By Markos Zachariadis and Pinar Ozcan

You take out your smartphone and log onto Amazon to make a credit card payment, transfer some money into your ISA savings account and, as a small business owner, check your current cashflow.

While you are there, you are offered better terms on your business loan, kept up to date on your current re-mortgaging application, and reminded about a new IPO investment opportunity.

It may not be reality just yet, but a revolution is underway in Europe's retail banking sector. The innocuously named second Payment Services Directive (PSD2), that came into effect in the EU earlier this year and in the UK at the same time under the name 'open banking' has laid the foundations for a dramatic reshaping of retail banking. 

While the phenomenon of open banking is likely to spread to the US and elsewhere, for the moment the UK, with its unique co-location of financial services centre and fintech hub in London, is probably the best example of the motivation for and mechanisms of open banking.

The domination of UK retail banking by a small number of banks, limits competition and leads to restricted choice of products and services for consumers. In addition, the heavily regulated nature of banking makes it difficult for new firms to enter the market.

The introduction of open banking is intended to create a more competitive environment, forcing banks to share privately held customer information with third party providers (TPPs), under certain conditions.

Easy open access to customer data should create a level playing field for the incumbent banks and any other licensed firms that wish to provide financial products and services.

With customers' consent, licensed TPPs will be able to access customer data held by banks, using standard, public and open (as opposed to proprietary, internal and private) Application Programming Interfaces (APIs) - the technology that allows one piece of software to communicate with another.

TPPs can also access other data about bank services, prices and service quality. Access to all this information improves a TPP's ability to offer services to existing bank customers and other consumers.

Open banking is still in its infancy, its eventual effects uncertain, and there will inevitably be reservations, around data privacy and security, for example, given the current climate, but we are sure that the retail banking experience is about to undergo a radical reinvention, and that this revolution will eventually extend to financial services more generally.

After spending well over a year interviewing the various players involved, and researching the mechanisms and market, we are able to outline some of the more important effects of this initiative, ways in which open banking will impact retail banking, financial services and the business world beyond.

1 Consumer convenience   

At the moment individuals and small business often have more than one bank account. They may use one account for day-to-day transactions, have an ISA with another bank, and a credit card with a third.

Viewing financial details becomes cumbersome, involving a variety of different applications, websites and passwords. Similarly, applying for a financial services product such as a loan, often means completing multiple forms with different banks.

Open banking changes this, allowing TPPs to provide a far more efficient, integrated, convenient and transparent service for clients than the traditional banks can at present.

A TPP can aggregate and integrate customer data from multiple banks, present that information in an easy to understand way, and use that to provide a single point access to a range of suggested products, services, and expert advice, based on analysis of that aggregated information.

The convenience of one-stop visibility on their finances will help to improve the performance of SMEs' finance function - by enabling better liquidity management, for example.

As open banking develops, TPPs will integrate other applications into their platforms. Just as a property search application might seamlessly include Google maps to enhance the app's utility without leaving that application, so new financial platforms will integrate a range of additional services that may not directly relate to financial services but create additional value.

Calm before the storm: HSBC is one of many banks under threat from open banking

2 Consumer choice 

As well as convenience consumers will benefit from better product and service choice as well as pricing. Previously, traditional banks captured customers, cloistering customer data, and offering the customer proprietary services. 

With exclusive access to its customers' data, the revenue and expenditure details, spending habits, and repayment track record, the bank was at a significant competitive advantage when making decisions about the products and services to offer its customers.

Now the banks, along with other TPPs, will be part of a new financial services ecosystem, using open data to provide value to consumers with much less friction.

Fintechs are unlikely to provide the products and services that they offer directly, instead acting as a layer on top of the actual provider (which may be a traditional bank). But by aggregating and analysing customer data, the services traditionally available from the banks, such as accounts, lending, borrowing, and investments, as well as more innovative offerings, are likely to be available via fintech TPPs with better choice, better pricing and very likely a better consumer experience. 

For example, a TPP might provide a lending platform that, using sophisticated technology to analyse customer data and make customer behaviour predictions, can offer more competitive terms, while achieving lower default rates. 

Or with investments a customer could give permission to access their data to a TPP, which could then make investment suggestions based on the risk profile that the customer indicates. Pensions and mortgages are other obvious services that will be affected.

Furthermore, SMEs may be able to obtain business and finance advisory services via TPPs, which would not otherwise be available due to cost. And, while individuals have long enjoyed free banking services, unlike SMEs, there are signs that open banking may create a level of free banking for SMEs too.


3 The democratisation of banking services 

Open banking enables many people to have a bank account who would normally be unable to access bank services via a traditional bank. 

For numerous reasons - no permanent address, poor credit rating scores, international students who come to the UK for a limited period - there are many people in the UK unable to access banking services. 

With open banking, TPPs can take advantage of new banking regulations where, under a certain amount of money, they can give people access to a bank account number and a prepaid card.

In order to do this the TPPs need to obtain a specific type of licence and they can then piggyback on the infrastructure of traditional banks, and using prepaid accounts, allow previously excluded people to set up a bank account.

Democratising access to financial services in this way has huge implications for the wider economy. It economically empowers segments of society who were limited in the extent to which they could actively participate in the economy.

