at the slow but seemingly inexorable progress of banking APIs. Regulation and market demands will require banks and other financial services firms to make it easy for another firm to gain access to their customers’ data, and to engage with their platforms to transact. Most realise that the world of financial services is going to be shaken to its foundations by their arrival. Financial data will soon become a new commodity owned and managed by customers, not banks.
Banking APIs are generally good news for all parties involved, but for incumbent banks and institutions, business as usual is no longer an option. In Europe, because of the imminent implementation of PSD2 (the European Commission’s Second Payment Services Directive supported by the European Banking Association), banking APIs are an even more urgent challenge. PSD2 sets out a series of guidelines that will define how banks will have to enable bank customers to authorise accredited third parties to securely link their bank accounts to access data or initiate payments. This is going to be game-changing.
Projecting the impact of a broad rollout of banking APIs isn’t easy. That said, we can comfortably predict a range of likely outcomes:
Banks will improve the offering to their existing customers. By being able to complement their customer transactional data with those from other institutions, banks will be able to offer their existing customers products and services that are better tailored to their needs. By better understanding their customers, they will be able to offer:
Banks will soon realise that APIs can become a source of new income. The analysis of customer data is a service useful to businesses beyond financial services. As an outcome of creating new infrastructure to manage the new banking API requirements, we could see banks and API service providers create completely new revenues opportunities. These could include the provision of customer authentication, risk scoring and eligibility verification, to name just a few.
There is a possible downside to this. Once a provider is able to gain a holistic view of their customers, they may realise that some provide a higher risk than initially thought. This could result in higher prices and a more restricted product offering to some customers. Customers will need to be selective on who they allow to leverage their data.
It will be easier for customer to change banks. Thanks to APIs, challengers and competitors are able to offer customers products and services that are a much better fit to their needs by combining data sources. By understanding new prospects better, they can “poach” their competitors’ best customers. By having lower cost bases, more up to date technology and often more customer-centric mindsets, challenger banks or comparison sites should be able to offer a real challenge to the established players.
Historically, large banks make poor use of the customer information they collect. Few banks offer their own customers better deals than those available to all. Some of this was dictated by regulation ( or the banks’ interpretation of it), but some was the result of trying to get maximum profit from a customer who is inherently reluctant to change bank. With banking APIs, we should see a sharp increase in customer mobility for three fundamental reasons:
As with existing customers, lower quality customers could see price and range of the products offered to them deteriorate.
The market will become more transparent. Today, aggregators have become a powerful force in increasing competition and reducing costs – the effect on the UK auto insurance market is a good example of things to come.
Banking APIs will further strengthen this trend. With the new APIs, customers will be able to see exactly how they’re being treated by their existing banking providers.
