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The type of disruption Open Banking will bring

Posted on: Wednesday 7th of February 2018

In Zone to Win, Geoffrey Moore draws a distinction between three different types of disruption that a sector can face – infrastructure, operating model and business model. Infrastructure disruption can be relatively easily accommodated. At the other end of the spectrum, business model disruption requires companies to move to a new way of delivering services and making money – putting it at the extremely difficult end of the spectrum. Operating model disruption comes somewhere between the two, requiring businesses to transform how they operate but not to a new way of doing business. And it made me wonder what type of disruption Open Banking will bring to the UK market.

To illustrate the different levels of disruption, Moore outlines how smartphones impacted three different sectors – estate agents, airlines and advertising. Smartphones require estate agents to upgrade their infrastructure, particularly around marketing and communications but it doesn’t change how they operate or make money.

For airlines, smartphones have required significant investment in new processes, technology, data management capabilities and competencies to enable customers to book, check-in, collect their boarding pass and show it as they proceed through the airport. But they still make money by selling tickets and transporting passengers.

Mobile smartphones have transformed where we spend our time, where brands want to advertise and how that space is sold. The old model of advertising allowed agencies to provide creative services for free while making money on the commission from placing those adds in offline media – TV, radio, print, billboards. But digital advertising is purchased programmatically with transactions executed by non-agency businesses who have the required algorithmic capabilities to help customers bid in real-time for online placement. (Well at least until GDPR scuppers the Adtech market – but that is for another post. Not only are margins slimmer, but traditional agencies don’t even have the right skills.

Now if we look at the impact Open Banking will have on the banking market through those three different levels of disruption, what can we deduce?

At the very least, Open Banking will disrupt existing operating models. Any incumbent that seeks to mitigate the threat from new entrants and make the most of the opportunity will need to make their core banking platforms more open so they can integrate third-party services via APIs and offer them via an app store. To incorporate these services they will need to be more open to partnering and easier to partner with. They will also need to re-design customer journeys and their underlying processes to incorporate partners’ services. Further, the data required to serve the needs of customers, partners, regulators and the bank itself fundamentally changes – as does how that data is managed.

You could also argue that the new banks are like the new airlines that have perennially entered the airline market, leveraging new technology to deliver the same service at a lower variable cost and price to customers. Some achieve sufficient scale to make survive while others wither and the large established players creak on, despite their low levels of profitability.

But there are also parallels with advertising agencies that Open Banking will bring disruption at the business model level. Like the agency business, banking is heavily dependent on cross-subsidisation. Current accounts are not profitable but they provide the basis for a strong relationship with a customer so can be the platform for selling other services that are profitable – loans in particular. And like the agency business, the major threat does not come from new entrants doing the same thing as you but better, but from businesses that use technology to disintermediate. And these businesses always pick the most profitable part of the value chain to start in as this is where they can deliver the most savings to customers while still being able to make money themselves.

Bankers believe that Big Tech won’t want to become banks because they will not want to be regulated.  But that is moot.  They won’t want to become licensed deposit-takers because their balance sheets are heavy with cash. But they are already present in payments and will probably enter lending – as Amazon has, as PayPal has, and as would be a logical move for Apple beyond Apple Pay Cash.

This may not happen immediately but it will happen. Banks have the time to respond and as Moore argues, the starting point is transforming the operating model quickly enough to buy time to transform the business model.