It also allows these individuals to obtain better advice relating to financial matters, possibly helping to avoid mortgage arrears or credit card underpayment, for example. And it creates business opportunities for TPPs and other firms that can identify and service the needs of this customer segment.

4 Data control

Many stories in the news recently have highlighted issues around data privacy and security; trading personal data for commercial gain, without the knowledge of the individuals concerned; poor implementation of technology allowing consumers to access the private data of other consumers; hackers downloading massive databases of personal data.

All these situations involve an individual or organisation's loss of control over its own information. Open banking proceeds from the principle that the individual customer should have power over and control of their personal data, including that currently held by the banks they deal with. Customers can, therefore, provide or withdraw consent for access to personal data whenever they wish.

This may appear a trivial detail but its impact is huge. Data is the oil that lubricates the financial services market. Without customer data TPPs cannot provide competitive services.  Customer permission becomes currency.

Now TPPs are competing for customer permission and must factor into their business model a way of incentivising consumers to provide permission. This is how a modern digital economy should work.

In addition, having control over their data helps to provide consumers with peace of mind regarding data security. They know that whenever they no longer want a TPP to have access to their data, they are able to retract permission in an automated and transparent way.

5 Rethinking business models

Perhaps the biggest impact that open banking will have on the business world is the way that the provision of banking and financial services will be affected overall.

There is every chance that the retail banking landscape, for individuals and small business at least, will be almost unrecognisable from a consumer's perspective within five to 10 years.

Traditional banks must rethink their business models to survive. They can move to position themselves as TPPs, as most are, but face several challenges in doing so.

Customers may instinctively be reluctant for their personal data and financial arrangements to be shared among the traditional banks, rather than via new fintech TPPs.

The banks are also grappling with legacy IT systems and a fixation on compliance. Perhaps more problematic, however, is that the traditional banks may simply not be sufficiently agile, innovative, or technologically adept to compete with new entrants. 

It is not clear that the traditional banks understand the scale of the threat or pace of change that is likely. If they wish to respond adequately it will require a huge shift in the traditional bank's understanding of how it offers value and makes revenue.

The banks should no longer be thinking about selling everything to the customer themselves but instead about sharing with others. They should be thinking of competing through platforms, creating an ecosystem of reliable strategic partners - and sharing revenues on the products and services that those partners push to the customer. This is a move from traditional vertically integrated banking to a far more modular and networked architecture.

It is not only the traditional banks that will be threatened. Traditional service providers such as accountants, business consultants, pensions advisors, and many others, that obtain business through recommendation or tie-ups with banks, must find their place in the re-oriented value ecosystem, alongside new service providers.  

Indeed, a wide range of companies supplying products and services may face increased competition, because of the greater transparency and choice available from TPPs offering a platform approach.

6 The march of the tech giants

It is not just the fintechs and consumers that stand to benefit from open banking either. Any organisation that can meet the necessary conditions to obtain a licence can trade as a TPP.

That includes giant technology companies such as Facebook, Amazon, and Google. Combine the huge amount of personal data that these digital behemoths possess, with their data analysis capabilities, and the personal customer data that the banks hold, and the tech giants are well positioned to dominate financial services.

They already have a customer base of hundreds of millions of users. Even if they do not move directly to play a role as TPPs, they can easily tie-up partnerships with fintech TPPs or acquire them.

These firms have already shown that they can leverage data to disintermediate other industries. Financial services is unlikely to be an exception.

For the tech giants it is just one more service that they can offer on top of everything else. Amazon, for example, is already making loans to selected online sellers through its Amazon Lending arm.

Who will the winners be in the open banking revolution?

Open banking will take time to gain traction. Initially, there is likely to be a degree of destabilising, turmoil and confusion, as the market retools, reshapes, and reconfigures.

In a sense it is a race to become a platform and offer modern customer friendly services. The starting gun sounded at the beginning of 2018, but it is not clear if all of the banks have left the blocks yet.

Banks will have to learn new ways of collaborating and balance that with security and compliance, and that will not be easy. The fintechs, for the time being are likely to remain a shiny products and services veneer, resting on top of the balance sheets and infrastructure of the traditional banks and other established financial service providers.

If open banking is to deliver the benefits it promises, there are still challenges to be met. Without enough fintechs entering the market as TPPs we may not get the competitive market envisaged. 

There are risks that the tech giants may exert a monopolist like influence on the market. People need to trust TPPs enough to provide data access permission, and make digital payments and transactions to create the data that TPPs rely on. Traditional banks and partnering fintechs will need to resolve branding issues.

But change is inevitable. Business transformation, facilitated by digital technology, has led to the collapse of entire markets. Banks may not disappear in the near future, especially given the heavily regulated environment, but while the future configuration of the open banking universe may be uncertain, one thing is for sure, retail banking and the financial services industry is on the cusp of momentous upheaval. And consumers willing to share their personal data are likely to benefit with interest.

Markos Zachariadis is Associate Professor of Information Systems & Management and teaches Business IT and Services on MSc Management, Data & Business Intelligence on MSc Management of Information Systems & Digital Innovation.

Follow Dr Zachariadis on Twitter @MarkosZach.

Pinar Ozcan is Associate Professor of Strategic Management and lectures on Strategy & Practice on the Distance Learning MBA plus Strategy Analysis and Practice on the suite of MSc Business courses.

Follow Dr Ozcan on Twitter @cpozcan.

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