Will GDPR inhibit or enable Open Banking?

It’s a financial world: Will GDPR inhibit or enable Open Banking?

Will GDPR inhibit or enable Open Banking?

Image result for "customer apathy"
GDPR is not the biggest threat to open banking, customer
apathy is a far greater one. Banks and Fintechs have been pouring money into
getting ready for open-banking, creating open APIs and new services and
offerings for customers. However if there is one lesson that the seven-day
switching service has taught us it is that the majority of customers are simply
not interested in banking and see all banks as the same. Most customers would
like to spend the absolute minimum amount of time thinking about their finances
and see banking as a means to an end not the end itself. The volumes for seven
day switching have been disappointing with an average of 75,228 per month in
2017. The expectation that there would be a mass move away from existing primary
current account providers has not happened.

Even when customers have switched, it hasn’t been to either the
neobanks (Monzo, Atom, Starling) or the challengers (Metro Bank, Clydesdale
Bank, Yorkshire Bank, etc). With the exception of Nationwide Building Society,
the net beneficiaries have been the large, global banks – First Direct (HSBC),
Santander, TSB (Sabadell) and Halifax (Lloyds Banking Group). The neobanks are becoming
secondary banks for the majority of their customers not the customer’s primary

If seven-day switching hasn’t got customers excited about
banking, will the offer of open banking be enough to get customers spending
more with their existing banks or switching their primary banking relationship
away from their current provider? If so, which banks are likely to be the

Open Banking is intended to create more
competition in the banking industry and to encourage better services and more
innovation to improve the customer banking experience.

One way of improving the experience is  to provide a single place where a customer can
see all of their banks accounts regardless of which bank provides them.
is not a new idea. Yodlee, the best known player in the aggregator market, has
been around for over 17 years providing services to over 1,000 financial
institutions and fintech providers. Account aggregation, which sounds like a
good idea, has not taken off in the mass market. Apart from the customer apathy
described above, the screen-scraping technique deployed by many aggregator
tools involves the customer breaking the terms and conditions that they had
agreed with their banks. This is where GDPR, Open Banking and PSD2 (which use
open APIs) jointly provide a regulatory framework to give consumers the knowledge,
should they wish to take up such services, that they are legally protected.

GDPR is about putting consumers back in control of how their
data is used. GDPR from a customer’s perspective is a pre-requisite for open banking
as it will give them the confidence that their personal data will only be used
for the specific purposes that they have had to explicitly agree to when
signing up for the service.

Account aggregation is not the only new service that banks,
fintechs and non-banks are beginning to offer to customers. Real-time spending
analysis, the ability to split restaurant bills and lower cost foreign
transactions are among the services that both existing and neo-banks are offering.

A question that the banks must answer is
whether the current open banking offerings are providing an experience that is
sufficiently differentiated from the competition that it will make customers actively
switch to them.

Neobanks being built using cloud first, modern technologies
have advantages in both complying with GDPR and offering new services as a
result of open banking. They have had been able to build from the start a
single view of the customer in real time using open APIs and microservices. However,
they lack scale in terms of both the numbers of customers and the depth of resources.

The existing big five banks have all the advantages of the
size of their customer base and IT budgets. However they are hampered by the
complexity of the legacy infrastructures, customer data is spread across
multiple legacy systems designed for batch-processing makes building a
real-time view of a customer’s relationship with the bank a significant
challenge. This is why a number of the major banks have either elected to work
with Fintech firms to help them address this or have designed new digital banks
using modern technology.

For banks and non-banks (since the legislation was drawn up
to encourage challengers from other sectors such as telcos, retailers and fintechs)
GDPR increases the potential financial and reputational risks of entering the
open banking market. While most people know little about the detail of GDPR almost
everyone seems to know about the fines of up to 4% of global revenues for a
breach of the regulation. The regulation goes live on 25th May 2018
and no organisation knows how strictly it will be enforced and certainly don’t
want to be the test case for the first fines.

Given the risk of fines and the cost of meeting regulation,
the revenue upside of entering the open banking need to be significant.
Providing an aggregator service or a breakdown of expenditure in real time are
good customer experiences but don’t directly bring in additional revenue as the
neobanks are finding. Open banking is of course about more than just providing aggregation
and PFM (Personal Financial Management) and the revenue growth is forecast to
come from the provision of additional financial and non-financial services. All
of the neobanks have realised that offering current accounts alone is not a
profitable business. To be successful they need to be able to offer other
services and are positioning themselves as marketplaces. One of the most
successful organisations operating as a marketplace has been Moneysupermarket,
but even they are finding that competition is driving down their margins and
the barriers to entry (helped by the intervention of regulators) has
significantly impacted their profitability.

A key criteria to be a successful marketplace is to have
scale – amazon, ebay and Ariba (in the b2b world) demonstrate this. As open
banking becomes a reality then the winners will also be the ones that have the
scale. For the moment that advantage lies with the incumbent banks.

The success of open banking will neither be enabled or
inhibited by GDPR. The success of open banking in the retail segment will be
measured by the level of switching activity significantly rising.  This will only happen by providing an offering
that so engages the customer that it overcomes the disinterest that most
customers have about banking.

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