Few banking institutions can afford to be all things to all
people anymore, at least not by creating and managing everything themselves.
Adopting a fresh product design mindset can set up banks and credit unions for
participation in a wider financial marketplace where it's all about the
platforms and the apps.
Forrester Research is predicting that 2022 will be the year
that open banking and open finance take off, even in the United States, which
has lagged places like the European
Union and the United Kingdom, where open banking was mandated. What makes this
forecast, taken from the firm’s “Predictions 2022: Banking” report, especially
interesting is not the what or the how, but the why.
The firm sees open finance being driven by consumer demand,
not by technology, according to Aurélie L’Hostis, Principal Analyst. While many
things are technically possible, consumers in America, and, indeed, worldwide,
are ready. They won’t clamor for “open” anything, but what they want will be
plain.
“Customers are asking for better ways to manage their
finances, and that’s the same everywhere in the world,” says L’Hostis in an
interview with The Financial Brand. “Every consumer is looking for a better
way, a cheaper way, a more convenient way to manage their money. Open banking
and finance are about providing the affordable and useful services and products
they need.”
While many traditional financial institutions have fixated
on boundaries and barriers, consumers have grown comfortable with alternative
providers. L’Hostis believes demand has grown to the point where most financial
institutions “if they wish to survive, are going to have to join the race.”
For those players, she continues, the decision will not be
if to compete in open finance, but what approach or approaches to take.
Increasingly, says L’Hostis, banks and credit unions will
need to decide how they are going to participate in open financial services and
then build the relevant ecosystem, or devise their best way of connecting to
one, to enable them to get into the race. She says that motivations will vary.
Hows and Whys of Getting into Open Finance
“The future of banking is very much about ‘openness’ and
evolving business models to fit that future,” L’Hostis adds. She believes
traditional institutions will make a significant shift in 2022 away from
developing products and services to only be used under their own roofs.
Instead, they will increasingly be conceiving and designing with an eye towards
their entries playing well in an open finance sphere.
The idea is that they will work as well with products and
services offered by other financial institutions, fintechs and other
participants in a wider mix than ever. Along the way, part of the design challenge
will be figuring out how the new offerings will generate revenue for the
traditional institutions, according to L’Hostis.
Institutions will be choosing how they plan to fit into open
finance, which may involve concentrating on one aspect or pursuing multiple
strategies. Here are three approaches Forrester envisions:
Embedded banking services, supplied through specific
functions, such as credit, or more broadly, through banking as a service
relationships, is a growing area of interest in the U.S. Some specialized
versions of this have been around for many years — after all, most retail store
cards today are provided by banks — while others are on the leading edge.
Marketplaces, where a bank may be one participant
among many or may be running the marketplace, represent a different approach.
This is not unlike the idea of running a supermarket. What dinner doesn’t
require ingredients from multiple aisles? And some feature competitive store
brands as well as name brands. Starling Bank‘s founder Anne Boden has been
pushing the marketplace concept in her writings and implemented it in the
bank’s Personal Financial Marketplace. The venture has nine participants so
far.
Apps are a key way of entering open finance. At the
top of the app food chain is the so-called “super app.” Among the models
already playing on the world’s financial stage are Alipay and WeChat, notes the
Forrester report.
The firm points out that currently there are fewer than 50
such super apps worldwide that are led by a banking entity.
The observation highlighted above from the report addresses
concerns that talk of open finance and open banking leaves all but the largest
banks in the dust. L’Hostis insists that no institution can afford to not
consider these issues and the appropriate response.
“If you want to add value for your customers and for your
community,” says L’Hostis, “it’s really the only way to go.”
How Open Finance Reinvigorates Banks’ Offerings
L’Hostis believes the bar is going to be raised for
financial services providers of all types. She thinks as open finance enables
more consumers to obtain the best of the best through marketplaces and other
approaches — while enjoying connectivity among different providers — that they
will increasingly expect more from everybody.
“Customer expectations are going to be higher because they
will increasingly be fully empowered,” says L’Hostis. Consumers have long
expected their financial institutions to give them services on any channel they
choose. Even as mobile apps grow in popularity, all generations still want to
be able to go to branches, for example.
But L’Hostis says the expectations will go beyond channels.
“They’ll want digital tools on their phones, but they will
also want to increasingly receive personalized financial solutions,” says
L’Hostis. “Financial institutions will need to have a very holistic
understanding of their customers to be able to do that. They will have to focus
on the values they actually deliver to consumers every time people interact
with their finances.”
A key aspect of open finance will be providing that
introduction and handoff on a timely basis.
L’Hostis says the challenge comes down to finding ways to
point people “to individualized products and services at the point of need, at
the point when people need them in their customer journeys.”
“Increasingly, banking is not necessarily something you’re
going to do with your bank,” L’Hostis adds. Embedded banking represents an
aspect of that, where the functionality, provided by a financial institution or
fintech, is deemphasized or completely invisible.
Meeting people’s financial needs will potentially come “at
the expense of brand visibility,” says L’Hostis.
But especially important: Many institutions will have to
shed the focus on sales and customer acquisition that has become commonplace in
the industry. Getting people in the door, literally or digitally, won’t be as
important as the success of the relationship through the customer lifecycle,
according to L’Hostis.
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