By Kanika Hope, Global Strategic Business Development Director, Temenos

In this year’s Economist Intelligence Unit report on retail banking trends across the world, over 400 survey respondents cite Open Banking as the top strategic priority by 2025, and consider acting as a true digital eco-system as well as a hybrid model of aggregating third-party products in addition to providing their own, as the primary business models of the future.

Both of these are classic Open Banking platform models that we are already seeing today where banks collaborate with third-party manufacturers and distributors to provide services to their own and others’ customers.  

It is true that Open Banking has received a boost globally over the last year. Regulators worldwide are actively promoting competition and innovation while at the same time, driving API, digital identity and security standards. In other words, they are encouraging Open Banking initiatives, both directly and indirectly.

Europe’s PSD2 was the pioneering initiative. This along with its own Open Banking framework made the UK one of the first markets to mandate open banking for 9 leading banks. In Australia, the Government’s Open Banking initiative mandates the four major banks to make banking data available to TPPs (third-party providers).  Canada is expecting to see similar initiatives with the Canadian Bankers’ Association focusing on digital identity as a precursor to an open banking framework.

The UK leads the way… or does it?

The reality is that the UK is a pioneer irrespective of the slow uptake, and the rest of the world is watching this market closely. The Open Banking Implementation Entity (OBIE) has reported there are now 100 regulated providers, of which 17 TPPs are now using Open Banking in the UK. Challengers like Monzo and Starling are bringing new and exciting services to the market, and forcing incumbents to launch their own initiatives.

But if we look more closely at the UK market, the reality is that Open Banking adoption has been slow despite all the hype.  

There have been implementation challenges at existing financial services institutions. Four of the 9 Open Banking working group banks missed the January 2019 deadline and many of those who have complied had serious performance issues with their published APIs. Meanwhile, in Europe, only 41% of banks are on track to be compliant with PSD2 ahead of September 2019 deadline.

Consumer awareness and apathy are other factors. In the UK, one year from the launch in January 2018, 58% of respondents in a YouGov survey still did not know what Open Banking meant.  Privacy and security concerns have also compounded the issue, with the disillusionment caused by recent incidents at the Facebooks and Googles in this area, causing the average banking consumer to hesitate to share data with third parties.

Luckily for banks and building societies, those consumers who were made aware of Open Banking in the same YouGov survey categorically said that they would trust banks above new entrants in keeping their personal and financial data secure.

This gives banks and building societies a real opportunity to make a success of Open Banking.

What does success look like for Open Banking in the UK? 

Open Banking will be deemed a success in the UK only when it is able to drive a consumer-centric revolution of sorts in financial services i.e. helping launch banking innovations that are intrinsically based on the interconnectivity of data and services from multiple

 eco-system players that become mainstream and make a tangible difference to the everyday lives of end-users.

In the end, the speed of change in the UK versus Europe will depend on how quickly banks and building societies are able to adopt the API standards and launch their winning propositions, challengers like Monzo and Starling scale and on how fast consolidation occurs i.e. acquisition of some of the challengers by incumbents as it is a crowded space today.  

What are the implications for building societies?

To make a success of Open Banking, building societies need to make their members aware of the concrete benefits of Open Banking, while assuring them of the safety of their data.

These go beyond simply making consumers and SMEs more effective managers of their finances to providing complete lifestyle services from a single app, say, home-buying or travel, or to changing the current non-transparent and largely static credit scoring processes in terms of clearer eligibility, greater inclusion and improved convenience. For example, Santander’s Open Bank recently launched a charity marketplace, where customers can go to the website, select a charity, set up an automatic transfer every month or year, and receive a tax receipt. 

The key question building societies must address is how does Open Banking create greater choice and control over what members buy and from whom. Open Banking could provide the following attributes:

• increased convenience - faster mortgage origination as paper bank statements are replaced by real-time transactional data
• personalized products at lower cost - precise loan terms due to more granular credit data availability such as SME business performance rather than collateral
• greater transparency - full disclosure of fees and charges
• or unbiased advice based on trusted data - with no underlying advertising or data monetisation agenda. 

Building societies could capitalize on their strong brand, the position of trust and public-spiritedness to address under-served segments in British society such as SMEs. If a member decides to freelance or launches their own business, their first port of call should be their building society rather than a fintech or challenger bank. 

There are a number of strategic options apart from launching compelling value propositions on their own. For instance, building societies could use their traditional expertise to collaborate with each other around a particular niche proposition, say, providing a one-stop shop to meet all the needs of the buy-to-let buyer or the property developer. In this way, they can gain an edge over both the larger players as well as the new entrants.  They could also reach new market segments by providing products and services to other aggregator sites such as a next-generation Zoopla or money supermarket.

In doing so, there is a clear benefit. McKinsey estimates that following a successful Open Banking strategy can bring a financial institution an uplift in return on equity of up to 6% over the current industry average. 

But first-mover the advantage is key to success and the time to act is now!