Imagine a market of pure customer data liquidity, where financial institutions and tech firms can access, exchange and use authorised consumer data seamlessly. Who will be the winners and losers in this scenario? asks Avaloq’s Jiten Varu
Will loyalty, brand and incentivisation play a (more) fundamental role in retaining clients and attracting new ones? Will cost become even more important in driving client flows?
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Will tech-savvy Google Bank Plc and Amazon Insurance Inc. dominate? Or will the sheer size and buying power of incumbent banks and other financial institutions mean they will still win out?
The implementation of the second Payment Services Directive (PSD2) across the EU and the rollout of the Open Banking programme in the UK – both in January – are the seeds of this future.
PSD2 lets regulated third-party providers access a client’s bank account information and/or request payments. It aims to attract new providers and technology companies and create more innovative services for clients. Likewise, Open Banking will allow clients to give companies other than their bank or building society permission to securely access their accounts.
In the UK, Open Banking will be extended to cover all products with payments capability such as credit cards and e-wallets throughout the course of 2018 and 2019, in alignment with PSD2.
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By GlobalDataThe concept of Open Banking comes into play at a challenging time for existing banks, which in many cases are facing reduced revenues since the financial crisis as well as increased pressure from regulators, which is generating more costs, for example in compliance. New entrants such as digital and mobile-only banks do not face legacy costs and infrastructure hurdles, giving them strong advantages that more established players do not have.
How should, therefore, institutions navigate through this new era of PSD2 and sector openness? The temptation for many might be to deliver a minimal solution – one that meets the regulatory criteria but nothing more. In our view, this would be a mistake: banks will be at risk of savvier entrants, including fintech firms and startups, without getting any of the benefits themselves.
In contrast, generating ‘data gravity’ should be a priority.
The key will be to motivate partners and third-party providers – what we term as the ‘ecosystem’ – to use client data but without the seed organisation giving up the data ownership. Banks should not only offer application programming interfaces (APIs) so that third parties may retrieve client data but they should also offer new, non-UX services to foster ‘stickiness’ and retain and grow their customer bases.
This will entail becoming much smarter with data, bringing into play lifestyle considerations and developing new consumer ecosystems that will integrate banking services seamlessly in a secure, safe and trusted environment. Indeed, while exposing APIs to third parties will accelerate the commoditisation of the banking front end, accessing such data should also allow a number of new use cases:
• Competition for loans and credit products will be fairer, where competing banks will access the same information to determine the risk. Anything that helps to streamline the decision process – such as customers’ banking data – will be key to improving profitability;
• By capturing a holistic view of client’s wealth, institutions will be able to propose more informed choices, reinforcing their ownership of the client relationship, and
• Institutions will be able to propose new services based on banking data analysis such as developing bespoke reward programmes.
The UK is, actually, leading the charge on this new era of ‘data liquidity’. Under the Competition and Markets Authority (CMA) mandate, the UK is fully specifying an interface which will guarantee interoperability between different institutions. The EU regulator has only specified certain mandatory services to be provided, letting each bank decide the implementation details.
While interoperability in the EU will be costlier than in the UK, perhaps giving an advantage to incumbent players in the short term, there is still a profound need to optimise systems and processes for what is expected to be a defining period in Europe’s financial services market.
We believe the institutions taking first and full advantage of the new opportunities will gain a competitive advantage in this environment. Indeed, Avaloq is already preparing a fully-fledged API covering the entire banking scope to support banks and wealth managers for this next step.
