Many of us are thinking about how Open Finance will begin to impact our relationship with our money and the institutions we interact with, but there isn’t much focus on how it will really play out in the long run. Much like the 2018 Netflix interactive adventure Bandersnatch, we think there are several possible alternative endings.
Of course, the twists and turns along the way could have a dramatic effect on what Open Finance looks like in the future. In this case, those twists and turns are things like regulation, customer experience, and trust. To keep things simple, we have considered three discreet endings:
- Incumbents become the everyday data custodians, collaborating with new providers to develop enhanced solutions
- The market disaggregates and providers, both large and small, take a slice of customer data
- Big Tech players move across all facets of Open Finance and become the main channel that customers interact with
Of course, Open Finance is an incredibly complex landscape and there are many more nuances and variations in how it could play out. These endings merely help us to frame the key ideas and simplify some of the drivers that will shape the path Open Finance takes.
Ending 1: Incumbents maintain customer relationships and partner with new providers
This seems like the most obvious answer, as it largely maintains the status quo.
However, there is one thing that traditional incumbents have struggled with – the rapid pace of innovation in Financial Services. Smaller Fintechs are perfectly poised to be able to create data-driven solutions at speed.
In this scenario, we imagine that the incumbents partner with Fintechs to provide Open Finance solutions, be that the digital front end, facial recognition KYC technology, a Machine Learning risk decision engine, or any other element of the value chain.
M&A has shown huge growth in financial services, with over £30Bn of deals in 2019. Many of these have been clear examples of incumbents buying smaller players to tackle specific segments of their value chain. This activity however is drawing Competition and Markets Authority attention due to the risk of monopolisation as seen in the now failed VISA-Plaid deal.
This ending would result in a good deal for incumbents and Fintechs alike, but will the Fintechs that have worked so hard to capture customers’ attention in recent years be satisfied with just part of the overall financial value chain?
Ending 2: Market disaggregation, with large and small players taking a slice of the data
Over the last 10 years, we have seen a rise in the so-called ‘challenger banks’, with the likes of Monzo, Starling and Revolut chipping away at the market share of incumbents. The same is true across other facets of finance, with examples such as Nutmeg Investments, Lemonade Insurance and Mojo Mortgages drawing customer attention by providing an easier digital solution to many of our financial problems.
One of the key reasons Fintechs believe they are able to draw customers away from incumbents is superior customer experience: over 90% of Fintechs citing this as a key advantage.
So, if Fintechs are able to offer a better customer experience, why aren’t we all banking with Starling and using Lemonade for our car insurance? Much of this is due to the friction associated with switching; the inertia required to go through the rigmarole of changing provider.
While switch friction is one challenge Fintechs must overcome, customer trust is a much more pervasive one. Our recent report on Open Finance found that only 40% of people are comfortable sharing their data with a non-bank third party.
As Fintechs grow, there is also a question over how they should be regulated. Increased regulation may mean that Fintechs get stuck in the same red tape as incumbents, causing a slowdown in the innovation that underpins their competitive advantage.
Ending 3: Big Tech players become the window to our financial world
Many of the Big Tech organisations or GAFA (Google, Apple, Facebook, Amazon) have already dabbled in providing customers with financial solutions, with mixed success. Apple and Amazon both have well-trodden paths in the Credit Card space, and Facebook has toyed with peer-to-peer message-based payments and of course, the controversial cryptocurrency, Libra.
Google has recently announced Plex, a mobile first bank account, and extension on the Google Pay app. Google Plex is essentially a very well-integrated digital banking platform, through which users can select one of 11 traditional Financial Institutions (at launch) to open a savings account with.
It seems like a fairly obvious ending on the face of it. These players already hold so much of our data, are very innovative, have vast amounts of technical capability, and have well established channels to almost all of our digital lives. The shear reach of these organisations alone would result in a step change in financial inclusion across the globe.
This ending does come with its share of challenges though. For one, these Big Tech players have come under a lot of scrutiny recently for their use of customer data and anti-competitive practices. Adding customers’ finances to the span of control these companies already have on our lives will certainly continue to draw regulator attention.
What will determine how Open Finance plays out?
As we discussed in our latest report, the industry will need to have several key foundations in place before Open Finance becomes a reality. The way that these foundations are laid will ultimately determine the future of Open Finance.
- Define a consistent approach to contextualised data sharing – Open Finance will require an extension of the foundations laid by PSD2 to create a much wider financial data ecosystem.
- Will incumbents be hindered by changes needed to comply with a consistent approach?
- Will Big Tech have an advantage by coming in with a clean slate?
- Focus on the value exchange to drive awareness and customer education – For Open Finance to be a widespread success, customers need to understand the value it could provide and seek out new solutions.
- Will financial institutions be able to deliver on the demonstration of value which has been lacking from Open Banking?
- Will Big Tech players be able to shake up the perception of financial products and drive customer awareness through pre-existing digital channels?
- Which ending will ultimately drive greater financial inclusion?
- Embrace further regulation as an opportunity and a business enabler – Many incumbents and Fintechs alike will perceive regulation as a tick-box exercise. However, to thrive in an Open Finance future, organisations will need to view regulation as a chance to go above and beyond to deliver fair and valuable solutions to customers.
- Will the increasing regulation of Fintechs help or hinder their ability to out-innovate incumbents?
- How will regulation fit in to the wider business model of Big Tech firms?
- Appreciate that there is a compelling case for business change – Open Finance will bring value to customers, and in turn to the organisations that provide for them. A more open ecosystem will become a breeding ground for collaboration and business model change.
- How will this open collaboration change the ownership of the customer relationship?
- Is there even an appetite for Big Tech firms to make a major business model shift into Open Finance?
- View digitisation as a step on the path to Open Finance – A high level of digital maturity is the only way to support the technical and data needs of Open Finance.
- Will the digital capability of incumbents be able to keep up with that of Big Tech?
- Will the COVID 19 pandemic have forced digitisation across the industry to help level the playing field?
- Will incumbents be able to accelerate this digitisation further through partnerships with Fintechs?
As mentioned, Open Finance is a very complex plot requiring many key foundations to be in place, so it may ultimately play out as any number of twists on the endings we have discussed here. We have seen from the uptake of Open Banking that change of this scale will not be fast, but Woodhurst is excited about the evolution of Open Finance, whatever the ending may be …
