Our previous article talked about the risks of Open Banking, but there’s also a range of potential opportunities it may bring.
In this article we’ll look into the three main areas that differentiate the incumbent bank offerings and what newer FinTech companies are bringing to the table. These areas are; the structure of the businesses, the way they are monetised and how they service customers.
We’ll start by looking at how the more traditional financial services companies are structured.
Traditionally banks are separated by business area. Within these areas you see a number of roles from entry level to the managing directors who report directly to the CEO.
This siloed structure makes cross-working difficult as each division is responsible for its own performance. Therefore, they may not be as focused on cross-division working as they are on making sure their own house is in order.
Usually traditional financial services companies make their money through collecting interest on consumer deposits and charging interest on consumer lending.
Deposits tend to have very short terms and consumers are able to withdraw most funds quickly when they want. This means that banks have to have enough capital to be able to respond to a withdrawal request in the time given in the customer’s T&Cs.
In terms of lending, commercial loans give the biggest profit margins, however in terms of numbers it is retail mortgages that provide the bulk of income. Various loan offerings also provide a large chunk of revenue as do credit cards.
But, because the Bank of England interest rate is so low and has been for such a sustained period of time, profitability for banks has declined. Even though the rate they borrow money at is also lower, the margins are much less than when interest rates are higher. Banks have also continued to pay at least some interest on consumer deposits which has hurt their profit margins even further.
The typical model for servicing customers have been through branches, a telephone banking service and online banking facilities. A lot of banks are closing branches and the automated telephone service most provide has been a cause of frustration for customers needing help quickly.
Both of these may have been forgiven if the online services offered were up to scratch but unfortunately for a lot of larger banks this isn’t the case. The large and complex nature of their infrastructure means change is difficult and they cannot keep up with how quickly the digital world is moving.
The first and most obvious point is that due to the smaller size of FinTech companies their structure allows them to be more cohesive as a company. New ways of working such as through agile methodologies are much easier to implement and fewer layers of management hierarchy means decisions are made more quickly.
This agility means that they can also service their customers better – as they focus on one or two channels as opposed to all of them like larger banks do.
For instance, some FinTech companies only service customers through online channels and because this has been their offering from the beginning, customers are aware and happy with it. Plus, because they focus on fewer channels they are able to make sure these run as smoothly as possible – something that is all-too-important to the customers.
In terms of making money most FinTechs have swerved the standard routes of deposit taking and standard lending – finding them to be unwieldy and unfair to consumers.
Instead they are looking at monetising consumers’ data. Partnering with other firms to create ‘marketplaces’ where these third-parties will pay a percentage to them when a customer takes out a product.
A number of these companies are also looking at subscription-based propositions – charging set monthly amounts for certain accounts such as business banking or foreign currency exchange.
Whether these strategies will allow FinTechs to make as much revenue as older banking models remains to be seen. But, given their operating costs are significantly lower, we are seeing healthy profits being reported.
It’s easy to see where the opportunities lie for the FinTech companies and they are bullish about their ability to capitalise on it. 94% of FinTechs see Open Banking as a major area of growth for them.
What about the incumbent banks? Is there anything they can do to stop this wave of disruption leading to a significant loss of the market share they have spent decades, if not centuries, building?
There is a huge advantage that larger banks have over FinTech companies: consumer awareness and perception.
A Telegraph report last year stated that only 12% of surveyed consumers knew what the phrase ‘FinTech’ referred to. In another report, 77% of respondents said they were unlikely to utilise Open Banking, rising to 90% for over 55’s. Whilst campaigns like the Barclays Digital Eagles ones are increasing customer knowledge about the digital solutions available, it won’t be in the larger banks’ interest to highlight the availability of these smaller FinTech companies.
And it’s this lack of awareness that is currently stopping Open Banking creating a mass-movement of consumers towards smaller, more niche FinTech companies. Instead we see it creating an opportunity for the large incumbents and tech companies to work together to devise digital solutions that ease the pain that customers are experiencing.
Strategic partnerships are certainly key here. A priority should be combining the technological capabilities of the digitally astute FinTech company with the customer numbers of the larger bank.
The larger companies benefit from having a more agile partner who can respond quickly to growing technical threats and customer expectations will be paramount to keeping competitive.
The smaller FinTech companies get access to a large customer base and can also tap into the perception of expertise the larger more established companies have. It’s win-win.
For companies who have taken the threat of Open Banking seriously, they’ll already have formed these partnerships and will be well on their way to improving their offerings in line with customer expectations.