Posted on: Tuesday 19th of December 2017
Open Banking Game – Changers for 2018
Open banking will reshape the UK banking landscape. It empowers consumers to use their banking transaction data for their benefit – to make better decisions and make their lives easier. The full impacts will not be felt on its arrival in January 2018. But 2018 may well see some seismic shifts. The following would be game changers.
1. Acquisition of Monzo or Starling Bank by Amazon
Amazon is the platform king of retail, having built a successful business on the back of increasingly rich personal data. So if it were to make a strategic move into banking, acquiring one of the open API banks would be logical. Amazon already plays on the periphery of banking – providing payment services to customers and loans to businesses that sell on its marketplace. And it may not wish to offer full-service banking due to the regulatory overhead that entails. But the business case for buying Monzo or Starling and taking it into other countries where Amazon operates would be compelling.
Both Monzo and Starling are growing fast on the back of customer recommendations -evidence that they’ve nailed the value proposition. Like Amazon they are giving consumers good value for their data through providing spend analytics and offering apps such as Flux, which delivers digital receipt management. Were one to be acquired by Amazon, its growth would be turbo-charged and incumbents would have to respond to the increased threat such a move would bring.
2. An incumbent bank creates a joint venture with a platform player
How could an incumbent bank respond to such a move – or even mitigate the threat prior to its appearing? Clearly it will need to replace legacy systems with open-by-default digital banking platforms and data environments that enable a Right Data strategy (as opposed to the Data Right focus most banks have traditionally taken). So far most banks have taken the view that the costs and risks of re-platforming outweigh the benefits. That will change once they recognise their future competitive relevance is on the line. Undertaking a replacement programme is one option, partnering with an organisation that already has a digital platform is another.
DBS and BBVA are the digital poster children in banking – neither of whom have a significant UK presence – so are obvious candidates for a joint-venture. As are the likes of Alibaba and Tencent who have the required digital capabilities embedded in their online payment platforms – AliPay and WeChat Pay. And while they may struggle for trust and traction if they entered the market directly, delivering the digital capabilities to a trusted UK banking brand for a share of the revenues generated works for both parties.
3. Acquisition of Xero
Open banking increases the risk of banks being disintermediated by new entrants who create high value services, relegating core banking service provision to secondary importance. In SME business banking, this is already happening with accounting software providers being the agents of disintermediation. Most small business owners would more readily change bank than software that integrates their business data and helps them control cash flow – the life-blood of their business.
Xero is the leader in this market. It would be expensive to buy – loss-making but capitalised at NZ$4.5bn, roughly 15 times sales – and only a tech company could afford the earnings dilution it would bring. But for any business seeking to become a huge influencer in the highly profitable SME business banking sector – buying Xero would be the fastest and most powerful route.
4. Apple Pay becomes cardless
A less obvious move, but equally disruptive, would be Apple mimicking PayPal and creating a prepaid Apple Pay account which becomes the first source from which funds are taken when paying using an iPhone or Apple Watch. Apple could easily match (or better) the transaction data spend analytics that Monzo and Starling are delivering to consumers, without the need to open a new account. Such a move would be another sign of banks being disintermediated by device providers.
5. An incumbent starts charging for current accounts
Banks have never made the most of the troves of personal data that current accounts provide. Despite that, basic current accounts have been provided for free because traditionally they have been the platform for cross-selling other financial service products. This value diminishes with disintermediation – whoever replaces the bank as the primary relationship owner is in a better position to serve customers needs. Banks are left with a high cost-to-serve product and reduced scope for cross-subsidisation through sales of higher margin services. A return to charging for current account services is inevitable and a major incumbent taking that step in 2018 would be a sign that open banking is gaining traction and causing banks to take desperate measures.
Whatever happens, 2018 will see banks challenged to innovate at pace and create more compelling value propositions so they remain competitive amid the accelerating rate of digital disruption that open banking will bring to financial services. Wishing you all a prosperous New Year!