Regulatory change is coming, geared towards increasing competition and innovation in retail banking. This is good news for customers. In August this year, the Competition and Markets Authority (CMA) released recommendations arising from its investigation into the retail banking sector. Its report concluded that retail banking still isn’t as innovative or competitive as it needs to be. It subsequently issued a provisional order requiring major banks to adopt open application programming interfaces (APIs) and make banking data available to trusted third parties in an easy, safe, and secure way by early 2018.
This follows the approval of the Payments Service Directive 2 (PSD2), which will also come into effect from January 2018, by the European Commission last year. While the impact of this latter legislation on UK banks remains unclear while the medium- and long-term ramifications of the recent EU membership referendum are still unknown, it will be applicable to all banks operating in the EU.
Combined, the CMA recommendations and PSD2 will accelerate progress towards “open banking”. But while this has been welcomed by challengers and fintechs that compete with the bigger banks, there is concern amongst established players that these changes could threaten their relationships with their customers. However, if banks get their response right, this regulatory change could be a catalyst for increased loyalty and enhanced connection with their clients.
Customers could be ‘switching’ away from banks
Under open banking, it will no longer just be competitors within financial services that banks may worry about losing ownership of their customer relationships to. With banking data accessible through easy-to-consume APIs, companies outside of banking will be able to offer new products and services that enhance the way we interact with our finances.
This new threat is compounded by the fact that these very companies are the ones leading the way in terms of delivering the personalised experiences and engaging content we have all become used to. From personalised recommendations across media and retail – what to watch, read, or buy next – to simple-to-use navigation tools that automatically update with information about traffic conditions or train delays and recommends alternative routes, or being connected to our home heating system or new car and interacting with a service that understands your usage and history, these services are delivered through an intuitive, engaging customer interface and are starting to build supportive relationships based on prediction and personalisation.
Meanwhile, the banking industry is still struggling with customer satisfaction. According to a survey by Which? earlier this year, only one of the five big banks – HSBC, Royal Bank of Scotland (RBS), Lloyds TSB, Halifax, and Bank of Scotland – managed a customer satisfaction score of above 60 per cent. This compares to the scores of over 80 per cent earned by digitally advanced brands from other industries, such as John Lewis and Amazon, in the UK Customer Satisfaction Index (UKCSI) from July 2016.
Yet, despite the huge growth of fintech in recent years, the perceived similarity of the large UK banks and the barriers to entry in the banking sector mean that customers have had little motivation to change or alternative to their current service. By creating a more level playing field that ultimately delivers better experiences for customers, open banking (as enabled by CMA / PSD2) is set to change that.
Opportunity to enhance customer relationships
Rather than a threat, banks should see open banking as an opportunity. Those who capitalise on it will lead the way – deepening their customer relationships, improving loyalty, and retaining customers for the right reasons.
First and foremost, the new regulations provide the opportunity for banks to build their customers’ trust. Open banking will drive greater transparency, exposing all costs and fees. Customers will be able to see all of their accounts from multiple banks in one central place, and have access to information about comparable products so they know if there is a better deal available. This more complete view of their customers’ wider banking behaviour will enable banks themselves to develop more personalised product suggestions and better targeted value-added services from an informed, credible position.
As well as using this information to drive innovation within their own services, retail banks can also benefit from opening up this data and working with other complementary service providers to develop new and unique propositions. Facebook is a great example of this. The social network has made life easier for its users by allowing them to use “Sign in with Facebook” to pull data directly from the platform to connect with other products and services without having to create a new account for each service. Open banking reform has the potential to drive a similar experience in banking. Banks will give control of data back to the customer, making it easier for them to share their banking information with other companies when they want to, and where there is a clear advantage to them.
There are already many companies that we interact with today making use of the data we’ve shared with them, and in return we benefit from a more personalised service. In banking, new propositions will appear that use our data in more innovative ways, showing us things about our spending and lending that will benefit us and enable us to improve our decision making.
Building customer-centric propositions
Yet, with openness also comes a significant challenge. With banks set to compete against brands that were built in a customer-centric era, they will need to rethink their own model. As they look to reinvent their propositions to drive maximum benefit to the customer, retail banks don’t just need to think about what’s happening now, but what’s around the corner.
Emerging technologies are changing at a greater rate than ever before. Trends such as the Internet of Things, geospatial positioning, remote authentication (such as biometric facial scanning and recognition) and hyper-personalisation where the environment recognises you and targets its services accordingly, will mean that customers no longer have to actively engage with banking to benefit from banking services. Instead, their banks will work tirelessly on their behalf – negotiating the best rates for investment, utility bills, and more. Over time, banking services could evolve from something with which customers have an ‘active’ relationship into more ‘ambient’ financial companions, helping people manage their money through experiences that blend seamlessly into their everyday lifestyle.
It is important then, that banks start to make this transition sooner rather than later. The majority of banking, saving, and lending products in the market today have a ‘me too’ feel and offer limited differentiation other than price. Whether or not they are ready for revolutionary change right now, the regulatory drive to increase innovation and transparency should be used by banks as a starting point to stimulate product innovation that can evolve over time. For example, personalised savings schemes that monitor spending across all of your accounts, from multiple providers, flagging when you’re deviating from your goals and making alternative suggestions (pointing out, for instance, that you’re only £50 away from meeting your savings goal for the month, and suggesting that you take the bus home rather than using Uber). Mortgages is another area with huge opportunity to build a stronger customer relationship: numerous value-added services such as house searching, moving, and insurance could be offered to position banks as more of a supportive property companion instead of simply a money lender.
Of course, banks still face significant challenges which often relate to legacy systems that slow down innovation. Partnerships will be key to overcome this challenge and build new experiences for customers in a short space of time. This is where fintechs, rather than being seen as a threat, could be one source of support. Many investors certainly see a bright future for many of these companies – fintech ventures have seen unprecedented growth over the last few years, with investment reaching more than $5billion in the first quarter of 2016, a 67 per cent increase over the same period the year before.
Fintech ventures are already leveraging new technologies to offer more accessible, efficient, and personalised banking experiences. Tramonex – a London-based company – uses blockchain technology to reduce transaction costs and speed up money transfers, enabling SMEs to access the foreign exchange market. Artificial intelligence is also being used to identify irregular transactions to improve fraud prevention, as well as to predict bad loans and refine credit risk models. The same technology is even being used to track consumer activity and get a better understanding of how people use banking services. This enables brands to tailor their offer to a customer’s specific needs and behaviour.
Once companies outside financial services have access to banking data, the fintech ecosystem will be enhanced with other kind of innovators that banks can team up with and learn from. Amazon was one of the first companies to offer personalised recommendations based on customer buying and browsing history. Banks could work with companies like this to offer personalised budgeting tools around specific tasks. For example, decorating a new house, potentially linked to a mortgage proposition. Social networks could also provide interesting partnership agreements. For example, individuals could link their business’s accounts to marketing campaigns across various platforms to help with cash flow management.
Although it may not have been a voluntary process, banks are entering a new era. Rather than seeing open banking as a compliance issue, retail banks should take it as an opportunity to redefine their business and align it to what people need and expect in today’s consumer-centric world. By meeting or exceeding those expectations with the help of strategic partnerships, banks can maximise revenue streams, boost customer retention rates, and futureproof their business models. Change is not easy, but those that fully embrace the opportunity presented by the upcoming regulation will ultimately prepare themselves for a successful future. Those that don’t will risk falling even further behind the curve, with challenger companies innovating over their own services and luring customers away with a more attractive experience elsewhere.