The product of the Competition and Markets Authority (CMA), which determined that the UK’s biggest banks were too dominant, Open Banking requires the UK’s nine largest banks to make their data available to vetted fintechs via APIs.
According to the CMA, the value proposition of open banking to consumers is significant: “open banking will mean reliable, personalised financial advice, precisely tailored to your particular circumstances delivered securely and confidentially.”
It elaborated, “With Open Banking, apps could use your transaction information to find the current account which suits you best. If you run a small business, apps could find the best deals for your business accounts and loans. Apps could even help you avoid overdraft charges by moving cash into your account when it dips into the red.”
For the banks subject to Open Banking, the new rules present a huge challenge. While much has been made of the technological and customer experience innovations fintechs are bringing to market, large banks have been able to use their ownership of customer data to defend their positions in the market.
As of mid-January, they will no longer have the ability to keep fintech upstarts from accessing that data, potentially giving fintechs a powerful weapon that can help them disrupt banks even more than they already have.
So what will banks do?
If you can’t (or don’t want) to beat them, partner with them
One hint as to how that question will be answered comes in the form of news that London and Johannesburg-listed specialist banking firm Investec has partnered with UK fintech MarketInvoice.
As detailed by the Financial Times (FT), “Under the partnership MarketInvoice, which manages small-company loans online, will provide digital invoice finance and business loans services for the specialist bank, handling the underwriting and payment processing for its customers.”
As part of the tie-up, Investec will fund £50m in invoice finance transactions.
Partnerships between large banks and fintechs are not new. For example, last year Santander teamed up with Kabbage to use Kabbage Platform for business loans. Kabbage Platform is an online lending platform that the fintech licenses to banks. But the Investec-MarketInvoice deal is notable because as the FT notes, it’s “the first move by a bank to outsource the provision of some of its client-facing banking services to a technology platform.”
In other words, unlike past partnerships between established players and fintechs, Investec is effectively allowing a fintech to own the customer experience, not just provide the technology behind its own branded customer experience.
2018 will almost certainly see similar deals being struck, as Open Banking will mean that banks can no longer hold their customers’ data hostage. While such deals are not without risk, there’s an argument to be made that under Open Banking, banks will have no choice but to rethink how they serve their customers because realistically, they either won’t be able to innovate fast enough to compete with fintechs, or won’t have the desire to, specifically in product categories that only contribute modestly to profits.
With this in mind, banks would be wise to consider that a marketplace model, under which they connect their customers to fintechs they’ve partnered with, will become far more common than the model they’re used to, which is built on the notion that they can and should provide all things to all customers.