The future of finance is open. But not because of Open Banking legislation, but because the internet has unshackled information flows. In the future, financial information will flow horizontally across an ecosystem, rather than vertically through an integrated value chain; finance will be embedded into everything from ecommerce to homebuying.
Open banking legislation has been a helpful catalyst
This month sees the two year anniversary of Open Banking legislation in Europe. It marks the two-year anniversary of us starting to use the tongue-twisting anacronyms of ASPSPs and PISPs. And the two-year anniversary of what is now a global regulatory drive to introduce more competition into the banking sector (today, more than 10 jurisdictions are enacting similar rules). But what has Open Banking really meant to the world of finance?
In some ways, Open Banking legislation is truly radical. Digitisation is opening up distribution across all industries – from e-commerce to aviation. But, what is different about Open Banking legislation is that it takes away banks’ agency: effectively, banks don’t have any choice but to open up. Whereas a hotel can choose whether or not to list its rooms on booking.com, a bank can’t choose whether or not its customers’ account data is displayed on another site; the customer has been put in charge of their data.
In other ways, however, the legislation is much less radical. In many places, Open Banking hasn’t prescribed standards. This is a big fail given that setting semantic and security standards is where regulators could have added most value. Deadlines have also been allowed to slip. But, more generally and significantly, we didn’t think big enough with Open Banking.
Account information is useful for many use cases, like budgeting apps, but to build a really meaningful view of a customer’s financial and commercial lives – and in turn deliver transformational levels of value-add – requires much more than account information. Open Banking could have gone much further and facilitated access to everything from credit to shipping data. After all, this all belongs to the customer.
This is why Open Banking, although unequivocally an important catalyst for change, won’t be the end point (in the same way as it wasn’t the start point).
The opening up of the banking stack is inevitable
To paraphrase Barack Obama, progress doesn’t always travel in a straight line, but progress is inevitable. In the information economy, the characteristic of which is a fundamental change in the flow of information from hierarchies to networks, all industries will be reconfigured. It won’t be a straight line – special interests, regulation, politics and other factors will affect the speed of change - but that change is inevitable.
Financial services definitely won’t be an exception. One of the most information-intensive economic activities, business models will have to be profoundly re-worked. And this will happen with or without Open Banking. Take Yodlee as an example, it has been aggregating customer financial information, going much further than just account information, since way before the introduction of Open Banking legislation (since 1999, in fact). And, in the US, which has so far not introduced explicit Open Banking legislation, entrepreneurs moved in to fill the gap and, again, in a more comprehensive way than Open Banking mandates. Plaid, which is championing this approach, built a business connecting bank and fintech companies that they are currently in the process of selling to Visa for USD5.3billion.
The risk in the United States is that, without Open Banking legislation mandating banks to share data, banks can always shut off access – which is what PNC Bank did late last year. But, in the main, this hasn’t – and won’t – happen because 1) customers have become used to the superior convenience and UX of the apps they use and they would ultimately vote with their feet (consider the uproar among Venmo customer when PNC cut off access to Plaid) and 2) the banks are incentivised to share data because Plaid is creating new routes to monetization, either directly (such as revenue sharing) or indirectly (such as higher customer retention). And I think this gets us to the biggest problem with Open Banking legislation.
Open Banking is a strategic, not a regulatory, matter
The biggest issue with Open Banking is that it is a stick rather than a carrot. It forces banks to open up a narrow set of data. It doesn’t make it in the banks’ interests to do so.
And so, firstly, Open Banking has been delegated within banks to the compliance team, who are responsible for implementing it. And, secondly, banks are in most cases doing the minimum to meet the statutory requirements. Which leads us to the third point, which is that in most cases banks are not looking at Open Banking strategically. Open Banking is a step towards something bigger - Open Finance – where the free flow of information will benefit networked business models. Therefore, Open Banking is not ultimately a regulatory consideration at all, but instead a question of where banks want to play in the value creation process in the future – with massive implications for profitability.
We are en route to open – or embedded – finance
In other industries that have been digitized, we observe a common pattern. Manufacturing gets split from distribution, removing pricing power from manufacturers and creating a long tail of specialists. And distribution tends to concentrate in the channels with the highest levels of engagement. And so it likely to play out in the same way in financial services.
In light of this, it seems Canute-like to try to resist this change and, by extension, either to deny access to platforms that will attempt to mediate the exchange of value between manufacturers and distributors (e.g. PNC denying access to Plaid) or to comply only with the mandatory portion of Open Banking and not seek to monetize the broader opportunity of Open Finance.
If we accept that customers will want to conduct their financial affairs through the channels with the highest engagement – Whatsapp, Slack, WeChat, Amazon and so on – and that financial services companies don’t simply want to become dumb pipes, then financial firms must embrace platform models. This is why Visa is buying Plaid. Only by orchestrating value and connecting the various stakeholders within the ecosystem – customers with fintechs, fintechs with fintechs, customers with customers and so on – can financial services companies hold onto customer loyalty and profitability in a world where financial services become decoupled from production and increasingly embedded in third party channels.
Open Banking legislation was helpful, but not brave. This calls for financial services companies to be brave instead - to look strategically beyond Open Banking to embrace the future of Open Finance.