Regional banks have a big opportunity in open banking
Sergio Barbosa, CEO, FutureBank
Co-founder and CIO of enterprise software development house, Global Kinetic, Sergio directly heads its open banking platform, FutureBank. A skilled software engineer, innovative product developer, and keen business strategist, he has participated in several notable fintech milestones, including building the southern hemisphere’s first digital-only bank all the way back in 2002.
Pandemic spurs digital transformation drive
Even as this pandemic pushed digitalization to the top of banks’ agendas, associated business stresses cut into their capacity to respond. Forced to prioritize measures to survive now over thriving the year after next, they re-allocated resources overnight. IT budgets were hit hard. Big digital transformation projects – including open banking initiatives – were cut or scaled back at HSBC, ING, RBS, and other boldface behemoths.
At smaller financial institutions, the situation was often critical. Regional banks and credit unions that were further along in their transformation journeys were in a significantly better situation than those that were not, but everyone was stretched by the new imperative to serve their customers and members remotely in straightened circumstances.
And yet. Over 18 months since the drama of that first lockdown, thousands of US financial institutions can proudly say that they got there faster than they thought they would. Many of their customers took a leap into the digital void with them, and a large percentage of those will continue using self-service channels after the masks come off for the last time.
No time to wait on open banking
We aren’t out of the woods yet, mind you, not by any measure. Margins are thin, fintechs continue targeting the most profitable lines of bank business, and unprecedented self-service banking rates, otherwise a reason to celebrate, are negatively impacting customer satisfaction rates across all ages.
There are strong indications that traditional banks and credit unions, including the very largest, are losing primary account status to digital-only banks at a faster rate than before. As reported by Ron Shevlin of Cornerstone Advisors, “Roughly one in four Gen Zers and Millennials now call a checking account from a digital bank their primary account. That’s about double the percentage it was at just nine months ago” (my emphasis).
Financial institutions of all sizes – but small- to mid-sized ones especially – face some level of threat from categories of companies no-one would have heard of 20 or even 10 years ago. The point is that banking is being reshaped by forces outside of the industry’s traditional spheres of influence and ignoring it won’t make it go away. In a July 2021 report with a focus on the United Kingdom, McKinsey says, “If open finance continues to accelerate it could reshape the global financial services ecosystem, change the very idea of banking, and increase pressure on incumbent banks.”
Bank consolidation declined somewhat during the pandemic but is predicted to lurch upwards in the coming years, driven in part by digitalization. Change is no longer negotiable for incumbents hoping to be around in twenty years, and it has to encompass pretty much everything about the business. McKinsey again: “It will be imperative to understand and respond to these changes, reimagine offerings, adjust business models, and forge successful partnerships with fintechs or tech companies, to ensure continued success and relevance.”
Regional banks and credit unions face a dilemma like few anyone in the industry remembers. With barely any time to catch their collective breath, they must set about the next stage of their digital transformation. Covid-19’s systemic side effects did nothing if not make the case for open banking stronger, more urgently central to American financial institutions’ future prospects than it was before.
Open banking is also a significant opportunity
Research by the Digital Banking Report shows that over half of banks with assets of €86.22 billion or more already have an open banking strategy in place or say they will have within a year. Overall, 24 percent of financial institutions (all tiers) have a strategy, and another 21 percent plan to implement one in the next two years.
In the United States, regulators are not setting the open banking agenda, as they are in Europe, Australia, India, or Brazil. It’s commercial self-interest, good old-fashioned competition in an ever widening ecosystem owing its lush good health to technical innovation and the mutual benefit of value exchange. The APIs on which much of this ecosystem rests have contributed immeasurably to Big Tech’s successes and are driving the so-called “platformication” of nearly every business model out there, including banking.
Open banking can benefit banks and credit unions in several important ways, including:
- Multiplying and improving products and services with best of breed third-party offerings and a renewed focus on core competencies
- Driving down product development costs and time to market for greater agility and faster ROI
- Improving back-office processes and bridging siloes, a big focus for banks pursuing greater efficiency across the business
- Enhancing user experiences through data and third-party user-centric design, with KYC, remote account opening, and loan applications three burning priorities
- Adding new revenue streams by monetizing their infrastructure, distribution network, or other assets using banking-as-a-platform (BaaP) or banking-as-a-service (BaaS) models
- Expanding everyday customer touchpoints through embedded payments and financial services and ancillary third-party products
- Reaching new market segments, including some that were uneconomical in a branch-centred paradigm or where the primary relationship lies elsewhere
- Cementing customer relationships with the services they need and the experiences they enjoy in a period of industry disruption and consumer behavioral flux
I will go into some of these in greater detail in my next couple of blog posts. Today, I’d like to underscore how vital third-party partnerships and cross-organizational collaboration is in achieving each of these benefits, especially for institutions where the digital mindset is not yet pervasive and relevant expertise thin on the ground, which is to say, most banks and credit unions.
With open banking, small isn’t the big deal it used to be
I recently read that JPMorgan Chase’s annual tech spend is around €6.90 billion more than the combined amount at all 94 US banks with assets between €8.62 billion and €86.22 billion. Still, no institution – not even JPMorgan Chase – can do it all, well, and at the speed of change we are seeing. The days of going it alone are over.
There is a growing ecosystem that combines the best resources, niche products and services, a ton of data, and existing and potential customers. Using APIs, smaller banks can access the ecosystem and contribute to it through banking-as-a-service or -platform models. They can do pretty much everything their giant competitors do, faster than they could have before, with less risk and fewer development and operational costs, relatively speaking.
Partnering for the best value in open banking
Developing an open banking strategy and navigating the highly dynamic fintech ecosystem isn’t easy. Banks without dedicated DevOps teams and sandboxes usually need a partner to guide them through the process of testing and integrating complementary third-party products and services or facilitating the same for their prospective fintech partners.
FutureBank is a fintech marketplace and technology platform enabling banks and credit unions of all sizes to test a wide range of third-party products at scale. There is minimal upfront cost and significantly less risk involved in making an investment. Compatible with over 6000 financial institution back-end systems, we offer a single integration point for fintech technologies for rapid time-to-market.
I would like to invite any bank or fintech planning on or considering a banking-as-a-service or -platform play to view our offering, which I believe is unique in the market for its focus on both ends of the open banking spectrum, if not also the breadth of pre-integrated technologies on offer.