Alex Brazier is the Executive Director for Financial Stability Strategy and Risk and a member of the Financial Policy Committee (FPC) at the Bank of England. He’s not a techno-utopian fintech hype merchant like me, he’s an economist. Earlier this year, he gave a speech talking about open banking in which he said that “by allowing customers to connect to a range of banks and service providers through a single point, Open Banking could open to the door to the ‘unbundling’ of banking”.
At Consult Hyperion we don’t think there’s any “could” about it but, as my colleague Tim Richards wrote earlier this year, some banks will thrive in the world of open banking while will simply become utilities, highly regulated pools of capital. He goes on to say that while both models are acceptable - which is why some of the work we are doing helping clients to determine their open banking strategies is so interesting - as a bank surely it would be better to choose your strategy rather than being forced into a model you may not be well suited for.
For a consumer perspective, it could be argued that the unbundling is a good thing. Bringing together bundles of services from different providers is actually quite an appealing vision of the banking front-end of the future. The problem, from the banks’ perspective, is that that the front-end neither needs to be a bank nor wants to be a bank. Quite the reverse, in fact. The people who are good at front-ends (eg, Amazon) are perfectly happy to take control of the interface with the consumer and, as per Tim’s point, leave the banks as heavily regulated, low margin pipes sitting out of sight as the equivalent of utility companies but for money rather than gas, water or electricity.
How can banks compete with this? Well, they can become technology companies. Now, I know that the “meme” that banks are, essentially, a special kind of technology company (special because they are granted special privileges that other companies do not have, such as the ability to create money) is not mainstream, it deserves attention. It means, apart from anything else, that bank boards will need to include switched-on technologists and take a strategic view of technology, as Christian Edelmann and Patrick Hunt said in the Harvard Business Review: "Technology specialists will play a greater role in allocating investments, working alongside senior management from a more traditional background".
This is a point that was well made by my old friend Brett King when I had my “fireside chat” with him at the Consult Hyperion Unconference in Manhattan last month. We talked about his new book “Bank 4.0”, in which he says that the foundation of banking in the coming era is “being great at technology” and one or two other things. If you’d like to learn more, you can listen to Brett and I discussing the book in the latest Tomorrow’s Transactions podcast available here on our web site or via our iTunes feed.
In the book Brett quotes Francisco Gonzalez, the Executive Chairman of BBVA, as saying that sooner or later it will be the internet giants (including Amazon) who will be his main rivals rather than other banks. This is why BBVA is reinventing its processes to being new products and services to the markets. But can banks really become technology companies? Many observers think not. Instead they posit a future for banks as financial factories who have to accept the new order and partner with Amazon and others. Lenders would manufacture financial products, and tech giants would serve as distribution and servicing channels. In other words, Amazon’s future is to do with financial products what Amazon already does with other products.
What’s more, as that Bloomberg article notes, because Amazon wouldn’t have to pay to lure customers -- it already has millions of them -- it could afford to set up digital accounts without “all the nuisance fees and relatively high minimum balances” that lenders impose. The Wall Street Journal says similarly that banks "face pressure to build relationships with big online platforms, which reach billions of users and drive a growing share of commerce” when reporting on Facebook’s request to banks to share detailed financial information about their customers, including transactions and balances, "as part of an effort to offer new services to users".
As Tim and I have mentioned before, in Europe the banks won’t have any choice about this. The CMA Remedies in the UK (since January) and PSD2 implementation throughout Europe from next year means that it will be the consumers who will have the choice whether to give the internet giants access to their accounts, not the banks’. This is why it is so important for banks, payment companies and others in the space to develop business strategies for the open banking world - now.
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