Banks are increasingly competing in a world where non-banks are able to create a direct traditional banking relationship with customers. Just like other digital businesses, banks need to learn the importance of being "discoverable" to remain relevant. Third parties should be able to find them in the digital ecosystem so that they can do the work required to make banking services available to their customers. This is called open banking - a key component of fintech innovations.
Jigyasa Singh, managing director, financial services, Accenture Africa
Unlike Europe or Hong Kong, South Africa has no regulations driving the adoption of open banking, but many banks are taking the initiative to adopt it anyway. Banks are choosing how they want to engage with their customers, other fintech players and the industry itself. The CEOs of FNB and Standard Bank are on record talking about platform banking, and both Nedbank and Absa have made investments in the open banking space. This means that our banking sector sees opportunity and possibly a way to pre-empt regulation, and manage some of the risks that open banking may pose. This article shows the three approaches to open banking, as well as the risks to be managed along the journey.
Approaches to open banking
Research shows financial institutions are more or less evenly divided between three main ways of engaging with open banking:
- Banking as a marketplace
Discovery’s roots are as a disruptive health insurer – a company that introduced tracking and rewarding its customers’ gym attendance. That evolved into tracking customers’ buying habits and rewarding spend on healthy foods in grocery stores and restaurants. Discovery wins by harvesting useful information about its customers to help predict health issues, and Vitality’s partners benefit because they are encouraged to spend money within the platform partners. The success of this led them to apply the same thinking to vehicle insurance – and now to banking. Banking as a marketplace shows players adopting a wider ambition to take over in the financial industry. They aim to be the go-to provider for various financial services options.
- Banking as a platform
Platforms often evolve as a by-product of a company’s core business. Amazon’s core business was selling books, but it has now evolved to a point where you can buy pretty much anything from Amazon. To execute its core function, it needed sophisticated customer service systems and a vast and low-cost cloud infrastructure. Amazon is now providing its cloud infrastructure, and the exact same call centre systems it uses, to its clients. In SA, FNB and Standard Bank have come out strongly to be in favour of platforms.
- Banking as a service
Here, banks provide banking services for third-party providers (TPPs) which on-sell their innovative products. Apple Pay is the company’s peer-to-peer and credit-card operation. It partners with local banks in the jurisdictions in which they operate, and provides the card security and ID management, while the local banks offer Apple banking services.
There is a lot to unpack around these three approaches, as each has its own pros and cons. Banks should assess the viability of each in terms of strategic alignment, and be very critical of what they aim to achieve and gain versus what they are giving away – particularly relating to customer relationships, trust and security.
Overcoming the challenges of open banking
For years, banks have been losing facetime with their customers – from the push to get customers to use ATMs instead of branches, to the shift to online driven by banks and fintechs – and most recently by Covid-19. While drawing money from ATMs forces people to interact with the banking brand, when customers shop online, it’s not their own bank’s logo they see, it’s the MasterCard or Visa logo. When they pay with Zapper or Snapscan, the money is leaving their bank account, and the bank has lost that link to its customer.
It’s hard to create a meaningful, marketing relationship with a customer if you’re invisible and this is a choice for each individual bank to make. A bank can extend its reach if it allows its ecosystem partners – retailers, telcos and other fintechs – to own the end-user relationship while the bank becomes a provider of banking services in the background. In this way, Open banking is driven by banks and ecosystem partners, for the mutual interest of both parties in the service of the customer experience. Still, in this model, the bank cedes its customer relationship to a third party. So how else could banks see this as an opportunity instead of a threat?
In the near future, customers will be able to use a third-party app to move money between accounts – even at different banks, and get a holistic view of their accounts across all participating banks. When that becomes possible it will be interesting to see how the large banks make sure they are still investing in their relationships with their own customers.
Traditional, vertically integrated banks will need to become what they’ve never been before: savvy bilateral traders. Those that treat open banking as a strategic growth priority will position themselves to deliver the seamless and engaging digital experiences
customers want – and potentially boost revenues by upwards of 10%.