Banks have traditionally been wary of opening up their processes to outside parties. With rapid innovation, it’s becoming increasingly difficult to keep up and provide customers the user experience they’ve come to expect. FinTech companies can help, but banks tend to view them more as competitors instead of partners. Author Chris Skinner explores this dynamic in his book “Digital Human: The Fourth Revolution of Humanity Includes Everyone”. He acknowledges Open Banking as the new relationship between FinTech and banks.
Where it all begins
From the emergence of the first humans to the present day, humanity has lived through different phases. According to Skinner, the first was becoming human: we created colonies and groups. The second phase came to be through the invention of money. The industrial revolution marks the third era of mankind.
We are now living in the age of the network; a period where we’ve transformed ourselves into digital beings and strive for digital equality. This is where major change begins for the banking world and almost all other major industries, as physical interactions cease to exist. Everything becomes digital and accessible, anytime and anywhere. Large loyal customer bases protect organizations for the time being but evolution has given rise to a new market space which has become the playground for many FinTech organizations, especially within the banking industry.
These FinTech organizations – think PayPal, Google Pay and more – often fill a void encountered by traditional banks. The latter prefer to keep development in-house. However, with technology moving at blinding speed, financial institutions struggle to keep up. The result is that the FinTech organizations develop new services that partially encroach upon the territory of traditional banks. The knee-jerk reaction to protect that territory is understandable. However, Skinner believes that there is more advantage to be found in cooperation than in both parties being at odds.
In a world where companies strive for the best user experience, he proposes open banking and plug and play services where both FinTech and banks open up their systems to others and truly collaborate. Banks have the core systems and clients while financial organizations have the agility, expertise and the resources to innovate. A peace treaty between the two parties where plug-and-play services are exchanged through APIs is the next logical step according to Skinner. Banks can incorporate new services in areas that they traditionally find difficult to serve because of many constraints such as high costs and risks, or the lack of expertise.
One scenario, two approaches
Onboarding is a crucial process for banks, but frustration can lead to customers dropping out. Bank A and bank B would like to digitize the experience in an attempt to reduce their dropout numbers and provide a seamless onboarding process. Bank A decides to develop the entire portal in-house. The estimated delivery time is within a year. B starts their project at the exact same time but takes the open banking approach. They look for a FinTech that has a ready-to-go solution. The entire project constituting of finding the right partner, performing customizations and integrations takes about six months.
In the end, both banks will have a digital onboarding solution. However, B can offer this six months ahead of A. Having a better user experience than A, it’s entirely possible that a lot of A’s customers will drop out to move to B which offers a better service. This holds especially true for millennials who don’t shy away from switching providers in search of a better service. By choosing in-house development, bank A has lost the competitive advantage. Bank B on the other hand, has responded quickly to the needs of its customers by choosing the plug-and-play services.
Why banks should embrace FinTech
In the age of the internet, people are presented with a plethora of options. Moreover, changing a provider, bank or an insurance company is easy. Consequently, user experience is the battlefield of choice to augment and retain customers. However, with today’s rapid pace of innovation, traditional banks that keep development in-house simply lack the agility and speed to meet client expectations. Especially when compared to brand-new banks which work with a different mindset and utilize cutting-edge tech from the get-go.
By partially opening up their systems to FinTech, banks can embrace agility. The only thing they need to do is pick the tools and software that improve the customer experience. Open banking consequently leads to being more responsive, improved user experience and potentially lower innovation costs.
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