Open banking is now with us. While some people are still fighting to accept APIs as the new reality, for many the dialogue has moved on and they now look to identify partners with whom they can collaborate and thrive.
The pace of change in the financial system is ever increasing: new infrastructures, legislation and regulation, and market and product evolution. But, who pays for these changes?
Ultimately, the consumer pays for every change, either directly or indirectly. But with PSD2 going live earlier this month, there is some anxiety about this mandated move towards “open” banking. Some of that angst focuses on who is to pay for continued development of the infrastructure. Are the costs of the required broader access to be borne by the banks or shared across the entities that provide alternative services via that access?
Such a debate is hardly surprising when the impact will be, at least in some areas, to end the banking monopoly that has existed for many years over a wide range of financial services. Should the banks that developed and maintain these utilities be forced to give “free” access to other commercial (potentially competitive) entities?
In truth, any and all costs always end up with the customer, and if there is an individual consumer behind that, with him or her. So the oft referenced concept of “free banking” has always been something of a fallacy, albeit one that has perpetuated for decades.
As banks and their core services become more akin to utilities, the opacity of the pricing of these services is a cause of concern, so the provision of pricing transparency in offerings such as Earthport’s own is increasingly a competitive differentiator.
During the financial crisis, the bail-out of banks via the public purse challenged the definition of a free market – at least as it had been applied to banks. A “free market” after all, removes the need for a “lender of last resort” allowing banks to operate outside of regulation and standalone.
The crisis demonstrated that banks and governments are indelibly linked, that sovereign nations need a robust and stable banking system, and that that system must not be allowed to fail in times of stress. Banks are under obligation to adhere to legislation, regulation and codes of practice, and to meet a variety of social responsibilities. These include the provision of services to the most vulnerable in society, access for rural communities etc. Sometimes these complex obligations are evident in direct legislation (e.g. requiring the provision of free or low-cost current accounts) sometimes supported through government programmes (e.g. those ensuring the provision of ATMs in remote and/or less profitable areas).
We didn’t quite get to see what would happen if the system actually unwound, but we came perilously close. Moreover, despite widespread criticism of the banks, their legacy systems, and indeed their internal cultures, we have yet to see a mass exodus of bank customers to alternative providers. Nevertheless, it should have been something of a wake-up call.
PSD2 and open banking are, at least in part, responses to the financial crisis. A recognition of too much concentration risk in the system. Banks now fear a different risk; that such legislative prescription will support their disintermediation, driving wholesale industry changes that will erode their market share across a wide range of financial services.
But for those that do adapt to this brave new world (and it is now inevitable) choosing the right partners means banks can benefit from their most valuable assets: the scale of their customer bases, the associated deep rich data, and the hard to erode trust that consumers have in their brands. The right partners can enable banks to leapfrog development costs, unchain themselves from monolithic legacy systems and directly leverage exciting new technologies to provide cheaper, better and more efficient services.
To do this they will need to act with some urgency, some institutions continue to invest heavily in aged systems lacking the flexibility to move with the changing dynamic. However, this new regulatory framework around the “free market” will be good news for consumers. It means a greater choice of better services. The mythical free banking era is long gone as banks struggle to make the margins they did in the past, hampered by low interest rate regimes, more challenging capital and other regulatory demands, and fresh competition from nimble providers without legacy issues.
Most banks now realise that life will never be the same as it was before 2008 – and some are already making forays into the brave new world, working with carefully identified partners, learning how to be successful after the vertically integrated model is re-tooled, determining new pricing models across multi-party chains. Given what we experienced over the past decade, sharing the risk and the reward isn’t such a bad thing, is it?