Open For Business: How Open Banking Is Driving Competition Around Customer Experience

For the financial services sector, maintaining the status quo is as good as falling behind. Innovation has always been at its very heart, and those that fail to push the boundaries of what’s possible soon fade into obscurity. The introduction of Open Banking has widened those boundaries considerably, putting customers firmly in the driving seat while businesses compete to offer the most tailored and convenient experience. In this article, we’ll explore open banking in detail; what it is, how it originated, and the impact it’s had on banks, insurers, wealth managers, pension providers and the fintech startup space in general. We’ll also touch on how Open Banking has revolutionised the customer experience, and what businesses need to do to stay relevant. 

Open for business

Before 2018, financial services companies had complete control over their customer data. If a consumer chose to do business with a certain insurer, bank or pension provider, those companies would have full jurisdiction over that data, effectively making them a one-stop-shop for customers who had very little choice or control in the matter. The idea of a financial services company giving up its customer data to a third party for the benefit of its customers was completely unheard of, it would have been seen as holding the door open for the competition. 

Then everything changed. On January 13th 2018, a new Payment Services Directive known as PSD2 was introduced following pressure from the Competition and Markets Authority (CMA), which forced financial services providers to share data at their customers’ request. Now, any business providing a financial service has to provide provision for third party access. The intention was to encourage innovation and allow customers to take a more ‘modular’ approach in how they handle their finances by utilising other services built on top. If a bank didn’t have a decent money manager or budgeting tool, a customer could simply go to a third party such as Yolt and, thanks to the miracle of an open-API ecosystem, get the best of both worlds. Yolt allows customers to connect the service to their bank accounts and use it to control spending, round-up purchases to save money and so on. This is the new customer-centric playing field of open banking, and while challenging, it’s also creating incredible opportunities for providers of financial services. 

Driving innovations in customer experience

Today, the Open Banking industry has exploded. As of 2021, it’s growing by a staggering rate of 24% year-on-year, and is expected to be worth more than £31 billion by 2026. Empowering customers and encouraging market competition might have been the initial driver behind PSD2, but to their credit businesses have run with it. Fintech start-ups in particular are finding easier routes to market, creating carefully curated, modular tools that add value to a customer’s financial journey. To enter this marketplace, once a start-up has a killer idea it needs to find a tech partnerthat has the capability to deliver on the APIs and data layer integration needed to get involved. This wouldn’t have been possible a few years ago. Today, if a start-up sees a gap in the market for a particular tool, it can simply create an app that fills that gap, and the customer now has the option of enlisting that app as part of their financial toolkit.

Take pension providers, PensionBee, in the UK for instance. Open Banking (PSD2 directive) has allowed them to create a money app where users can get an overall view of their pension balances all in one place. Very useful for people that have hopped around from job to job with various ‘pension pots’ scattered around. Users of the PensionBee app can even scan their savings for wealth traps and ‘bad contracts’ and move their money from pension to pension. This is something that would have required a lot of leg work on the part of the customer prior to OpenBanking, as their pension providers would have kept their data close to their chest. This is the transparent, API-driven ecosystem that OpenBanking has created, and the opportunities are seemingly endless. But what about data privacy? Do customers trust Open Banking enough to embrace it? 

Consumer trust in Open Banking

More than 2.5 million customers in the UK alone have now connected their bank, pensions and savings accounts to third-party apps in exchange for an important value-added benefit. That’s a 1.5 million increase on 2020’s figures and remember that OpenBanking has only been in play for a little over three years at the time of writing this piece. The truth is, Open Banking is a consent-based ecosystem, so a customer’s data is only shared with a third party if they themselves decide they want that third party’s help. 

More than 2.5 million customers in the UK have now connected their bank, pensions and savings accounts to third-party apps

It therefore falls to third parties, like many of the business leaders perhaps reading this article, to earn customers’ trust and loyalty along with providing a unique and useful service. If, by harnessing APIs and the “open door” afforded by PSD2, you can persuade customers to share their data in exchange for a service that will add value to their financial world, your fintech company might just become the best thing customers never even knew they needed.