Open Banking is a general term that describes two pieces of regulation: the Competition and Market Authority’s ‘Open Banking remedy’ and the European Payment Services Directive 2 (PSD2).
(For a handy guide on the legislation, here's everything you wanted to know about PSD2.)By opening up customers’ banking data through secure APIs, Open Banking has the potential to disrupt the way that people interact with their finances and the relationship they have with financial services providers.
According to the Barclays report, Open Banking could create value for individuals and SMEs in ways that we haven’t yet fully imagined. These could include: bringing benefits to customers through the aggregation of financial products on one platform; the creation of new services that help people to manage their finances; providing insight into spending and saving habits; and also widening access to products and services.
This is great news for challenger banks and fintech start-ups like Monzo, Atom Bank, and Tide who will be in a stronger position to take control of the customer relationship beyond core banking services. For banks, this means even more competition to hold on to customers, so they need to be making the case now for why customers should hold all of their financial products in one place. Personalisation and convenience will not be enough to keep customers interested long-term, banks will need to genuinely reward customer loyalty and make services compelling and useful to ensure long-term staying power.
In the commoditised world of Open Banking, loyalty to a brand will be harder to generate without delivering genuine advantages to customers who display loyal behaviours. When you have relatively open marketplaces customers are more willing to try out lesser-known providers. The trust in this instance doesn't belong to the provider but to the marketplace itself. The risk to banks presented by Open Banking is that people – particularly the tech-savvy – will be more willing to try an app from a third-party provider than one from a bank that they don’t already have a relationship with.
Loyalty means more than financial reward
Banks will find it difficult to compete directly with third-party aggregation services without first joining up siloed products and services to give customers tangible benefits from holding all of their products in one place. This means providing relevant and useful services to customers and an even greater focus on the customer experience beyond just ease of use or promotions.
Take Apple for instance. It doesn’t offer the cheapest phone or tablet but all of its products work so well together that customers would rather pay more for that service. Once you have two or three products with Apple, the glue that holds the experience together becomes stronger, meaning customers get more value from the relationship and become less interested in switching.
There’s no doubt that the major retail banks are already thinking in these terms, although HSBC is the first to go public having recently announced the launch of a Beta app. The app will allow users to link up accounts from up to 21 different banks and to view spend. It will also provide access to view loans, mortgages and savings through a single platform. The app is due to launch in January 2018 when the new Open Banking regulations come into effect. The key to the success of such a service will be how effectively the app meets the genuine needs of users and how useful the functionality is over the longer-term.
Making it ‘useful’
We’ve been speaking with banking customers to find out how receptive people are to the aggregation of financial products and if they believe it could help them manage their money better.
The introduction of aggregation technology will provide new functionality that users will find appealing. The people we spoke with felt they would benefit from having the ability to track their spending holistically. “It would make me more serious about my money”, said one respondent. “I can imagine it would be really convenient and make my life easier.”
Respondents felt aggregation has the potential to empower and support them in their financial decision-making. Some people felt it could encourage them to improve their spending behaviour, others see the potential for extra, enhanced support: “A one-stop shop is the ultimate goal, let me do everything in one place.”
The aggregation of financial services however will be a new concept to many people. Our research points to three potential barriers to adoption: Education; Privacy and Security; Stickability.
The lack of education around Open Banking means that it is treated with caution and concern. Educating people about the benefits of aggregation will be one of the key components in building trust. In our research, we discovered that unprompted participants found it difficult to think of the benefits of aggregation beyond convenience. Things such as offers, better rates/products or speed of procession loans or mortgage applications were not considered until prompted. Given that these problems will be industry-wide, the bank that explains this in the best way will have an advantage in the marketplace.
Concerns were also raised around the aggregation of banking details, particularly around security and the concept of sharing financial data between banks. A resistance to change is natural, but building awareness early will make this transition easier.
Privacy and security
Privacy and security will be a big barrier to adoption for many customers. Trust has been missing from the banking industry for some time, banks are going to have to work harder than third-party suppliers to win customers over.
We found that the aggregation of data creates a fear of being watched: “It feels like I’m being watched, I’m not sure I’m comfortable with that.” There is also the perception that a bank would use this technology for its own commercial ends: “They’re not doing this out of the goodness of their heart, what’s in it for them?”
People were naturally concerned about having all their data in one place fearing it presents a one-stop-shop for hackers. When it comes to privacy it is important that people feel in control of their data and permissions. The concerns about ‘being watched’ means they will seek reassurance that they remain in control.
For younger more tech-savvy users the benefits of such a service out way any trust issues. They feel more at ease sharing their data with third-party providers if “there is something in it for me”. Convenience in order to make their life simpler is a core driving factor for adoption with these customer types.
While customers will investigate the new, it has to sustain interest and usefulness in the long-term. The key to building a successful and useful app is to ensure that functions are immediately useful, understandable and combined with core banking functionality. When we asked participants to design their ideal aggregated banking app all placed importance on core banking functionality such as moving money between accounts (80%) and sending money to someone else (71%).
Third-party payment and loyalty schemes are increasingly seen as financial products so integrating this functionality will also appeal to customers. In our research 65% of respondents found the aggregation of loyalty schemes appealing. In addition, reporting and analysis tools will be an attractive proposition but these will need to be simple to use, functional and meaningful to the individual.
Due to the wealth of information with aggregation, it will be vital not to overwhelm users to ensure initial and ongoing engagement. Logical information architecture and distinct visual design is important for helping customers to develop an understanding of how useful the features and functionalities are for their specific needs.
A renewed focus on the customer experience
Companies that provide a great end-to-end customer experience that is relevant and useful for customers are seen as more trustworthy and attract more loyal customers. Banks that fail to use the Open Banking Standard to give customers a more fulfilling banking experience which rewards them for their loyalty will – over time – surrender their customer relationships to third-parties.