Information technology has changed how we carry out our day to day activities in many ways. From how we shop and communicate to the way we watch TV and manage business — even our personal finances — technology has an ever-growing presence in our lives. For younger generations, like Generation Y or Millennials, this increase has already become the norm. These generations have been born or grown into a digital- and mobile-first environment. They expect everything to be accessed as easily and as quickly as they are able to pull their mobile phones from their pockets. Most of their daily interactions are online and in the next five years, at least three out of four customer interactions will be online or mobile.
Generation Y prefers digital channels to conduct financial services
As everything else goes mobile, younger generations expect their banks, financial advisors and institutions to enable digital transactions. Every major research study in the field shows that Generation Y has a clear preference for using digital channels to conduct financial services. This generation is not interested in going to a branch where they have to sit through a lengthy process and sign a bunch of documents to open an account.
This shouldn’t be surprising. When almost everything you need can be done from your mobile, why should banking be different? Banks can argue about the complexity of financial services, but they should move quickly to meet these expectations and keep up with emerging digital-only or early adopter banks. N26 allows you to open an account in 8 minutes while an account with Atom Bank is set up in just a few taps. The new generation of digital natives want frictionless services that can be accessed anytime, anywhere.
Coming soon: Open banking environments
Indeed, a lot of banks have responded. They have built very robust and modern mobile banking applications and offer quick online support as well as real time person to person transfers. And they are not the only ones. The list of Fintech startups that are trying to redefine the banking experience is growing every day. Regulators are also paying attention and now require banks to take a proactive role in building a true, interoperable financial ecosystem. The second generation of the Payment Service Directive or PSD2, aims to take that even further. The objective is to increase competition, transparency and security in payments and account access. While there are many ways in which the PSD2 regulation aims to enable that, the main one is that banks are required to give third parties access to customer accounts and information. Once implemented, the result will be a truly open banking environment.
Open banking allows banks to serve customers in verticals
While a lot of bank executives see this as a threat, others view it as an opportunity to deliver an advanced level of customer service. In an interview with Simon Cocking, the author of “Open Banking Strategy Formation” Paul Rohan says the race, and thus the opportunity, for banks and other tech players is to become the dominant design. He argues that dominant design is the one that wins the allegiance of the marketplace, the one that competitors and innovators must adhere to if they hope to command significant market following. To achieve that, he suggests that market participants need to invest in stages, aiming to add value at each stage and react to the emerging dominant design. That is the way banks should approach PSD2. Banks have a clear historical advantage because, in the end, they are the ones that have the banking and financial relationship with a vast customer base. And with that comes a very long history of data. Banks are in a very good position to become the dominant design, and open banking will help them achieve that. By collaborating with specialised fintech companies, they can take advantage of capabilities and technologies that will allow them to expand the number of verticals in which they can serve customers.
Becoming the everyday bank by creating seamless and omnichannel experiences
Banks have yet to deliver frequent customer interactions. The way banks currently operate results into most customer interactions being transactional. As such, customers interact with banks only with a specific action in mind, like checking a statement, applying for a loan, etc. People interact with banks more than they realise. Consider how often you make a payment with your card online or at a shop. Most of the time, we are using a card that was issued by the same bank that holds our bank account and handles our savings and loans. Through embracing open banking , banks can involve the customers in an immersive manner, becoming the everyday bank by creating seamless omnichannel experiences and thus increase customer retention.
UK on the right track: PSD2 compliance and Open Banking Working Group
Some banks are already doing just that. These early adopters aren’t waiting for PSD2 to be operational before embracing open banking. Just last month, BBVA launched its API market making eight of its APIs available and it’s even already PSD2 compliant. BNP Paribas has also launched its Open Bank Project, which gives developers access to a set of APIs. The UK has been working on its own set of standards prior to the launch of PSD2 and has created the Open Banking Working Group. The Group facilitates collaboration between banks and fintech companies. Banks are wanting to reach more people and provide a better service to meet the expectations of specific target groups like Millennials. Fintech startups are jump-starting their operations by using the existing banking infrastructure and focusing on user experience while developing features that solve evolving customer needs.
More information – more opportunities to engage customers in additional interactions
It should be noted that this access to information can also be used by the banks themselves. Banks are in a position to also be service providers by accessing and using information from other banks. This information will increase the opportunities banks have to engage customers in additional interactions and add value for their customers. It will also increase the amount of data, which can be analysed with predictive analytic technologies so banks can identify patterns, predict future outcomes and lifetime value for different outcomes. Banks can also collaborate with fintechs or other technology companies by providing information for them to analyse and also receive data from them, such as social media activity.
Ultimately, by being a proactive part of this open banking ecosystem alongside fintech and technology companies, banks can help to create a powerful machine where hundreds of millions of customer’s data is analysed and seamless customer experiences are designed. An ecosystem where they can be the leaders and the innovators of next generation banking.