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Twelve Months On, Open Banking Poses a Significant Challenge to Traditional Banks

This Sunday marks the first anniversary of the Open Banking initiative which was designed to increase competition and ensure a better experience for account holders. The last year has seen a sharp rise in the number of new fintech start-ups entering the market, putting 35 per cent of the revenue of traditional banks at risk.

With competition intensifying, traditional banks are struggling to keep pace. Some are trying to move to a more nimble operating model in response – including launching their own digital banks. But the high costs of doing this, as well as the infrastructure implications, make this a very difficult task, according to Dave Locke, Chief Technology Advisor at World Wide Technology.

Locke comments: “In the last year, the Open Banking initiative has contributed to a significant surge in the number and type of financial service providers. As a result, we are seeing an unprecedented amount of change from traditional financial institutions that need to safely unwind their technical debt, much of which is motivated by the need to compete with new entrants in the market. However, the complex nature of existing systems built with conflicting metrics over the years acts as a significant barrier to this. Legacy infrastructures are typically built from an interdependent patchwork of applications, which communicate with one another in complicated ways.

“Challenger banks, on the other hand, are born on the cloud and don’t have to contend with the legacy IT structures of most traditional banks. This enables them to better organise their operations around the customers’ needs and provide incremental improvements to their systems – in a way that legacy banks have difficulty doing.”

As of 2018, 63 per cent of current financial services players didn’t exist a decade ago. According to PwC, 64 per cent of banking customers around the world are expected to take advantage of the Open Banking initiative by 2022.

Locke concludes: “Currently, banks have two major advantages over the latest fintech players: an established customer base and the customer data that comes along with this. To capitalise on this and stay competitive, they must first gain extensive insights into the existing infrastructure to create a real-time picture of the entire network. They can then use these insights to create a roadmap to their desired business outcomes. Once this level of visibility has been achieved, banks can confidently rationalise the way that different applications share data within the system, allowing them to achieve the level of agility they need to stay viable.”

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