The Future of Open Banking

I recently interviewed Ryan Garner, a leading thinker and speaker on the data economy.  Ryan is Innovation & Insight Lead at 11FS, who describe themselves as a challenger consultancy.  11FS help to build and launch new digital banks and banking products, as well as delivering benchmarking, research and consultancy for banks, insurers, governments, regulators and start-ups around the world.  Ryan has recently joined 11FS from CitizenMe, a software company that helps consumers leverage value from their personal data. I talked to Ryan about the way in which Open Banking has the potential for fundamentally reshaping the consumer relationship with financial services.

So, Ryan, things are rapidly changing in the banking sector.  How do you see the current challenges and opportunities?

I think the finance sector right now is like the mobile sector 10 years ago.  In 2007, the iPhone ushered in the smartphone era and in 2008 the App Store introduced a load of amazing apps. As smartphones matured the mobile operators were disintermediated by Over The Top (OTT) services. As much as mobile networks tried avoiding being a “dumb pipe”, they couldn’t innovate in the right way. Their relationships with their customer base were just well… eroded. People became quickly attached to a type of smartphone they had, you know iPhone or Android, and the mobile services they had, like Facebook and WhatsApp.

Now thinking about the incumbent banks right now, they do a very good job at building the infrastructure for banking to happen but there’s often nothing particularly helpful about any of their products.  They don’t do anything particularly exciting.  They don’t join the dots in the user experience that make people go ‘Wow. Right!’. Banks sell products.  But people don’t want products, people don’t want a mortgage, people don’t want a bank account, people don’t want a savings account.  People want to be better with money, people want to get a home, they want to send money and go on a holiday.  People don’t exist in products but that’s currently what we are sold in the marketplace.

The challenge for incumbent banks is the same as mobile operators 10 years ago, how do they avoid being just an infrastructural necessity? And how do they avoid being disintermediated by something way more sexy?

Do you sense banks are facing their own ‘burning platform’?

I think that what’s going to happen over the course of 2018 is we’re going to see a breakthrough from a challenger bank or banks… plural.  We’re going to see the use of data, through open banking, but also through stitching together APIs that create more appealing end-to-end experiences for customers. As a consequence, we’re going to see people engage with their money in a way we have never seen before.  We will still be using the underlying architecture of banking but customers will start having a very different relationship with them.  So just like with phones, you’re still using the 3G/4G network, still using the text messaging, still using the contact book but all that stuff is packaged up into something more exciting and useful like social networks and messaging apps.  It will be the same in the financial world, all the core products will still be there but will start helping people get more stuff done. Maybe that’s an interesting outcome for incumbent banks, providing the core products and infrastructure for others to build on.  But over the course of the year, we’re going to see really strong value propositions sitting over the top of these core banking products, in a way that help people be better with money.

Have you got examples of what these challenger banks are and their plans?

The big ones would include Monzo, Starling Bank and Revolut; they’re really focussing on helping people to achieve different things in their life.  So Revolut call themselves a ‘neobank’ and their big thing right now is helping people buy crypto-currency.  This might look like a bubble right now [Interview in December 2017], but it certainly resonates with people, especially young people, who are trying to maximise the return on their money.  Maybe the combination of crypto trading and easy to use challenger bank apps introduces wealth management services to a whole new generation of consumers.

Monzo has a broader appeal, helping people manage their day to day finances and keep their spending under control. They are also building a new backend freeing them from the legacy systems slowing the down the incumbents. So this is solving simple things like, a big pet hate of mine, not updating my balance once I’ve paid for something until a couple of days after the purchase.  And then, all of a sudden, your balance goes down, and I am thinking ‘Oh what, where’s that gone?’ With challenger banks, like Monzo, that doesn’t happen everything is instant.  You can see where your money has been spent, you can start categorising where you’re spending your money, you can create savings pots for different things.  And you can pay and transfer money much, much more easily.

And what these new challenger banks are doing are looking at the really important jobs people have in their lives and providing solutions for them.  They’re not selling them products, they’re creating a platform that delivers end-to-end experiences.  They might give them a current account or a credit card to facilitate the getting there but the focus is different.

For example, people expect to be able to go on holiday, but they really struggle saving towards it.  Now, that’s really interesting, because how do you help people achieve something they expect to be able to do whilst not necessarily having the means to do it?  None of the products in the marketplace are going to help people do that right now.  But with some creative thinking, some open data, open banking data and stitching together APIs from other 3rd party service providers, we’re going to see services helping people do exactly that.  And this will really resonate way, way, more than anything that’s currently on the market.

So what are you personally looking forward to?

One of the things I’m quite excited about is just being able to get an overview of my finances.  So, I’ve got a current account with bank A, I’ve got a mortgage with bank B, I’ve got a credit card with bank C and I’ve got three different apps on my phone.  I’d be lucky if I even had an app for my mortgage one, you know does, that even exist?  I’ve got loads of different pensions all over the place from various companies I’ve worked at. How can anyone make sense of what my current financial position is? How do I know how I’m doing? Will I be able to retire? Am I ever going to pay off my mortgage? The answer is, I can’t answer these questions right now.  What open banking will eventually do is enable a service where I can connect up all the different financial products I have. This service can tell me “okay, you know this is your current financial position, you’re probably spending a little too much on coffee and if you put an extra £100 a month away, that will make massively difference in your pension pot when you retire.

