THE TRANSFORMATION OF FINANCE THROUGH OPEN BANKING
More convenience for customers, digital disruption for the banks’ business model: How a new standard is fundamentally changing the rules of the payment game.

“Everything starts with trust” („Vertrauen ist der Anfang von allem“) — Deutsche Bank used this well-known slogan to woo customers in the 1990s. There’s no question about it: trust is one of the most important assets a bank can have. After all, we entrust our bank with a great deal of sensitive data — whether it’s incoming and outgoing payments to our checking account or in the context of a loan due diligence.

This makes the new trend of “open banking”, which is currently gaining momentum in the financial sector, all the more interesting. Roughly speaking, this involves third-party providers gaining access to a bank customer’s account data. Bank customers should thus be able to decide for themselves whether to release their accounts to other providers and thus use services from different providers in parallel.

The recently introduced EU Payment Services Directive 2 (PSD2) even explicitly requires banks to set up such interfaces or “system accesses” for third-party providers. In this way, legislators want to strengthen competition between banks and also new financial service providers. After all, in the previous “closed” system, banks had exclusive access to customer data, resulting in a barrier to market entry for new providers.

In this blog post, I discuss the impact of the new standard on (digital) financial management as well as the financial industry as a whole — and finally provide insight on how traditional banks should leverage open banking and digital marketing for themselves to continue to be present in the market with a new business model.

The new digital autonomy for managing finance

So what is the benefit do bank customers have, when they open up their account, and thus personal data, to a third-party provider? First of all, this means having greater freedom of choice between different financial service providers with less effort. For example, a securities account could be released for an external investment advisor (or an AI-supported “robo-advisor”), which would carry out the desired transactions. Or a loan could be applied for from an institution with which no business relationship has existed to date. The credit provider would then have immediate access to the relevant financial data needed to assess the probability of default.

The idea of open banking is similar to that of the electronic health record (EHR) planned in Germany. All essential information and processes relating to personal healthcare (doctor’s visits, medication supply, etc.) are stored in a centralized data wallet. The patients decide which specific information they want to make available to which institution, for example to different specialists or clinics. In Open Banking, it is possible to bring together financial data in a centralized manner to compile a completely individual portfolio of financial services from different providers. The effort to administrate all of the accounts and services is no greater than if all of them were obtained from just one institution.

The traditional “principal bank” gives way to the digital platform economy

This has profound implications for the traditional business model of banks. Until now, both private individuals and companies typically entrusted themselves to a “principal bank” that bundled various financial services — such as checking accounts, lending, or investment advice. This had the practical advantage that the bank had access to all data and no administrative steps had to be taken when adding another service. The bank has a deep insight into its customer’s financial situation and can therefore provide highly individualized advice. Open Banking now has the potential to disrupt this model of a “full service” bank. Data sovereignty now lies with the customer himself and he is given the freedom to choose the best provider for a desired financial service in each case without any additional effort.

As a result, competitive pressure on banks is increasing sharply. According to Porter’s well-known “Five Forces” model, mainly the threat of new providers and the bargaining power of the buyers (i.e. bank customers) would bring more competition and jeopardize previous profits. Moreover, a strategic problem arises from the fact that a “full service” and a “boutique” approach are usually mutually exclusive. That is, specialized providers usually have a better offering in their respective disciplines than generalists. However, generalists benefit by controlling market entry as well as having the ability to offer a wide range from a single source. At the same time, they reduce the effort and expense for the customer in purchasing.

New strategies, old strengths: How established credit institutions should deal with the potential disruption from Open Banking

So how should banks respond? In all likelihood, sticking to what they have done so far is out of the question. After all, the old business model of the “principal bank” was based on the exclusivity of data access in a closed system.

In principle, there are now two ways in which banks can respond to the trend toward digital platforms:

Strategy 1: Establish their unique platform — Here, the bank acts as the operator of a marketplace for financial services on which competitors can also place their offers. An example of this is Deutsche Bank’s “ZinsMarkt”, where fixed-term deposit offers from various banks can be compared and purchased.

Strategy 2: Offer participants on a platform — Banks use marketplaces and platforms as sales channels for special services to acquire new customers. This gives them access to the customer base of other banks via open banking.

Depending on the individual market situation, a bank will opt for strategy 1, strategy 2, or a combination of both strategies. The tendency will be for large banks to offer platforms and small banks to place their specialized offerings on these platforms.

Regardless of the specific design of the strategy, digital marketing is the be-all and end-all for success. Marketplaces and platforms through which financial services are brokered will compete with each other. Here, it is primarily the user experience (UX) that determines how frequently the customer uses the respective platform. If financial service providers participate as providers in a platform, they will have to build up competencies similar to those that successful online retailers already have today. These include, above all, dynamic pricing, optimizing the findability of their product on the various platforms, and working with affiliate networks to pick up as many customers as possible online.

At the end of the day, however, traditional banks still have a decisive advantage: namely, their established brand and the trust of previous customers gathered in it. The saying “everything starts with trust” still holds, especially today. Maintaining and developing brands and the trust placed in them is the most important step for banks to continue to be competitive.

However, banks also face new challenges in the context of digital brand management: they must make their brand a tangible experience in digital channels and platforms as well. The requirement of traditional brand management to keep the brand image consistent at all times is giving way here — in favor of a dynamic presentation of the brand that is precisely tailored to the respective target group or even individual.
['Felix Schönherr']
['Digital Marketing', 'Financial Services', 'Banking Technology', 'Open Banking', 'Banking']