Home Digital Building the bank of the future (Part I)

Building the bank of the future (Part I)

Part I: The first steps of Open Banking

For almost 20 years, new technologies and digital innovation have impacted every business activity, including the financial sector. Although retail banking has not fundamentally changed until now, the way of doing business in this field is facing major changes. In fact, newcomers have recently entered the market bringing new ways to deliver offers and services, as well as a more customer-focused value proposition, to a historically traditional ecosystem. Recently, however, a new tendency has emerged: Open Banking is booming in the financial market and could profoundly disrupt the way we think about retail banking activities.

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The financial sector first saw the development of online banks associated with the dot-com boom in the early 2000s, more recently followed by mobile banks with the growing use of smartphones. These so-called neobanks (most of them belonging to a traditional actor) appeared as disruptive competitors facing traditional and gigantic actors. Online and mobile banks gain a competitive advantage from their ability to develop cheaper offers – although it should be noted that for the moment, these new entrants have yet to reach the critical size to compete properly with traditional banks.

Indeed, the technology is mature enough to offer customers a fluid experience and to do without customer advisors for basic services that make up these new players’ offers. Although they did not upset the whole financial sector, online and mobile banks brought novelty to a traditional market, especially the use of new channels and a more customer-focused vision. Taking customers into account when developing an offer has become much more important in such a fast-moving market. In fact, customers’ expectations are now higher; they expect to get the best service at the right price, something that is targeted by new entrants. At the same time, another type of actor has also joined the financial game in recent years: fintech. These startups, pure-players surfing on financial technology expertise, have developed tremendously in the retail banking landscape, bringing technological blocks and new use cases. Contrary to online banks, they do not aim at answering every customer’s needs in terms of banking activities; instead they focus on one part of the value chain.

Thus, online banks, fintechs, and mobile banks are changing everyday retail banking, making it easier, quicker and cheaper (no account fees, free debit card, P2P money transfer, and so on) in order to enhance the customer relationship. Nevertheless, the traditional model has not yet transformed to face this new competition. The main business activities for retail banking are aimed at collecting and lending money, both driven by interest rate fluctuation with the difference resulting in profit or loss for the bank – and for centuries, the trends have been highly favorable for banks. Whatever the distribution channel, traditional, online, and mobile banks followed the same model. Innovative services flourished in the market, but there were still no real threats hanging over the retail banking model.

Now, as newcomers have integrated into the traditional market, a new tendency is emerging: Open Banking. In this sector, where data security and confidentiality are essential criteria, Open Banking began a transition to open up banks’ information systems and facilitate data-sharing among actors. This dynamic is encouraged by regulation and the implementation of Payment Services Directive 2 (PSD2), requiring banks to share their data with third parties.

PSD2’s goal is to encourage competition on payment services by separating the roles of the different players, offering a better and more personalized service to customers and closely fitting to their needs and expectations.