If you see a very good financial advisor, they’ll take a look at the whole lot in this way.  But those financial advisors can be expensive and time consuming to work with. And I think for anyone who has some financial habits they want to change or not spotting the bits of money they spend here and there, then this is going to be incredibly helpful, particularly for people who don’t have much money. FinTech innovation, open banking, and the API economy will democratise this, making it available to everybody.

What other use cases do you see for open banking?

Well, open banking also provides a lot of product information.  With access to live feeds of product information, I can see whether I’m getting the best offer in the marketplace for the financial products that I have. If I’m on a bad deal I have the ability to switch easily between different products and services.  So for example, I’ve got a savings account for my kids.  I have no idea whether I have the best rate.  I set it up a couple of years ago when my kids were young and I’ve not looked at it since.  What intelligent services using open banking will do is it will say okay, this is the account you’ve got at the minute, this is the rate you’ve got, these are the benefits you’ve got of having that account, and this is what else is in the marketplace.  There’s likely to be a better offering because I’ve not looked at the market for two or three years – that’s how banks make money, it’s how energy companies make money.  You buy some energy, a tariff and for the first year it’s a good deal and then after your first year, it’s not such a good deal.  The transparency of live, up-to-date product information will empower customers to make the right decisions about the right products they should be used to maximise the return on their money.

Another important use case would be looking at spending patterns and be able to see that I spend £150 a month with British Gas.  Now, the energy market is going through a similar process to the banking market albeit a little bit behind.  But that data, alongside product information, is opening up in a similar kind of way.  Which means we’ll be able to then make switching happen very easily and quickly.  No one really wants to spend money on energy and so if people have got the opportunity for a service to help them switch and save an extra £200… then that’s extra money for their holiday.

My final key use case would be setting up little automation rules. ‘Sweeping the change’ is the classic example of automating the rounding up of payments and passively saving the change.  I think an American bank first introduced this, I think it’s a lovely idea to make saving for stuff easier.  There’s a company called Dash, that plugs into the Monzo platform and sweeps the change and converts it into bitcoin. If you had been doing that for the past six months, you might have made a tidy sum of money.  These little automation rules will make a big difference to people’s lives; helping them save, helping them move money, helping them make their money work for them without having to put too much effort into things

Okay, so you make a very compelling case.  But why will this not end up like fitness devices which have a very variable track record in terms of their long-term adoption?

I think that’s a very good challenge.  But I think finance plays a much more central role in everybody’s life than fitness apps do.  Maybe that’s the travesty of the modern age – our health should be more central to our lives than money.  But I think the reality of the matter is different.  Money enables a lot of things that we do in our lives, everything from saving for retirement, saving for your kids’ future, buying a house, just getting by, paying bills, etc, etc.  All these things are connected to how we live our lives.  We live in an extremely financialised world where if we didn’t think about our money and manage our money correctly, we would get into serious trouble.

Do you think there will be a sudden burst of activity with people switching banks?

I don’t necessarily think that a lot of people will switch away from their existing banking propositions, especially not this year, maybe not even next year. In the short term I think they will be additive to the market, i.e. I bank with HSBC but I’ve also got a Monzo account. What it will do is allow new challenger brands, as well as new value propositions from incumbent banks, start to change the customer experience.  Because as soon as I’ve signed up to this new service that allows me to get a single view of my finances, which is then helping me move money around and save money in a much more efficient way, why do I need a relationship with my bank?  Disintermediation is slow but when it hits it can be brutal. Remember Blackberry, they launched their first email-enabled device in 1999. By 2009 their share of new handset sales had peaked and by 2012 they had virtually disappeared.

But maybe you will stay because you trust your bank in a way that you may not trust a new entrant to the market?

Maybe but trust in institutions is at all-time low. If you buy into the view of Rachel Botsman digital technology is now distributing trust out into lots of different pockets of life. I mean who’d have thought that we’d get into a stranger’s car to get a lift or stay in someone’s house that we’ve never met before.  We have gone from a localised trust, where we lived in small communities and your reputation was your currency because you can’t get on in that community without it.  We then started to rely on big brands and big institutions to be the basis of how we trust and mitigate risk in our lives.  Now, this is being redistributed back out to individuals again. Technology has facilitated this distribution of trust back out to individuals again.  I think trust has evolved, and we are making new and bigger trust leaps.  Think of when you first started using the internet and put your credit card details in; it was a scary moment, right.  Now we are getting into cars with strangers.  In this context, getting a bank account with a new brand is not going to be such a massive leap anymore.  If you’ve got a year’s worth of experience with someone helping you manage your money across multiple accounts and then they offer you a bank account, a credit card or a savings account, why wouldn’t you take it up?

Do you consider that trust is working very differently in a digital world?

We went from a world where the bank satisfied all our banking needs.  We needed to trust them for the whole thing.  In a world where different parties are fulfilling different roles, trust is fragmented out.  Open banking is just one part of the trust.  No one is going to care about open banking as a ‘thing’.  But people will care about the service they’re being given and the outcomes they enable. With multiple services being connected together to deliver an end-to-end experience trust will be spread between the two or three different providers of that connected experience.  That’s why I think that the traditional banks aren’t going anywhere soon.  They’re still going to be providing a lot of these core products, it’s just that the interface that we have with our money is likely to change. Positive experiences drive trust so it becomes less of a trust leap to pay all my salary and pay all my bills out of this brand new bank.

Any final thoughts?

I think what’s happening in FinTech generally is a great example of the innovation opportunities available when digital technology and open data intersect. What’s going to be interesting is to see how customers use these new services and which FinTech providers find product-market fit. What I’m sure of is the things that we’ve talked about today are going to look very different in a couple of years’ time.