It’s been almost four years since the Payment Services Directive Two (PSD2) took effect. This new Open Banking legislation was rooted in the belief that enabling consumers to share their banking data with other financial providers would drive competition and result in better deals and services.

More than three years down the road, it’s debatable whether Open Banking has fully delivered on expectations. What’s clear is that the legislation has made steady progress in its adoption by service providers and end users. At the start of 2021, 109 new live-to-market applications had been created to help retail consumers and small businesses improve their financial awareness. This also provided banks with an opportunity to grow their partner ecosystems.

Whilst the initial uptake of PSD2 licenses was predominantly by B2B and not B2C service providers, most new services target the provision of improved financial decision making in retail consumers. However, the results from a recent survey suggests there is still relative apathy amongst the consumer market, with less than 40% of UK consumers who worried about their job security considering apps to support financial decisions as “appealing”.

New competition and new expectations

Open Banking has created the opportunity to develop improved customer experiences. However, the most recent Banking Services Quality Index showed incumbent banks are lagging in the eyes of consumers on the topic of customer experience. Whilst Monzo was number 1 on overall service quality, the incumbent banks are notably absent from the top spots in the Ipsos MORI poll. The only incumbent to rank in the overall top 5 was Nationwide, perhaps due to the £4.1 billion business transformation it has undertaken.

Why does the incumbent banks’ superior heritage and resources not win against the smaller challengers? Customers praise the smaller digital banks for their intuitive digital services, appealing products, and overall quality of customer experience. But it’s not products and appealing interest rates that create the gap. Both can be matched by incumbent banks.

The correlation between technological innovation and customer service is more influential. Challenger banks that have succeeded have done so by leapfrogging the development paths of incumbent banks. These new entrants don’t have to contend with technical debt and inflexible infrastructure or stale business processes and entrenched cultures. The resulting agility and reduced costs of change enable them to move from idea to reality quickly, which means they’re responsive to customer needs and deliver a more consistent, compelling experience for the end-user.

Customer experience is not skin deep 

In the face of the growing competition, it can be tempting for the incumbent banks to focus on improved user interface aesthetics, re-skinning existing services with slick interfaces. However, customer experience is not skin deep.

The beating heart of a compelling customer experience is the truly connected enterprise sat behind appealing interfaces. It’s the fully integrated data environment and the aligned business process that makes or breaks a customer journey. By enabling both customers and internal personnel to access the information they need when they need it, self-servicing customers and a hyper-enabled customer service functions are simultaneously created.

For incumbent banks looking to create and defend competitive advantage, the reliance on fast and unfettered access to data will become increasingly significant. The growing commoditisation and adoption of advanced analytics is providing the foundations for a new wave of intelligent service platforms. The data appetite of these platforms will increase as the effectiveness of analytical techniques improves. So, whilst gorgeous user interfaces won’t hinder an incumbent banks’ aspirations, a coherent data strategy should be the keystone of its competitive strategy. 

Embracing the hybrid future

Digital transformation isn’t a “once and done” activity. Constant disruption necessitates adaptation. Constant change is tough for any organisation, but for highly complex and regulated financial firms it’s particularly challenging. It’s taken a while, but incumbent banks are now embracing the cloud to expedite their transformation objectives.

Cloud migration is not trivial in practical or economic terms. However, the institutional agility and flexibility created by embracing cloud infrastructure and services more than justifies the investments required. Incumbent banks are able to deliver new services, provision capacity, and deliver ongoing modernisation in a manner unrivalled by historical efforts focused on delivering on-premise solutions. 

Despite the indisputable benefits of the cloud, a 100% cloud infrastructure is rarely the answer. The battle scars from many failed cloud migrations have compelled the use of appropriate tools and processes to drive a holistic, evidenced-based approach to migration decisions rather than application specific objectives. The net result of this activity is that some systems cannot be moved into the cloud.

Fortunately, a coherent hybrid data integration and API Management strategy can enable a convenient boundary across IT functions. The creation of API interfaces allows banks to wrap systems-of-record with more convenient, open standards interfaces in the on-premise environment. Hybrid integration solutions can then expose these on-premise interfaces to the new, cloud hosted customer-facing service platforms that are dependent on core systems-of-record.

Systems-of-record that are “designed to last” can be kept intact on-premises where required. Systems that are “designed to change” and deliver a bank’s competitive differentiation can be hosted in the cloud.

It's all to play for

Open Banking has provided the financial services industry with a rich opportunity to enhance collaboration and competition. It will be interesting to see how the incumbent banking providers’ ability to create and sustain compelling customer experiences will evolve, relative to their diminishing trust advantage, which has historically been a key driver in consumer inertia. In contrast, it will also be interesting to see if and how challenger banks and FinTech service providers will be able to maintain their customer experience advantage.

Although the long-term effects of Open Banking are uncertain, incumbent banks have a window of opportunity to create compelling customer experiences via well planned and executed digital transformation initiatives, incorporating insightful investments in people, process and technology.