The way forward for ‘Open’ Banks
Compliance to new regulations like PSD2 (the Second Payment Service Directive), is not the only issue facing banks in early 2018. Every Financial Organisation is now sprinting to be compliant on the day of the deadline, however they should look further ahead and treat the PSD2 deadline as a milestone and not the finish line
They can choose to be in the backstage as a banking utility provider, enabling other services to provide a great customer experience, providing the simple, commoditised financial fuel of the experience. Or they can choose to be the platform at the centre of the customer experience, providing them with quantifiable added value, using data and partners to put together a tailored customer-centric offer that will differentiate the business.
An existential crossroad for Banks
Much like in Dicken’s novel “A Tale of Two Cities”, the time of Open Banking is the best of times and is the worst of times for banks. The best of times, because it is full of new opportunities to become a true provider of lifestyle services to customers. The worst, because unless a choice is made, FinTech companies and aggressive competitors from Silicon Valley will steal market share.
The road of true customer experience providers…
Banks, if they choose to be an experience provider, can offer customers true value. This means sitting on top of the value aggregation chain. To explain the implications through an example, a utility provider would be a coffee beans vendor. Not in direct contact with customers but an essential component of the experience working in the background. The true customer experience provider would be akin to Starbucks or Armani coffee. Using different partners like coffee bean vendors, bakeries, interior designers, in order to provide customers with a valuable experience.
In order to become experience providers, banks need to create their partner ecosystem and join the platform economy. Giants like Uber, Airbnb and Amazon have shown that true value does not mean owning a car or a hotel room, or a plane or items to sell. It means owning the platforms which becomes a marketplace for the customer, connecting them with the right packaged offer and the right partners. Applied to banking, this leads to providing contextualized experience with personalized pricing across the customer experience journey via ecosystem of partners.
A bank partnering with a Fintech start up for a one-off transaction suiting a few customers will not have the same pricing model if they partnered Facebook. The bank will want a closer relationship with Facebook because of its enormous global user base and the insights it has on users, so banks will use a different, more adapted pricing model.
Banks wanting to be customer owners and provide an experience to their customers will need to be in charge of the curation and governance of a platform and be responsible for delivering the future roadmap for the platform. They will also need a vibrant ecosystem to extend an offer closer to customer needs. It is crucial that the ecosystem is managed appropriately. The ‘network effect’ that banks would want to create via the platform could help them scale up rapidly. Equally so, if the curation is not done properly, it could quickly lead to clients deserting the platform rapidly. When ecosystems compete with other ecosystems, one with better collaboration, less friction and better curation will win over others.
The road of commoditised, utilities providers…
Banks that choose to be utilities providers will be enabler of experiences, working in the background. Just like Uber aggregates the entire experience while the payment is entirely integrated and almost completely invisible. The transaction happens but the customer is barely aware of it. She can focus on enjoying the experience without having to worry about all the gears that come into play to make it a reality.
Some banks may be better suited to take this road than others. There is an element of risk in being at the centre of a platform economy. If things go wrong you get all the blame and customers leave. It can become a vicious cycle of disappointment if customers and partners do not see value..
Being a utilities provider is not worse than the alternative, as Dickens pointed out in the Tale of Two Cities: “No one is useless in this world who lightens the burden of another.”
If banks choose to be at the top of the value aggregation chain, here are a few requirements they must meet if they want their ecosystem to be successful and avoid the dangers mentioned above.
Building a successful ecosystem
Banks who are looking to build a successful ecosystem need to ensure a balance between the experiences they provide to both their customers as well as partners in the network.
Keeping your partners happy is this ecosystem is a necessary but not a sufficient condition. One must also maintain a balance between the B2B and B2C sides of the ecosystem. On one hand, customers should be kept happy with a relevant, tailored customer experience, offering them high-quality service which they would willingly pay for. On the other, the partners must be see value with what they are getting out of any relationship with a high street bank and be reassured that they are all commercially rewarded aligned to the value they provide.
Unless everyone on the platform is clear about the strengths they are bringing to the table and what they are getting for it, the platform won’t be a success.
Remuneration models for partners: a crucial part of ecosystems
With PSD2 coming up, banks will soon be forced to open their APIs. They are now trying to monetise them according to different pricing models. However, the real question now is how will banks construct their revenue models in the Open Banking world?
The delicate governance of an ecosystem requires the ability to offer tailored, relationship-based pricing models. Banks need to offer different pricing models as a partnership with a small fintech firm that is relevant to a few niche high-end customers is different to a partnership with Facebook who can potentially bring-in millions of transactions.
Whether banks choose the value or commodity route, they will thrive as long as they understand their role. For one, their concerns will be centred around the economy of scale, for the other lifestyle and customer experience.
The next challenge: building trust
As we dive right into the Fourth Industrial Revolution in banking, powered by data, the true issue remaining will be one of trust: who do you trust with your data? Who do you trust to keep your data private, secure, but also trust to use it efficiently toward an improved service?
Recent Accenture research claims two out of three consumers will not share their financial data with a non-bank. This is worrying as deadlines for Open Banking approach, so there is a duty for both high-street and non-banks to educate the public on the benefits of data sharing.
If banks can answer those questions above, we can then echo Dicken’s words in the novel “It is a far, far better thing that I do, than I have ever done; it is a far, far better rest that I go to than I have ever known”.