Research by UK law firm TLT finds that Open Banking is a game changer that presents existential challenges for every player as the competitive threat from big tech looms large
Open Banking is one of the most radical changes in the recent history of financial services and has already dramatically impacted the investment decisions of financial services companies, according to a new report (Opportunity Knocks) published by UK law firm TLT.
The new research – based on survey responses from 130 senior decision makers representing a diverse range of financial companies across the UK – reports that a vast majority (84%) are investing in Open Banking products and services. 44% are also considering launching new products or services to improve the Open Banking experience for customers. A significant majority (77%) say Open Banking and PSD2 is one of the most radical changes in recent history for financial services, with 35% saying they strongly agree.
However, more than half (53%) of respondents say the industry has found it difficult to adapt to these new regulations. Despite high levels of enthusiasm and investment, many financial services firms – both banks and non-banks such as fintechs and payment services providers – are struggling to formulate and implement comprehensive strategies to deal with Open Banking. Two thirds (62%) say they do not have a comprehensive strategy in place and 13% have no investment strategy at all.
Looming competitive threats, including from big tech
Financial services companies are also clearly worried about competitive threats in the wake of the implementation of Open Banking, the research finds. In particular, banks see ‘big tech’ companies – such as Google, Amazon, Facebook and Apple – as the biggest perceived competitive threat in the Open Banking space (63%). 45% of non-banks agree. Other threats come from within the existing ecosystem of banks, challengers and fintechs.
Two thirds (66%) of respondents believe the market will ultimately become more consolidated with larger banks and corporates buying fintech businesses and smaller banks to keep pace with the level of innovation and speed of product development required to make a success of Open Banking.
Even amidst myriad challenges and competitive threats, respondents suggest Open Banking is on track to achieve the aspirations of the industry's regulators. More than two-thirds say that Open Banking, once fully implemented, will bring greater innovation to the industry (70%) and more choice for customers (65%), while half agree it will enable greater customer control of banking data and services (50%) and easier industry collaboration (48%). Overall, a large majority (72%) believe that Open Banking has been a positive step forward for the industry.
David Gardner, partner in the financial services team at TLT, commented:
"Our research reveals the true scale of disruption that financial services companies are grappling with, alongside the opportunities that these far-reaching changes have created – provided that companies can keep up with the pace of change. It is encouraging to see that the vast majority of respondents hold Open Banking up as a positive initiative and – despite the challenges with defining a clear Open Banking strategy – the industry is not standing still.
"Innovation is happening all the time as more participants define their strategy and find new ways to collaborate,, which is creating a huge sense of anticipation in the market. The race is on for every participant to identify their position and launch a "killer app" or product to capture that opportunity. Open Banking will open up the market to new participants and continue to drive disruption for all. This could result in a more polarised market, split between niche offerings and financial services platforms, and between those who embrace agile transformation and those that are more reactive and slower to adapt.
"There are considerable challenges for existing players and new entrants – from complying with regulatory technical standards to identifying market opportunities and potential partnerships and making sure that customer data is adequately protected. Customer confidence and trust must be a major area of focus in order to realise the potential benefits that Open Banking can deliver. Would-be Open Banking champions need to consider their position, their partners and their strategy carefully, but make sure they can act and react quickly enough to take full advantage, before someone else does."