There have been a few questions about the future of open banking recently, with some commentators questioning its usefulness. This seems strange to me. Open banking is now mandatory across Europe, while the UK witnessed a 60% increase in active open banking users. Even Apple is getting in on the action. Open banking is here to stay.
The real question to ask is not how useful open banking is, but who will best utilise its undoubted usefulness? The obvious answer is banks. Yet traditional banks still seem woefully unprepared for this – it is reported that over 65% of banks do not even have an open banking strategy.
So again, it looks like it will fall to the challenger banks to innovate. But how do they do that? What does that really mean? Here, I will explain how the opportunities afforded by open banking are going to shape the future of the challenger banks.
Challenger banking will get hyper-personalised
The data opportunities afforded by open banking to challenger banks will be huge for innovation and personalisation.
Think how Google monetises searches and social media monetises relationships. Challenger banks will soon be doing the same thing but with our spending data. By using this data, challenger banks will be able to offer their customers hyper-personalised financial products. Plus, they don’t need to build these from scratch anymore. They can offer them by partnering with Banking-as-a-Service and embedded finance integrators.
These partners aggregate value-add financial services into an ecosystem of products and allow challenger banks to offer them to their customers with one simple integration. Plus, they can use the data to offer these at the point of need. Think short-term extreme sports insurance when you buy a ski pass. Or wealth management services triggered by high value purchases.
For many challenger banks, the end goal will be to aggregate all these services into one place, utilising AISP and PISPs – two key tenets of open banking.
AISPs and PISPs will be vital for challenger banks
AISP stands for Account Information Service Provider. It means a service provider that can access the information in a person’s bank account, but can’t do anything with it. Not in a physical sense anyway. What they can do is analyse it to offer products or financial advice, like the company Apple just bought, Credit Kudos. They use the data real-time data to assess someone’s suitability for a loan.
Or that short-term extreme sports insurance? That will be offered after an AISP sees a customer has bought a ski pass.
The possibilities go far beyond that, however. Just as Google can collate and analyse search data to predict future purchasing needs, challengers will be able to do something similar with spend data.
However, with an AISP, they’ll never be able to move money from one account. But a PISP could. PISP stands for Payment Initiation Service Provider. It means any business that is authorised to connect to a bank account and initiate payments on the customer’s behalf. This can be an online retailer remembering card details. Or a budgeting app being able to pull money from one bank account and dispersing it across other accounts and financial service apps.
Challenger banks can use open banking for better payments
One huge advantage of open banking for challengers is the options it provides with payments. Both in how PISPs allow different products within one bank’s ecosystem to move money around, but also the opening up of payment rails. These allow challengers to save huge amounts of time and money processing domestic and international payments.
This all goes towards possibly the biggest impact open banking will have on challengers: it can help make them profitable.
Challenger banks can finally become profitable
Despite there being around 250 challenger banks in the world, only 5% have broken even. Thanks to the embedded finance ecosystems I mentioned earlier, this is changing. Now challenger banks can turn a profit by making commission from the embedding of other financial services into their own products – or by embedding their products elsewhere.
All of this is only made possible by open banking. That’s why for many challengers, the end game has to be utilising open banking as an aggregator of the services and as a payments instructor.
Embedded finance is expected to be worth $6.3trillion by 2030. This industry will be open banking’s greatest legacy.
Challengers banks need to make sure it is theirs too.
