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In the era of Open Banking and Instant Payments, why are banks still ‘closed’?


In this blog, Simon Wilson, Global Sales Director at Icon Solutions, discusses how banks need to emulate the market disruptors to compete in a digital world. 

The financial services sector has entered an unprecedented period of upheaval driven by changing consumer behaviour, technology innovation and regulation.

Consumers are digital natives used to products and services being available at the tap of a screen. Expectations have been changed by big tech companies like Amazon, Ant Financial, Facebook, Google and Tencent, who have stolen market share by daring to reimagine and reengineer traditional services from television to navigation to shopping.

Along with FinTech upstarts, big tech companies are now moving into the financial services sector where incumbent players are still burdened by 40-year-old legacy systems. Unshackled from antiquated technology, these players are reinventing financial services by rapidly intertwining banking products into their spectrum of growing data-hungry services, stealing customers and market share in the process.

And regulation is helping them to better compete with incumbents. Across the globe, law makers are using legislation to empower the consumer and break the monopoly of financial services providers. PSD2 and Open Banking in particular have opened Pandora’s box, and now there is no closing the lid.

Disruptors are open, banks are not

The market disruptors have one thing in common – openness, it’s in their DNA. Technical and cultural openness has helped these companies, not just build businesses, but build entire ecosystems. By becoming platforms and connecting their businesses with others, they create a “network effect” that opens access to more data, allowing them to improve their products, attract more users, and drive more revenue.

From a technology standpoint, their business models are built on API-centric, open source technologies, usually based in the cloud, that provide the flexibility to react to market changes with new, deeply personalised services – all continuously updated, improved and delivered in real-time.

The contrast with the closed systems of traditional banks is stark.

Founded on the principles of trust and security, bank systems have been built to prioritise stability and security, not sharing. Technology is typically architected around product silo’s not around a customer. These models have served them well, but today customer centric openness is required if banks are to develop the business models and deliver the innovative products and services needed to retain and acquire customers in the face of growing competition and market uncertainty.

As the big six banks in the UK come under-fire for their lack of progress around Open Banking it has become clear that switching from closed to open is no mean feat.

A window of opportunity

By providing access to bank systems for third parties to initiate payments or acquire customer data, Open Banking is forcing banks to adopt a more open, API-centric approach, like the big tech and FinTech players.

What this brings is a clear threat of disintermediation, Open Banking, along with the rapid growth of Instant Payments and the emergence of open source technologies, has created an opportunity for banks to leverage their brand and existing customer base to catch-up and even over take the competition.

If Open Banking regulation created the consumer superhighway through a network of APIs, Instant Payments has provided the F1 vehicle to challenge all existing and outdated payment system approaches.

Moving to real-time unlocks a raft of use-cases and corresponding products and services that will win over consumers. The new services and products that banks can overlay on Instant Payment rails will generate more data about customers so they can – in turn – deliver better, increasingly personalised offerings.

For example, Deutsche Bank has announced a pilot with the International Air Transport Association to reduce processing costs between passengers and airlines, as have BPCE and Air France. By collecting customer payments direct from accounts, payments can be processed and received in near-real time. The improved speed, security and transparency is matched by convenience for travellers and provides banks with the chance to offer other relevant products such as travel insurance or loans

However, if banks don’t adopt an open approach to technology, they will lose the significant advantage that Instant Payments affords them.

Emulating market disruptors

To really leverage the benefits of both Open Banking and Instant Payments, it is critical that banks make the right technology choice. To really compete with the new market disruptors and generate returns, banks need a modern approach that can level the playing field or even tilt it in their favour.

Banks need to behave and think like challengers – becoming agile, staying responsive to market needs and leveraging modern open source technology to bring down costs and offer better value-added services to improve customer experiences.

So, what is the path to success and how can banks better leverage the open technology used by new entrants to their advantage?

My colleague Anirudh Maheshwari, one of our payments subject matter experts, has written a whitepaper “Creating a Next-Gen Payments Platform for an Evolving Digital Economy” to tackle these issues in-depth and provide recommendations on how banks can take the lead and be the agents of change in the digital world. Have a read of the whitepaper here.

What is clear is that as banks shift from being transaction-led to data-led businesses in the era of Open Banking and Instant Payments, a new approach is needed. But this will only be possible if banks shift culturally and technologically from closed to open.

Author: Saara Day