The top three global banks, which are the Industrial and Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China have a combined income of £7.12 trillion, a vast revenue for only three companies. Traditional banks have almost had a monopoly on the market for the longest time now across the globe.
Following the successful disruption of other industries using technological advances, e.g Netflix to video content, Uber to public transport; non-traditional financial services (FS) companies are smelling blood in these very profitable waters, and are looking for ways to infiltrate this market.
After a long period of undisturbed calm and tranquility, the old, unchanging banking industry, like many such industries in the last five years, is finally showing signs of disruption.
The banking space is growing with the influx of third parties like Virgin Money, and challenger banks such as Monzo, Atom and Tide using technology to infiltrate the lucrative banking market. The size of customer wallet share for traditional banks is shrinking as customers are now exposed to more choices. Sharing information on social media means customers are more aware than ever on how to manage money and are evaluating the different options available to them. As a result, customers are more willing to move money to different banks with competitive offers.
This increased competition is great for the customer, as services and offers are having to become tailored to fit them, rather than the one-size-fits-all product oriented model of the past. In order to remain competitive, banks will need to respond by delivering personalised products and services and larger value propositions.
Open Banking and its impact
Customers want to see technology driven services from banks, like the ones they have experienced in other industries like retail and travel. Banks are gearing up for this in most parts of the world; and in those where there is a lag, governing bodies are bringing in new regulations to accelerate this. One such regulation is PSD2 in Europe. PSD2 is forcing banks to open up their systems to third parties and is a decisive step forward towards a more transparent banking world.
The Open banking trend has been further accelerated by the PSD2 regulation. With European banks being mandated to open up their customer information to third-party service providers, thanks to PSD2, they are running the risk of losing exclusivity to data and customers. Banks need to act quickly and get the most out of PSD2 for themselves, otherwise they won’t be competitive. Embracing the innovations made available through Open Banking is the answer to this.
Leveraging Open Banking to track and monitor the way customers interact with banks and third parties more accurately, can help to create better user patterns which can be used as a framework to improve future services. Open banking can enable banks to gain a greater customer insight in two ways; through AISPs and Partner Ecosystems.
An AISP (Account Information Service Provider) enables customers to gain a full overview of all their payment accounts, like credit, debit, joint. Banks could themselves register as AISPs and consolidate customer information from all the parties involved.
This consolidation of customer information, including transaction data, revenue flows and account details will allow banks registered as AISPs to be able to tell which other third parties their customers are banking with, and gain insights on their consumption patterns. Banks could leverage this to cross-sell and up-sell products and services to these customers and thereby improve customer wallet share. This could also be a means of acquiring new customers.
Open banking ecosystems are formed when banks enter into partnerships with various third-party service providers – both financial and non-financial with the intention of improving their value proposition to the customers. Banks open up their data through secure encrypted platforms to partners, who in-turn could utilise this providing various products and services through the bank. The banks could deliver innovative revenue models with the partners and expand their value proposition through a diverse array of products and services as well as co-innovated solutions.
This allows banks to cater to the entire value chain of customers, thereby making them a value aggregator, which in turn opens up a number of revenue channels for the bank through increased customer wallet share from existing customers and new through the network. This also gives a sea of customer insights from the partner ecosystem, which the banks could use to up-sell and cross-sell solutions to customers.
Through partner ecosystems banks will be able to move from a utility-based service provider to a true value aggregator by providing financial, and possibly lifestyle services, to every customer. Ultimately, this will create even greater competition as banks try to increase their customer wallet share. This ability to “see” across all partners enables both banks and third parties to not only know who the competitors are, but also how to beat them.
By taking advantage of new technology and embracing Open Banking, any bank could become a true value aggregator with insights relating to a customer, and their partners’ customers, increasing customer retention and wallet share. The winners will be those who can use the insights in the smartest way, in the fastest time possible.