Open Banking: a future with two truths and a growing market

GDS Modellica

At the forefront of the banking and technology world today, there exist two indisputable truths. The first, which is widely accepted, is that any institution that does not incorporate open banking into its business model is destined to be left behind. The second truth, however, is somewhat more refined and requires taking a look, not just at the future, but at the here and now.

Sure, open banking is the future, but the present shows us something undeniable: the market is just not mature enough right now. Put simply, there is not yet a big clamour by consumers to redefine their relationship with financial service providers.

Recently, the consultancy firm PWC published a report entitled ‘The Future of Banking is Open’. The report contains a large amount of detailed information, both at the general and specific level, about open banking’s recent history, its current overall state and the way it is expected to evolve going forward.

The report’s executive summary explains that open banking can facilitate greater competition and innovation and a better focus on the customer. This is closely linked to current social changes which are moving us towards increased transparency, better data standards and greater information exchange. In fact, this trend had already started even before the pandemic arrived, but in many aspects, it has accelerated, and this is something that we have been seeing for over a year now.

By providing data access to third parties, open banking acts as a leveller for relationships established between traditional providers and new players that are currently disrupting the market. To use a football analogy, the current “first eleven” playing for the “star team” run the risk of being totally outplayed by rival teams made up of big tech firms and other market contenders, like fintechs.

Furthermore, in this match, there is much more at stake than just the result; this is like a cup final, where new players in the sector are ready to clinch the title through innovation in areas like payments. This means that traditional banking needs to become more flexible. At times, they will need to significantly improve their tactics (in-house solutions), and at other times, they will need to “sign new players” (third-party services). There will also be occasions where they need to sign an external coach, and they will even have to be prepared to adopt similar strategies to their rivals (integration in the ecosystem).

Standing out in a conservative market

Obviously, the starting point is advantageous. Both in the case of individual customers and SMEs, the market is fairly conservative, and the majority of customers are currently satisfied with their financial providers. There is no big call for change. However, there is another promising customer profile that will end up steering the market: the urban customer. These customers are young, have resources and are familiar with the latest technology, and they also generally tend to have four or more current accounts.

The main concerns of this still conservative market are dominated by security and privacy, and the current perception of these issues significantly outweighs the perceived benefits of open banking solutions.

However, that does not make the target market any less enticing. “We estimate that Open Banking has the potential to create a revenue opportunity of at least £7.2bn by 2022 across retail and SME markets”, states the report’s executive summary, which also notes some of the numerous usage cases which could be enabled by open APIs. To name just a few, these include account aggregation, better financial management, customer credit rating and the integration of loan and accounting platforms for SMEs.

Different options with common characteristics

The report also claims that companies have a responsibility “to ensure that they have a compelling vision of how they will stand out in a highly competitive and transparent environment”. The PWC team draws attention to the fact that “it is not feasible to chase all the potential Open Banking opportunities”, so firms will need to concentrate on developing “differentiated propositions and capabilities”.

Regardless of the market position that different parties may adopt (acquisition, partnerships or integration in the ecosystem), there are some common characteristics that companies need in order to succeed in an Open Banking environment. These include having a customer-centric operating model, strong data analytics capabilities, integrated and secure technology platforms and an agile and open working culture.

“Although the future is uncertain, companies cannot afford to wait and see how it unfolds. A strategic approach to Open Banking is critical if companies want to be confident of success”, the report concludes. With its wealth of information and analysis, we at GDS MODELLICA, definitely recommend reading the report in full.