Open banking may not have made a lot of an
impression on consumers yet. But it is a topic that the industry cannot afford
to ignore. Tier one UK banks already are bound to grant licensed startups
use of transaction-level data, and smaller banks will probably have to
follow suit in the near future. The potential impact on the banking landscape
is profound.

Today, the conventional business model for retail banks
would be to build strong relationships with their customers by offering free current
accounts along with other incentives. These services are a net cost to the business,
but they help the banks win trust and provide a channel for marketing more
profitable products, for example mortgages, loans and wealth management services.

Open banking threatens to sweep this business model
away as an avalanche. Agile fintech companies are already
developing apps that aggregate all of the financial services that
a customer receives from any provider, creating a single point of control.

This will definitely improve the banking experience
for many consumers. But it will also give a new layer between banks and
their customers. All communication with the customer may happen via the app –
and the app provider controls that communication channel, not the

According to market analysts, this poses a genuine
threat. If a bank can't upsell high-value services to the customers, it may be
left with a thin share of the market. Banks could be drowning in current
accounts while app providers skim the cream of profitable loans and investment
services off the top. Bain & Company point
out that similar disruptions in industries, for example music and travel, have seen
incumbents' profits fall by 10% to 20%, often within fewer than five

Threat or opportunity?

While the stakes are high, the odds are still in
the banks' favour – at least for now. For decades, they have collected data on
countless customers and billions of transactions, across the whole spectrum
of financial services. This data is a priceless source of insight that banks
may use to create customer experiences that their data-poor fintech competitors
simply can't match.

For example, rather than helping customers make
payments or check their balance, a brand new generation of banking apps could provide
users with a lot more relevant, personalised advice. By comparing individual
spending patterns using the behaviour of a wider population of users, they could
pinpoint topics that users really care about -reducing utility bills, for
example, or paying down a mortgage – and suggest helpful techniques for meeting
their financial goals.

Serious competition

Banks aren't just worried about competition from
fintech startups. There's also a risk that other data-rich companies could make
a beeline for the financial services market. Amazon, Apple, Google and other
tech giants already have enormous quantities of information about consumer
spending habits, in addition to some of the world's most talented data scientists,
UI and UX developers. When they want to build the world's best banking app, they
seem to have all the right tools already. What's to stop them from seeing
financial services his or her next market to dominate?

Again, the reply is that banks still have the
advantage, a minimum of in the short term. There is more to some user's personal
finances than just online shopping habits. And banks have a much more complete
picture of how people borrow, spend and invest their cash across mortgages,
loans, charge cards, savings accounts, stocks and money.

More importantly, customers trust their
bank to manage both their information as well as their money. As a heavily regulated
industry, banks just can't afford to play fast and loose using their
customers. Meanwhile, barely a week goes by without another scandal a good
internet company selling, losing or misusing customer data.

So when you probably trust online retailers to
deliver your shopping, you'll probably still have a few qualms about letting them
manage your pension.

That said, customers' trust and loyalty are finite
commodities. If banks don't act on their own advantage now, they will lose it
slowly and gradually. An outstanding user experience can easily seduce customers.
And if you can't provide one, your competitors certainly will.

On your marks

In short, the race to construct the killer banking app
is on – and banks, fintechs along with other players are all in the running. Whoever
gets there first will win it all, leaving the others scrambling to redefine
their role in a banking industry that bears little relation to today's world.

The difference between winning and losing, as we've
already hinted, come in the data. If banks can mobilise the treasure trove
of data they already possess and harness artificial intelligence and
machine understanding how to bring insights closer to the point of customer interaction,
then they come in a powerful position to lead the following stage in the
evolution of monetary services.

And that's not just unrealistic. Take a look
at our example with ICA Banken. SAS solutions are helping ICA
Banken analyse customer behaviour on the internet and combine it with historical banking
data to create a fully personalised and customised user experience. While
customers browse the ICA Banken site, intelligent algorithms automatically assess
their demands and display helpful information and relevant offers instantly,
resulting in a tenfold increase in conversion rates for the bank's campaigns.

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