Andy Dufresne would be doing very different things at the end of the movie if The Shawshank Redemption was to be set in today’s time. He will not be visiting several banks in a day, holding tense conversations with staff, in order to retrieve his money. He will instead move money around on apps, able to see all accounts and investments at once, swiping as he wished. He could get to his boat at Zihuatanejo sooner.
At some point, the analogy breaks down - as Dufresne would have to get the large amount of cash from somewhere or he could get noticed straightaway if the app’s security picked up on his unusual activity. But you get the picture: banking is not what it used to be, as the nature of the customer experience has completely changed thanks to technology.
Traditional banks have had to adjust and this has much to do with the onset of Open Banking – the practice of allowing customers to share their bank account information and transaction history to third party providers (TPPs) so that they can access a range of financial products and services.
Open Banking is now both a regulatory imperative and a market opportunity. Governments have introduced rules to enhance competition in the sector and allow consumers to have more control over their data and enable it to be shared to obtain services hitherto unavailable to them. It is also potentially a rewarding sphere of work; according to Accenture “as much as $416 billion in revenue will be at stake as the open data wave arrives.”
These are some of the ways that Open Banking have changed traditional banks:
Traditional banks have had to come to terms with the democratising nature of Open Banking and rethink their relationship with customer data. Previously, the relationship was straightforward - customers deposited their money and received a limited set of services such as saving instruments, credit and mortgages while the banks were entirely in control of the data. The customer’s money, as a potentially dynamic entity, was limited to the purposes that the traditional bank set for it; the money could only go so far as a traditional banker’s imagination could take it – the customers did not have a say, nor could the money have other agents act on it. Now with Open Banking, data becomes a shareable good, consumers get their money in the bank to talk to fintech firms, for example, to derive more value from it. The market already features numerous services, like instant payment services, credit provision, account aggregation services, and financial management tools.
Banks are having to reevaluate their revenue stream as sharing of customer data will be the direction of travel for the industry, thus generating new competitors for banking services. Banks can choose to develop some services in-house or collaborate with TPPs in response to fintech start-ups but Big Tech players like Google, Amazon and Apple are also moving into financial services changing the definition of banking, splintering the industry and hiving off the previously exclusive domains of incumbents. As analysts observe, “these tech giants bring unparalleled resources, data capabilities, and customer bases, posing both a challenge and an opportunity for banks and fintechs alike.”
Traditional banks are having to be relentlessly competitive in their offer as others move into their turf. Neobanks operating without overhead costs are able to offer better rates for customers; e-commerce platforms offer payment solutions or ride-hailing apps provide microloans. Open banking is mandatory in Brazil for financial institutions and small businesses have seen interest rates drop by 2 percent as banks compete in a more legible customer environment.
What then are traditional banks still good for as technology transforms their business? For one they are repositories of trust; customer loyalty to brick and mortar institutions is sticky - a survey in the US found that the average customer was with their bank for 17 years. An agile bank can leverage that trust to mediate customer engagement with verified fintechs - a process that scholars call “re-intermediation”, “similar to how iTunes can guarantee the quality of products for those who purchase music from its platform.”
This will be especially useful as more and more utilities like energy and telecoms come into the open data purview. Analysts argue that “open banking’s potential extends far beyond financial services.” They reckon that three industries – retail, travel and hospitality, and automotive – could use open banking data “to create a better customer experience, reduce costs, and build competitive advantages.” This is an additional revenue stream for traditional banks who could provide verification services and know your customer protocols.
Banks’ investments in security architecture will remain indispensable to the operation and possibilities of the open banking sphere. As one writer puts it, “Banks now regularly connect to hundreds of third-party providers, ranging from fintech startups to established financial platforms. Each of these connections represents a potential vulnerability, as the security of the ecosystem is only as strong as its weakest link.” Securing these connections will be vital for building trust in open banking.
There is thus a strong education mandate that banks have to fulfil in this sphere. Younger customers will organically take to new technologies but other customers will need banks to acquaint them with the possibilities of open banking and allay concerns about privacy and security – addressing, for instance, commonplace fears about their data being sold to other parties and so on.
Apart from investing in relevant technologies, banks will need a communications approach that is commensurate with what the regulation seeks to ultimately achieve - to get citizens to intuitively understand through personal practice what it means to control and use one's data. Banks are the gateway institutions that will be crucial to this cultural shift.