To say that 2020 was a transformative year would be putting it mildly. The ongoing pandemic has prompted profound changes in the way we live, work, spend and socialise — with prolonged social distancing restrictions meaning that many aspects of our lives have moved online in the past 12 months.
Financial services have been no exception to the disruption caused by Covid-19. But even before Covid-19, open banking had been driving a quieter revolution, encouraged by regulatory changes and spurred by growing competition and innovation in the industry. And rather than stall the open banking movement, the pandemic has only turbo charged it — rapidly accelerating the shift to digital and throwing up new customer challenges that banks urgently needed to respond to.
"Even before Covid-19, open banking had been driving a quieter revolution."
Now, as we wrestle with the new social and economic realities of life with Covid, it’s vital that financial institutions continue to prioritise open banking in order to support their customers in new ways and provide accessible financial services seamlessly over digital channels.
Last year, Tink asked financial executives from institutions across Europe about their attitudes to and investments into open banking. Based on the research conducted, we identified four key points to help financial executives make the most of the open banking opportunity.
Financial institutions are increasingly alive to the open banking opportunity — with 61% saying they now feel positive towards it. However, 42% still don’t have a clear strategy in place to truly drive value-creation and reap the full benefits that it can offer. One of the main reasons for this is a lack of clarity around how to realise its potential.
In 2021, the winners will be the executives who are able to translate the opportunity of open banking into a robust strategy — something which will put them in prime position to start achieving concrete returns. Our research made it clear that this isn’t a ‘one size fits all’ process. Indeed, while some financial institutions approach open banking as a long-term strategic play, a growing number of business leaders instead see it as an opportunity for short-term, quick-win value creation.
It’s important that banks don’t look at open banking as a compliance exercise but rather as a service that they offer to their customers. Thankfully, executives are now seeing the opportunity to automate or trigger processes based on the ability to read data and move capital. This means that they can deliver an even more personalised data-driven service.
"It’s important that banks don’t look at open banking as a compliance exercise but rather as a service that they offer to their customers."
Ultimately though, open banking can offer a considerable number of both short and long term opportunities for financial institutions across Europe — each with their own rewards. However, it’s a journey that will likely begin with more elementary open banking use cases which, over time, will evolve into more complex and sophisticated ones.
While the positive shift in attitudes is a solid indication of the importance of open banking, it doesn’t fully reflect the significance of the movement. Our research showed that financial institutions across Europe are investing big in their open banking efforts, with median spend typically lying between€50-€100 million, while 45% of executives have investment budgets that are even bigger.
The magnitude of investments shows that open banking has become central to digital transformation programmes. Of course, not all financial institutions will have budgets of this scale, so the key here is to allocate budget wisely and strategically — pumping it into the areas of the business that ensure maximum ROI.
So where are these investments being injected?
Our research revealed that 71% of financial executives are putting compliance related use cases — that deliver immediate value to their business by improving customer acquisition and engagement, as well as employee productivity — at the top of their investment list. With compliance seen as mission-critical to keeping a business running, it’s understandable that many financial institutions continue to focus in this area.
That said, it’s crucial for them to take their open banking strategy to the next level — investing in use cases that help enhance the customer experience and increase their competitive advantage. By doing this, they can ensure they stay ahead of their main competitors, such as challengers and PSPs.
Executives should also evaluate where to invest next by assessing the complexity, impact and urgency for open banking in every segment. And wherever competitors are taking market share from the existing businesses will nearly always be the most immediate area to invest in.
Last but by no means least, to fully reap the benefits of open banking, financial institutions need to forge successful and strategic partnerships with fintechs. Such partnerships are invaluable as they can provide the technology, expertise and vision to drive open banking value creation — creating both short and long term value for financial institutions and, in turn, for their customers.
Not only this; in 2020, 70%of the executives without an existing partnership indicate that establishing a fintech partnership to access open banking technology was a priority for them — a trend we expect to continue and grow in2021.
One thing to keep in mind, however, is that for partnerships to truly work, fintechs must be able to navigate the complicated procurement process, onboarding requirements and mission-critical service delivery that many larger banks require.
Financial institutions now have a golden opportunity to proactively respond to the current situation —prioritising and driving digital banking and payments to meet the increasing demand for online and mobile solutions. The winners will be the banks that leverage open banking and place a relentless focus on the development of innovative banking solutions that are tailored to the individual circumstances of customers and businesses.
2020 was very much the year of open banking value creation as executives began to wake up to its potential. Meanwhile, 2021 will be the year we see open banking truly become mainstream as it plays a central role in the continued transformation of the financial services industry.
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