As digitalization and regulation create a surge toward open banking, financial institutions have to decide which flavor to try when sharing customer data.
Will it be vanilla – for compliance reasons only? Or pistachio – for building ecosystems? Or will they embrace the full hot fudge sundae - sharing customer data externally and integrating external capabilities and data to build ecosystems and new offerings?
The data is key. Whereas in the past banks were monoliths totally focused on keeping client data safe inside, now banks have to have to share data with the outside – and their future will depend a great deal on how to use data to generate new revenues.
Think about it: 50 years ago car companies had value chains that were completely integrated. They designed and made all the parts, assembled, branded and marketed, financed, distributed and serviced their automobiles. Zoom forward to today: Car companies control the manufacturing and distribution process but outsource the making of parts and assembly. Dealerships, servicing and financing are often franchised.
The banking industry is facing a similar transformation in the face of digitalization. The difference is that the ecosystems they create will be based on data. Value will be created by the ecosystems that banks design and the revenue they generate.
These are the three primary models for open banking:
- Share client data externally, only to be compliant
This is the least disruptive and incremental approach to digitalization and is often what many large banks will choose, as they continue to view themselves as sole manufacturers with proprietary distribution channels.
The challenge with this approach is that, while it puts all of the control of digitalization on the bank itself, it also puts the burden of digitalization on it. This is problematic because if/when banks will be forced to share data due to regulation (like PSD2), and banks choose only to “tick the box” and comply without enhancing their offerings, they could be disintermediated by third parties. They risk becoming financial services “plumbers” – necessary, but behind the scenes and nameless.
- Share customer data externally to build ecosystems
Leading global banks recognize the threat of becoming a utility and are seizing the opportunity build ecosystems – regardless of regulatory imperative. Banks expose their services through third party developers who incorporate them into their offerings. Banks such as BBVA and Citi have been leading the way. Services offered include access to account information, payments, bank card integration and credit card points. Bank revenue is generated on a per transaction basis, or on a revenue share.
- Share customer data externally and integrate external capabilities and data to build ecosystems and new offerings
The next evolution of open banking is to integrate and bundle external financial services offerings within the bank to create new “best of breed” products and services. An example could be buying a home. Even before a customer applies for a mortgage, the bank could act as a trusted advisor through its mobile app to help the prospective home buyer plan for success. Closer to the time of purchase, the bank could introduce a series of partners to the customer: realtors, lawyers, insurance companies, movers, school advisors, landscapers, as well as a mortgage approval tool.
Now that you have seen the many flavors available of open banking, it is time to talk about the technological transformation. I will discuss this in my next blog.