They say imitation is the sincerest form of flattery. If that’s the case, there should be an outpouring of adulation from banks to GAFA (Google, Amazon, Facebook, Apple) and BAT (Baidu, Alibaba, Tencent).
Big tech companies have mastered the art of openness. They have weaponised it and are now reaping the rewards. In the era of Open Banking, banks also need to be open if they are to survive, let alone succeed.
The market disruptors use a sharing model that drives network effects. Amazon is a marketplace. Merchants connect to its marketplace simply and easily via an API. Amazon and the merchant share the revenues, customers and data. The more merchants sign up, the more consumers follow, and vice-versa. Meanwhile Amazon’s economies of scale make it near impossible to compete with. The network effect is in full flow. And 24 years later, it has become the second $1trn company.
Unshackled from antiquated technology, disruptors are reinventing financial services by rapidly intertwining banking products into their spectrum of growing data-hungry services, stealing customers and market share in the process.
And across the globe, law makers are using legislation to break the monopoly of financial services providers and empower consumers and businesses. Open Banking-like regulation is the tool to deliver on these ambitions, and at the core, it is designed to get banks to open up their systems to third parties.
The world is becoming more open, how can banks follow suit?
Embrace cultural and technological change
The big tech companies have one thing in common – openness and sharing is in their DNA. Their business models are built on API-centric, open source technologies, usually based in the cloud, that provides the flexibility to react to market changes with new, deeply personalised services - all continuously updated, improved and delivered in real-time.
Openness both culturally and technology has helped these companies, not just build businesses, but build entire ecosystems. By becoming platforms and connecting their businesses with others, they create a “network effect” that opens access to more data, allowing them to improve their products, attract more users, and drive more revenue.
The contrast with the closed systems of traditional banks is stark.
Founded on the principles of trust and security, bank systems have been built to prioritise stability and security, not sharing. These are good traditional principles, but today openness is required if banks are to develop the business models and deliver the innovative products and services needed to retain and acquire customers in the face of growing competition and market uncertainty.
As the big six banks in the UK come under-fire for their lack of progress around Open Banking it has become clear that switching from closed to open is no mean feat.
Adopting an open approach
Open Banking along with the rapid growth of instant payments and the emergence of open source technologies has created an opportunity for banks to accelerate their digital transformation ambitions.
Open Banking is forcing banks to adopt a more open, API-centric approach, like the big tech players. In the digital economy, services need to be delivered in real-time, providing a powerful impetus for banks to implement Instant Payments in parallel.
Moving to real-time unlocks a raft of use-cases and corresponding products and services that will win over consumers. And the new services and products that banks can overlay on Instant Payment rails will generate more data about their customers, so they can - in turn - deliver better, increasingly more personalised offerings.
For example, PayPal recently launched its Funds Now service, which will provide immediate fund access to small businesses. This was in direct response to the complaint of many small businesses that, across the payments industry, it was too difficult and too slow to get access to the funds from their completed sales (with funding delays of seven to 21 days being far too common). Introducing Instant Payments has enabled these small businesses, pay their bills, and service their customers.
If banks don’t adopt an open approach to technology, they will lose the significant advantage that Instant Payments affords them, and other players are already beginning to adopt.
Emulating the big tech players
The big tech players are open and real-time. While some banks may see this shift as a threat, the reality is that the Amazon’s, Alibaba’s and Apple’s of this world are lighting the path ahead, and industry initiatives are driving the market forward.
Open banking is a one-time opportunity to re-engineer the bank for the digital economy and build a business that thrives on data, not transactions.
Instant payments means that banks have the services to win and retain customers, and generate new and rich data sets to better serve them.
But without a shift to open systems, these initiatives will not be capitalised upon and wider digital transformation ambitions will falter. Choices made today, will define the future of institutions. Banks mustn’t be afraid to emulate what has brought so much success for big tech.
The time is now to ditch closed and embrace open.