OPINION: Navigating Open Banking
Where do traditional banks fit in modern financial services, a landscape increasingly dominated by open banking? I explored this question with Philip McHugh, Investor & Advisor, who reminded me that we’ve been here before. Legacy financial institutions have capably navigated game-changing trends, he noted, from payment gateways to BNPL, and will do so again with open banking. Here are highlights from our recent interview.
Q: What distinguishes open banking models in the U.S. compared to what you see in other parts of the world? How will this ruling close the gap, with respect to consumer behavior and how U.S.-based financial institutions go to market?
McHugh: The recent ruling in the US looks very similar to PSD2 rules set in place in Europe several years ago. Ultimately, I think the Europe experience will be the best benchmark vs China, Brazil and India where you have seen super apps dominate payment by riding on open banking capabilities.
In Europe, there certainly has been some disintermediation from neo-banks and e-money licensed companies. Pure digital banks and some comprehensive digital wallets or money transmission companies have all grown on the back of the European regulation.
However, traditional banks have done well. They have competed with strong digital assets and ultimately still own the trust of customers meaning they secure the core deposits and lending relationships. I think you’ll see similar trends unfold in the US.
Q: What is the evolving role of big established banks in light of open banking acceleration? Apart from facilitating transactions, what should they be doing to become more consultative as open banking levels the competitive playing field?
McHugh: I think they should approach the change the same way they approached some of the payment/gateway trends or BNPL activity where a large amount of fintech companies came into the market to take share. I see two options. The first is create strong digital assets for consumers to use. The second is to partner with fintech or BaaS providers to augment your existing services. Some of the large banks are already taking this approach.
Q: Citing the Vodeno-commissioned white paper “Banking-as-a-Service 2.0,” surveying senior-level decisionmakers in the U.K., Belgium and the Netherlands, 60% of respondents believe traditional branch-based banking will decline. How can traditional banks prepare for operational success in this environment?
McHugh: This is an evolution and not a revolution. Bank branching has been declining for many years and this recent regulation will only continue the trend. So traditional banks already live and thrive in the digital first world. If anything, open banking will create some innovative solutions and could actually bring banking services closer to areas that are traditionally underserved and underbanked due to branch closures. I see the trend as a net positive.
Q: Given the consumer protections against data use for targeted and/or behavioral advertising, what can financial institutions do to attract, retain and, when appropriate, cross-sell their existing portfolio?
McHugh: They can incorporate new services into their existing apps or core relationship. Again, BNPL was a good example where many large institutions included BNPL as a new customer journey on the pay page. Some may call it cross selling, but it was really about seamlessly introducing new options and services for a customer. I see the same happening for open banking solutions.