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The combination of Covid-19 crisis and low interest rates is a strong incentive for banks to think about new sources of revenue and new ways to answer their customers' changing needs. Some (actually most of) incumbents partner with FinTechs to pave the way for new business models, benefit from innovative technologies, and inspire themselves from new ways of working. Others are tempted to build walls to protect their assets from these challengers that have the agility and speed they're trying to recover.
Incumbents, with extended physical networks and limited digital offerings, are losing market shares towards these new challengers. However, besides their size and their massive customer base, there is one asset they still not leverage (or not enough) to invent new services and business models: customer data.
Before digging into tomorrow's opportunities, let's quickly recap what all those barbarisms stand for.
A financial institution integrates services developed by third-parties into its existing banking app to broaden its offering. Only one partner is selected by the financial institution for each type of service which could range from insurance to buying your next movie tickets.
A financial institution can integrate several services of the same type into its banking app to offer a wider choice to its customers.
In France, Lydia is a perfect example of a player trying to implement such a model.
A licensed financial institution enables non-regulated third-parties to integrate banking services into their own products thanks to APIs.
Through the European DSP2 regulation, third-parties can access bank account information and initiate payments provided they have the user's consent.
Thanks to this new regulation, third party providers are now able to offer new services to consumers.
Before the directive, these entities did not have access to banks' data. In order to provide their services, they would "request" bank access codes from users and connect through robots to their bank accounts in order to retrieve the information necessary to perform their services.
In France there are already many applications that offer AISP services, including fintechs such as Linxo, Bankin or Nestor.
Incumbent banks, with their legacy infrastructures and slow innovation cycles, have been struggling to implement and compete around these new business models. However, they have a direct access to customer data, which is the common ground of these new business models.
Unlike FinTech startups that have their business model based on the use of consumer data, a large majority of banks do not sufficiently leverage their data.
Let's take Kreditech example: this German startup raised $200 million in 2015 to build better access to credit through technology, combining non-traditional data sources and machine learning. Using 20,000 different data sources, their algorithm assigns a financial "score" to calculate the ability of users to repay, and therefore provide access to better credit. Instead of focusing only on classic ratios and payment history as traditional banks do, Kreditech seeks to understand the borrower's "underlying personality" from a richer data set. The company looks at information from social networks that is voluntarily shared by a loan applicant. Kreditech is now a market leader in Germany, but weren't traditional banks in a pole position to calculate credit scores for their clients?
One of the challenge of the banking industry is to know how to use the volume of available data from different data providers, including themselves. If they don't manage to use this data, they risk becoming simple data provider, that tech companies will use to build striking user experiences.
Traditional banks could be therefore tempted of locking down their asset to prevent tech players to use it and build better products and services. Nicolas Théry (President of the French Banking Federation) and Ana Botin (President of the European Banking Federation) are therefore positioning themselves against OpenBanking regulation, mentioning the risk of confidential data "vaporisation".
Other banks such as BBVA have chosen to take advantage of their data exposure by exposing their APIs on public portals, to take advantage of the creativity of external developers to enrich their products and services. Not to mention the fact that these APIs can be considered as new financial products, therefore a potential source of additional revenue.
In our opinion banks should definitely capitalize on their data and infrastructure, like BBVA did, but it's not the only differentiating asset they should leverage. As mentioned above, the risk for banks on the data front is to be commoditized and lose the direct relationship with end-customers. In our personal experience, notably regarding investment advice, a human touch is highly sought after by customers. By re-purposing and training part of their workforce, as well as offering independent advice to clients (granted this might be a tricky point given how things work today in the industry), banks could very well compete with technology and data-driven startups. A smart combination of technology and human interactions could allow banks to build long-term relationships with clients and access more and more data on customer habits and preferences, and their evolution over time.
With the DSP2 regulation in Europe, banks lost part of their control on data. Future regulation will decide if it only concerns regular banking accounts, or if savings and investment accounts will also be exposed to challengers, opening doors to OpenFinance. In the meantime, traditional banks can either try to protect themselves, or to fully play the game using data from different providers to develop digital user experiences, combined with the human touch they can provide more than anyone else.
It boils down to a question of point of view: this situation can be seen as an opportunity or as a threat. We prefer seing the glass half-full rather than half-empty, and considering that banks are in a unique position to serve their clients in new and innovative ways.
