Are banks ready for a future of open banking?

Andrew Au argues regulatory changes could spell opportunity for banks (or leave them vulnerable to competition).

OpenBankingBy Andrew Au

Over the years, Amazon has made an entrance into the automotive industry. But it’s also in the process of finding its footing in the financial services arena. In 2018, the company revved up its lending division, Amazon Lending, offering more than $1 billion in small business loans. This shouldn’t come as a surprise. Armed with troves of data, an eco-system ripe for targeted cross-selling and a substantial customer (or membership) base, big tech is well positioned to become a real player within both consumer and business banking segments.

But it’s not just big tech. Big banks are also sitting on troves of customer information. The opportunity for both is in deploying machine learning algorithms against these data sets to offer more predictive services and conveniences.

An evolving marketplace means a new definition of success

The Intercept Group polls 3,000 millennials across North America about banks each year, and each time we hear the same thing: “big banks” represent “my parent’s bank, not my interests.” In any industry, reclaiming relevance starts with recognizing and adapting to the shift in societal needs.

The premise of banks has always been to help us lead successful lives by providing financial security. However, this definition of success is changing. For Boomers, it was defined by stability. For Gen X, it meant being young and affluent. For millennials, who are now the single largest generation, success is about the pursuit of pleasure.

Some financial institutions are attuned to this. Take Wealthsimple, for example. At one point, its home page displayed four words that cleverly articulated the modern definition of success: “Invest in travel life.” Today, Wealthsimple has $4 billion in investments under management, and 85% of its customer base is under the age of 45.

An emerging opportunity for financial brands

During the reign of Boomers and Gen Xers, an information asymmetry existed wherein companies had more information than customers did. Today, consumers are swimming in information, but lack time. That has created a market for conveniences and insights to parse the overwhelming information.

Apps are a great reflection of how companies have begun to bridge the gap in response to unserved customer needs. There are a number of financial service applications that are filling these gaps to win the mindshare of millennials.

For example, for a cost of $1 to 3 per month, micro-investment app Acorns allows customers to round up their purchases to the next dollar and invest the “spare change” into a personalized stock portfolio. Acorns has taken a similar save-while-spending approach as Toronto fintech startup Koho, making the concept of investing more accessible and achievable. Robin Hood has similarly made life easier for consumers looking for convenience and ease. Offering no fee stock trading, it’s currently one of the only platforms that allows customers to trade crypto, stock and options. In five years, it has earned a valuation of more than $5 billion.

What does this mean for banks, which are accustomed to competing against other “banks”?

New regulations such as the Revised Payment Services Directive, an EU directive enacted in 2015 that empowers customers to use third parties to manage their finances, will eventually trigger industry restructuring. Practically speaking, it could allow customers to use Facebook to pay bills, transfer funds and monitor finances while having money held by a traditional bank.

WeChat serves as an example of the power of this integrated model. The Chinese social platform introduced payments in 2013, enabling users to send and receive money, pay rent or even donate to a charitable cause directly from the app. Bridging the financial and social networking realms, WeChat has helped fuel the meteoric rise of mobile payments in China.

Canada is behind other global markets when it comes to open banking, which allows customers to easily share their bank data with other institutions and fintech startups. But the federal government has promised to study its merits, and banks may soon need to decide what business they’re ultimately in. That is, do they want to serve as a marketplace or a platform?

As a marketplace, they will need to partner with other companies to offer a more well-rounded set of financial services. As a platform, they will need to find a creative way to monetize access to their customers’ data.

It’s easy to see the possibilities that come with the latter. If data suggests that a customer is in the market to purchase a home, why not proactively tell that customer what they can afford? This data insight can be taken a step further to suggest ways in which that customer can cut down on spending to afford $500 more per month on a mortgage.

Winning through true customer loyalty (not dependency)

Banks need to provide more (and different) value if they want to thrive. Customers are hungry for insights not information. Banks can look to popular financial services apps as an indicator of where they’re currently missing the mark.

Loyalty to banks has been built on dependency. With the pressure from big tech and regulatory changes, dependency will disappear forcing banks to earn true customer loyalty in the age of open banking. How they choose to so will determine the future of banking.

AndrewAu2Andrew Au is the co-founder of Intercept Group, a marketing consultancy with offices in Toronto and Boston.