The next couple of years are going to be pivotal in dictating the future direction of the personal banking sector. A number of challenger (or neo) banks are starting to come to market with their banking products and they are intent on shaking up the market. PSD2 and open banking is also promising to disrupt the industry, bringing a number of fintech companies into the fray.
The major banks will be fending off attacks from all sides. But who should they be most worried about and what can they do to respond to this disruption?
Possibly the most noise is coming from the challenger banks. They are all aiming to get to market this year with their banking products. Each one is taking a slightly different approach, but they’re all aiming to steal the incumbent banks’ customers from under their noses. Monzo and Starling have their full banking licences (without any restrictions) and are rolling out their current accounts and Atom have just released a new, super low rate fixed term mortgage product. Unsurprisingly, they also all have more products on the way.
These challengers are taking the incumbents head on. Without legacy infrastructure and institutional bloating, neo-banks claim to be able to offer a better customer experience, faster services; all for less money. However, the fact that they don’t have banking history or legacy infrastructure might also hold them back. Will they struggle to grow much further past the heavily engaged early adopters?
The majority of people actually take comfort in a bank’s longevity and although they may not always be trusted to do right by their customers, incumbent banks are trusted to look after their money and their data. And that counts for a lot.
Banking customers are notoriously “sticky” and the perceived effort associated with moving their current account provider is huge. Meaning that even when a bank drops a massive “clanger” (customers lose the ability to make payments or withdraw cash from their accounts for days as a result of a software upgrade, or are found to be rigging LIBOR) the number of customers who switch from those banks are still surprisingly low.
This inertia will prevent most customers leaving the incumbent banks in favour of these challenger banks, even if these new banks offer a much better experience. As a result, these challenger banks may initially find the going a bit tough and will not present an immediate threat.
So, where does the real threat come from?
If banks are not careful, they will face a great threat from large product providing enterprises (namely insurance and financial services companies) taking advantage of PSD2 and Open Banking.
For now, I won’t go into the background of PSD2 and Open Banking, nor will I explain how the APIs could be implemented. I will assume that by now most of you will have read a bewildering array of articles, publications and studies into how PSD2 will work or what the CMA are hoping to achieve by this. Although, if you would like to read an excellent article about PSD2, here is a link to Dave Tonge’s take on it.
There has been a lot of scepticism surrounding whether the banks will be ready by 2018 and whether they will play ball. By now they have all realised the danger of not being ready and getting left behind when PSD2 does take effect. So, let’s for a minute just assume that PSD2 will “go live” in the UK in January 2018, what is going to happen? How will the banks be affected?
PSD2 will allow consumers to share the information the banks hold on them with any number of financial institutes or enterprises. This will help the aforementioned enterprises facilitate greater product discovery with faster and easier applications. The consumer will be unshackled from their bank and free to shop around for more competitive products without the inconvenience of not having their financial details readily available. This is an inconvenience to the banks and could put a tiny dent in their bottom line, but could there be a bigger threat? What if these enterprises were to partner with fintechs to take advantage of this newly available data?
Fintech companies, specialising in account aggregation, have made great strides in taking banking data, processing it using Artificial Intelligence and allowing consumers to gain valuable insights into their financial world. These insights, coupled with having one single place to store all your finances already reduces the need to use the bank’s online banking platform or mobile banking app.
If large insurance, personal finance or pension product providing companies were to partner with a fintech, they could create their own platform. Allowing users to aggregate their entire financial universe and then leverage these insights to surface their own products when the consumer needs them. Creating a brand new, intelligent distribution channel. Companies and banks that are slow to adapt could risk being completely cut out of this fast evolving market.
This is truly a win-win scenario for consumers. And herein lies the banks’ biggest threat; companies with a reach of customers into the millions teaming up with market leading fintechs to offer a great user experience and a distribution channel that knows when specific products are most required. If the banks get caught napping, these companies could engage their millions of customers and cross-sell their products before the banks even have a chance to react.
So what can the banks do?
By turning the problem on its head, banks could turn their biggest threat into their biggest opportunity. Most fintechs are not out to bring down the big banks, they just want to provide a better experience for consumers. If banks were to embrace these fintech companies, they could reap the same benefits and offer their customers a better, more cost effective service. This would not only negate the threat from neo-banks and other enterprises but also present the opportunity to win business from any of the banks that have been slow to react to open banking.
And this is the key; by re-framing open banking as an opportunity, banks don’t have to fear the sharing of their customers’ financial data. All banks have to do it, so my advice to banks would be this: why not put yourself in the best possible position, with a product ready to take advantage of the market changes? Then at the end of the day, you can go to bed and fall into a deep, deep slumber, safe in the knowledge that open banking could bring one of the biggest client acquisition opportunities seen for years. And your bank will be in pole position.
Written by Jon Hart (@JonHart3), Head of Key Accounts at Moneyhub Enterprise