Forrester Research is predicting that 2022 will be the year that open banking and open finance take off, even in the United States, which has lagged places like the European Union and the United Kingdom, where open banking was mandated. What makes this forecast, taken from the firm’s “Predictions 2022: Banking” report, especially interesting is not the what or the how, but the why.
The firm sees open finance being driven by consumer demand, not by technology, according to Aurélie L’Hostis, Principal Analyst. While many things are technically possible, consumers in America, and, indeed, worldwide, are ready. They won’t clamor for “open” anything, but what they want will be plain.
“Customers are asking for better ways to manage their finances, and that’s the same everywhere in the world,” says L’Hostis in an interview with The Financial Brand. “Every consumer is looking for a better way, a cheaper way, a more convenient way to manage their money. Open banking and finance are about providing the affordable and useful services and products they need.”
While many traditional financial institutions have fixated on boundaries and barriers, consumers have grown comfortable with alternative providers. L’Hostis believes demand has grown to the point where most financial institutions “if they wish to survive, are going to have to join the race.”
For those players, she continues, the decision will not be if to compete in open finance, but what approach or approaches to take.
Increasingly, says L’Hostis, banks and credit unions will need to decide how they are going to participate in open financial services and then build the relevant ecosystem, or devise their best way of connecting to one, to enable them to get into the race. She says that motivations will vary.
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Some institutions will be defensive, seeing open banking as a threat and entering into it chiefly because they have no choice. Others will look at the increased connectivity it brings across institutions and subsets of financial services as an exciting opportunity.
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“The future of banking is very much about ‘openness’ and evolving business models to fit that future,” L’Hostis adds. She believes traditional institutions will make a significant shift in 2022 away from developing products and services to only be used under their own roofs. Instead, they will increasingly be conceiving and designing with an eye towards their entries playing well in an open finance sphere.
The idea is that they will work as well with products and services offered by other financial institutions, fintechs and other participants in a wider mix than ever. Along the way, part of the design challenge will be figuring out how the new offerings will generate revenue for the traditional institutions, according to L’Hostis.
Institutions will be choosing how they plan to fit into open finance, which may involve concentrating on one aspect or pursuing multiple strategies. Here are three approaches Forrester envisions:
Embedded banking services, supplied through specific functions, such as credit, or more broadly, through banking as a service relationships, is a growing area of interest in the U.S. Some specialized versions of this have been around for many years — after all, most retail store cards today are provided by banks — while others are on the leading edge.
Marketplaces, where a bank may be one participant among many or may be running the marketplace, represent a different approach. This is not unlike the idea of running a supermarket. What dinner doesn’t require ingredients from multiple aisles? And some feature competitive store brands as well as name brands. Starling Bank‘s founder Anne Boden has been pushing the marketplace concept in her writings and implemented it in the bank’s Personal Financial Marketplace. The venture has nine participants so far.
Apps are a key way of entering open finance. At the top of the app food chain is the so-called “super app.” Among the models already playing on the world’s financial stage are Alipay and WeChat, notes the Forrester report.
The firm points out that currently there are fewer than 50 such super apps worldwide that are led by a banking entity.
“Large banks must leverage open finance preparation and their scale to curate their own domestic versions, while midsize and smaller ones must design services for incorporation into others’ platforms.”
— Forrester report, “Predictions 2022: Banking”
The observation highlighted above from the report addresses concerns that talk of open finance and open banking leaves all but the largest banks in the dust. L’Hostis insists that no institution can afford to not consider these issues and the appropriate response.
“If you want to add value for your customers and for your community,” says L’Hostis, “it’s really the only way to go.”
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L’Hostis believes the bar is going to be raised for financial services providers of all types. She thinks as open finance enables more consumers to obtain the best of the best through marketplaces and other approaches — while enjoying connectivity among different providers — that they will increasingly expect more from everybody.
“Customer expectations are going to be higher because they will increasingly be fully empowered,” says L’Hostis. Consumers have long expected their financial institutions to give them services on any channel they choose. Even as mobile apps grow in popularity, all generations still want to be able to go to branches, for example.
But L’Hostis says the expectations will go beyond channels.
“They’ll want digital tools on their phones, but they will also want to increasingly receive personalized financial solutions,” says L’Hostis. “Financial institutions will need to have a very holistic understanding of their customers to be able to do that. They will have to focus on the values they actually deliver to consumers every time people interact with their finances.”
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Helping consumers through open finance will mean much more than simply providing easier access to other providers’ offerings. Successful banks and credit unions will help guide their customers and members to good third-party solutions.
A key aspect of open finance will be providing that introduction and handoff on a timely basis.
L’Hostis says the challenge comes down to finding ways to point people “to individualized products and services at the point of need, at the point when people need them in their customer journeys.”
“Increasingly, banking is not necessarily something you’re going to do with your bank,” L’Hostis adds. Embedded banking represents an aspect of that, where the functionality, provided by a financial institution or fintech, is deemphasized or completely invisible.
Meeting people’s financial needs will potentially come “at the expense of brand visibility,” says L’Hostis.
But especially important: Many institutions will have to shed the focus on sales and customer acquisition that has become commonplace in the industry. Getting people in the door, literally or digitally, won’t be as important as the success of the relationship through the customer lifecycle, according to L’Hostis.
Déjà Vu in Finance?
In a sense, open banking harks back to the pre-digital days when a community bank’s staff provided entrée and referrals to all sorts of local services for customers. Now the ‘community’ is bigger, deeper and digital.
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Providing More Inclusive Service Grows More Important
L’Hostis says she has begun to focus a part of her research time on how financial companies approach underserved consumer segments. She says she has noted an increasing focus by disruptors on these consumers. This trend picked up during the early days of the pandemic, in an effort to help people manage their money better. L’Hostis believes that as institutions continue to learn from that period, they will be smart to reassess how they address financial inclusion.
“Many organizations have the wrong focus and fail to recognize the business benefits of inclusive finance,” L’Hostis says. “I think many show a myopic understanding of it.”
Inclusive finance is not just about banking the unbanked and not about charity, L’Hostis insists. Globally, she says, more regulators seem to be asking for action on this front. The tide seems to be turning that way in Washington, as well, though specifics are still pending. She believes that technology will increasingly make possible access to banking and other financial services that were formerly difficult to offer.
“Often institutions are under-invested in the people, processes and technologies that are required to drive inclusive finance,” says L’Hostis. “But I think there are opportunities here.”
Ultimately, she says, it comes down to improving the focus on consumer needs, not just what the bank itself provides, and helping them with faster, better and cheaper services. Open banking may be part of the solution.