Written by Gianluca Corradi (Head of UK Banking at Simon-Kucher)
January 14, 2019 marked the first anniversary of Open Banking, allowing banks, fintechs and ‘big techs’ to compete in a more fluid space.
Despite a “below the radar” start, Open Banking is truly shaping the future of finance. It is generating huge threats as well as tremendous opportunities to incumbent financial services players and new competitors, particularly through allowing more businesses to specialise in parts of the value chain where they can create a strong competitive advantage.
Gianluca Corradi, Head of UK Banking at pricing strategists Simon-Kucher (which works with numerous banks and fintechs in the UK and worldwide), says “The first year of Open Banking has already brought a significant change for the financial sector and indicated countless opportunities for future growth. I see this unfolding seismic shift started by the creation of Open Banking as largely benefiting customers through better services and better access to finance.
“So far it is early days and customers have not seen the true potential of Open Banking, but they are already starting to experience the benefits. For instance, being able to see all your financial wealth, investments and pensions seemed out of reach only a couple of years ago, but now it is happening.
“Fintechs are now taking it to the next level, allowing customers to monitor their financial wealth across all asset classes, from jewellery to real estate, and this is subsequently triggering new innovation by the high street banks. A good example of this is the app Asset Vault.
“After an initial period of panic, even large institutions are now taking a positive view on Open Banking, thinking about new ways to boost the current business. Open Banking has the potential to become a primary channel for distributing financial services – equal to branches and online.”
Arrival of tech giants
Gianluca adds: “Sooner or later, the financial services sector will lose most of its customer-facing roles to Big Tech technology giants, the way Amazon shook up the retail sector, Apple reshaped the music industry and Uber transportation, especially at nighttime, in cities.
“The reason for this is, essentially, customers don’t desire a financial product, their need instead is to fulfil other primary desires such as having income in retirement, owning a house or simply having a night out. For instance, when people ride an Uber car they are seeking transportation and may don’t even have to think of physically paying for the journey … it simply happens in the background without the need for cash or a credit card.
“Loss of brand recognition for many large and established financial sector firms is highly likely in the not-too-distant future, but this will not necessarily translate into less revenue for banks as being in the background allows players to focus on economies of scale and higher revenues from a higher volume.
“Banks with a relatively lower cost of funding and global reach might opt for this strategy. After all, no bank in the world that has as many customers as Amazon, and partnering with such a giant represents a huge opportunity for reaching clients and increasing market share.
“Fintechs are also adopting different strategies to win in this market. Some have been successful in gathering an extensive customer base and are now leveraging this position to cross-sell other financial products through a ‘marketplace approach’.
“Others have preferred to focus their effort on continuous innovation by white-labelling their solution to more established players with large customer bases.
“Finally, a third group of fintechs has opted for a radical change in the business model – the BaaS (Banking as a Service), essentially outsourcing the entire banking capabilities to third-party players.”