With Open Banking regulations coming into force in jurisdictions around the world, including last week in Australia, it’s important that Australian bankers understand what it means for them. Is it really going to challenge incumbents the way some say, and make certain business models obsolete? What do people mean when they refer to the 'API economy', PSD2 and GDPR? And what are ‘RESTful APIs’ anyway? Most importantly, why should such things matter for bankers who don’t work in payments or technology and perhaps find the language of Open Banking inaccessible and intimidating?
In our report, we seek to demystify all this and more. Open Banking is more than just a new set of compliance requirements, and it will require much more than just new technology. It will affect almost everyone working in banking today, and every banker has a role to play in its evolution in Australia. Most importantly, while we don’t subscribe to the view that banking will be turned on its head overnight, we believe that it will have profound implications for every part of the industry, and that organisations have a list of things to start doing today.
Open Banking refers to the opening of internal bank data and processes to external parties via digital channels. These might be customers, trusted partners or authorised third parties acting on behalf of customers. This is the general case. Specifically, Open Banking in any particular jurisdiction is defined by its scope: including the data, the processes and, of course, the range of potential external parties.
So long as it is done securely, unbundling bank services and data in this way will provide greater competition, improve efficiency (through accelerated digitisation and, by removing friction in transactions between companies, greater specialisation and scale), and lead to enhanced or entirely new products and services. Open Banking will have profound implications for the way financial services are delivered and the long-term viability of different business models.
There is now a new and real short-term regulatory requirement which cannot be ignored: Second Payments System Directive (PSD2), General Data Protection Regulation (GDPR) and possible Australian equivalents. Fortunately, at least for the majors, readiness for PSD2, GDPR as well as earlier initiatives such as Comprehensive Credit Reporting (CCR) are useful precursors for the yet-to-be-defined changes following the Treasury’s Review into Open Banking (the Farrell Report). For executive teams and boards, they were also useful ‘fitness tests’ of the readiness of the organisation to accommodate new data governance and access requirements. The bad news is that the timelines discussed in Farrell are much shorter than what was available in other comparable changes to the regulatory regime.
While it is not cause for alarm, we don’t think a ‘wait and see’ approach to Open Banking anchored on merely complying with requirements is wise either. The evolution of the banking ecosystem will take time, but so will each banks’ ability to respond. A ‘wait and see’ strategy is at risk of being hijacked by the perennial need to keep up with changing regulatory standards in jurisdictions all around the world, and another lesson from UK and European experiences in preparing for PSD2 and GDPR is that waiting until the last minute only increases the cost, risk and disruption of the change. Such a strategy is also prime for disruption by competitors who have started preparing for and understanding the new environment sooner. Fortunately, there is a sensible path between these two extremes. What we are calling a ‘Walk-Run-Fly’ approach is one where actions are more aggressive than what regulations require, but where these actions are also grounded in a sober assessment of the technical, social and commercial objective to be addressed by incumbent banks every day. See our ‘Walk Run Fly’ approach below and detailed in our downloadable report.
1. More than just a new compliance exercise: Open Banking will transform the industry
However it’s done, unbundling and recombining bank services creates the possibility of entirely new business models. Broadly speaking, we see four models emerging in this landscape, including:
- Customer experience master
- Infrastructure master
- Product master
- Traditional
While, these aren’t entirely new models, Open Banking provides a pathway to digital enablement which wasn’t as open before.
2. Not just for technologists: there’s a role for everyone
In short, everyone has a role to play in a world of Open Banking and in the path to getting there. In getting ready for Open Banking, here’s how every layer of the organisation can get involved.
Customer relationship layer: Understand unmet customer needs, identify opportunities for key services through new channels, or new services through own channels, and translate implications for customer journeys.
Manufacturing and delivery layer: Develop product / service syndication strategy, and cultivate partnerships and channels for collaboration to satisfy unmet customer needs.
Operations layer: Identify opportunities for key services through new channels, or new services through own channels, and meet security, privacy and other requirements and expectations.
Technology layer: Develop and maintain APIs, Software Development Kits and rails into third-party service platforms, and meet security, privacy and other requirements and expectations.
Support layer: Re-orient risk and compliance frameworks, guide choices about value proposition and way to play, ensure required skill and capability mix in human capital, and align contractual arrangements to new risks and opportunities with legal.
3. Walk-Run-Fly: get started today?
As mentioned above, while it is not cause for alarm, we don’t think a ‘wait and see’ approach to Open Banking anchored on merely complying with requirements is wise either. We think a ‘Walk Run Fly’ approach is a practical place to start. Actions banks can take today that they won’t regret doing include:
- Readying the digital and data engine
- Strengthening security and governance mechanisms
- Clarifying strategic opportunities and pathways for growth
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