Open Banking Will Unlock the Door for Digital-Only Banks

By Lewis Hill on Friday 24 November 2017

OpinionDigital Banking

Instinctif's Lewis Hill highlights how Open Banking could pave the way for challengers to usurp the big banks.

Instinctif's Lewis Hill highlights how Open Banking could pave the way for challengers to usurp the big banks.

Ask people who they bank with and you will more than likely hear one or a combination of the following: HSBC, Barclays, RBS and Lloyds. Ask people what they think of their bank and you will typically hear something ranging from anger through to extreme apathy.

Yet in parallel to this, there is a growing cohort of digital-only banks that are bucking the trend – the most famous of which include MonzoAtom Bank and Starling Bank. Not only do they have different client service delivery models, they have cultivated a customer base that is highly supportive and engaged.

But while Monzo has acquired over 400,000 customers for its pre-paid card since 2015, as Barclays has seen over 142,000 customers switch from its current account over a similar period – digital-only banks still remain relatively unknown.

A simple lack of awareness of these alternatives, coupled with an often nascent proposition and inherent issues around consumer trust, means driving scalability is a key challenge for digital-only banks.

Yet Open Banking – set to launch on January 13th – stands to change this. It aims to increase competition and drive innovation in order to improve the consumer banking experience.

This will be achieved by opening up currently unavailable bank account information to third parties, including digital-only banks, using application programming interfaces (APIs). By analysing this information, alternative providers will be able to identify and develop new products and services that will benefit the consumer. The opportunity to rapidly diversify their proposition will help level the playing field and allow the fight to be taken more aggressively to the established players.

Importantly, digital-only challengers have the resources and technology available to take advantage of this opportunity. Unlike traditional banks, they do not run on legacy systems, and will be able to adopt this new technology quickly.

But to truly capture this opportunity digital-only banks will need to proactively communicate how their proposition is enhanced by Open Banking. In particular, they will need to communicate how the products they develop using APIs can serve consumers better than those offered by traditional banks. If communicated effectively, this will help digital-only banks enter the financial consciousness of the regular consumer and attract new customers.

If they succeed, it will unlock the door for digital-only challengers to usurp traditional banks, and replace them as the main port-of-call for a consumer’s financial needs.

In ten years’ time, ask people who they bank with and you might hear one or a combination of Monzo, Tandem, Starling Bank and Atom Bank – either in place of, or clearly alongside the Big Four. You might also hear them be more upbeat about who they bank with too.

Lewis Hill works at Instinctif Partners, advising fintech and financial services.

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