Have we got Open Banking marketplaces back to front?

Open Banking has been the topic du jour for some time and one aspect that comes up again and again is that of marketplaces. The theory goes that big banks, keenly aware of the threat of disintermediation, will partner with Trusted Third Parties to offer a whole raft of services that are of benefit to their customers. These third parties - assumed to be fintech companies - will leverage the bank’s scale and reflected glory to reach a wider customer base and grow like never before. The customer will have access to “best of breed” services ostensibly vetted and approved by a trusted institution (their bank). And the bank creates a new revenue stream, increases customer loyalty and staves off the threat of disintermediation. Everyone wins.

Marketplaces take centre stage

This was the subject of one of two discussions hosted by Travelex on Wednesday night at the National Theatre. I was privileged to be on stage for the evening with Anne Boden, CEO of Starling Bank, Miles Cheetham, Head of Proposition at Open Banking and David Elliott, Head of Financial Services Solutions at Amazon Web Services. Starling has recently launched its own marketplace, Miles is focused on making sure the needs of consumers are met by the implementation of the Open Banking standards, and David is a part of the backbone of many financial institutions’ open banking efforts - so all are uniquely qualified to offer their expertise.

The general consensus was that marketplaces are going to play a big part in the future of financial services. Consumers understand and are used to the concept (Amazon, eBay) and it makes sense for businesses to partner instead of competing. However, it’s the makeup of the typical marketplace that the generally model has back to front.

The received wisdom is that a marketplace will be set up by a high street bank and will be filled with start-ups. Anne argued quite the opposite saying that 50% of companies queueing to join their marketplace are “major brands”.

What’s the key ingredient to success for marketplaces?

With the number of challenger banks operating in the UK increasing all the time, this space will be crowded very soon. This begs the question, how to differentiate? My view, echoed by the panel, is that trust is the key ingredient in this new world and consumers are much more likely to trust brands they know. If those brands are in a particular marketplace, trust is built by association - especially important for challengers or fintech marketplaces.

Clearly there’s a benefit to both sides here. Marketplaces will be set up by challengers to offer things that they can’t. And for the big brands, the pool of potential customers has already been onboarded by their bank so KYC checks have been done, and competition for services within the marketplace will be limited.

The idea of trust is key and it’s one of the essential ingredients for a successful marketplace, but not the only one. If this marketplace model gains wide acceptance then how do they differentiate from each other? Again it’s down to brands. Having the right combination of bands in your marketplace can be the difference between success and failure. The innovation being talked about in this space will extend to larger brands as well as the agile start-ups, with new (potentially exclusive) services being designed for specific marketplaces. It’s a well-trodden road and one that works (think The Beatles and Apple Music and Spotify, Nike and Amazon or perhaps even Netflix and Marvel?).

Further as Miles pointed out, Open Banking allows companies to “merge financial data with other datasets to create new propositions”. I wouldn’t be surprised to see challenger banks offering exclusive services through their marketplaces with established brands. Offers that are specifically tailored for the needs of individual customers based on both transaction data and, potentially, data shared by other companies in that marketplace - API data flow can be two-way after all.

Here is the rub, however. Combining data and working with third party services can differentiate marketplaces and build trust. However, one misstep with customer data (from the marketplace owner or one of the participants) will instantly destroy that trust.

So what did we take away from our time in the limelight of the National Theatre? Well, marketplaces are the business model of the future in the Open Banking era, but perhaps not in the form that people first think. But isn’t that always the way with innovation?