A perspective on open banking and the rising phenomenon of 'Tech-Banks'
Has the commoditisation of the banking sector already begun? With Facebook picking up e-money licenses in Ireland and Spain, and Alipay partnering with payment providers across Europe, the US and Asia, it seems as though the first “Tech-Bank” is soon to become a reality.
When PSD2, the European-wide legislation for payment service users and providers, comes into effect in January 2018, banks will be required to open up their data and transaction services to any authorised payment initiation service. This is a huge opportunity for small businesses and fintech start-ups, but potentially an even bigger one for the tech giants who have been waiting in the wings. While the incumbent financial institutions have grappled with complex legacy infrastructures and sometimes clunky customer interfaces, the growing crop of digital banks and fintech platforms have already started to fill the gap, chipping away at traditional banking services from all angles.
Expect that rate of attrition to accelerate rapidly post PSD2. As seen in the telecoms industry, owning the primary customer interface is crucial to retaining market power. For the GAFA (Google, Amazon, Facebook, Apple) squad, who already own the user in so many other parts of daily life, creating a financial platform that satisfies modern consumer expectations could be quick work, putting traditional banks at risk of becoming merely a backend supply network.
So how can the incumbent banks win in the oncoming power struggle? Corporate venture capital flows into fintech are higher than they have ever been (European scaleups received almost $500 million from corporate investors in 2016), and the in-house innovation hubs are churning out new products at a rate of knots; but is that enough? Traditional banks should continuously be looking for ways to defend their primary customer touchpoints, and agility will be the key to keeping up with ever-evolving user expectations. The traditional banks still have the advantage of owning significant customer bases and can roll out new technologies quickly and at scale, but rather than focussing on specific products or partnerships, the winners will be those that build the best platforms, and in the longer term, those that win a place in the “Bank with Alexa” or “Facebook Me$$enger” ecosystems.