The boy who cried wolf is one of the most time-honoured parables in Western society. In its traditional telling, the shepherd boy and his flock meet an untimely end after crying “wolf” one too many times for the local villagers’ liking.
If you follow Britain’s banking scene you might be forgiven for having a similar reaction to the villagers when you read our latest report Open banking: How to flourish in an uncertain future. We’re crying “wolf” again, only this time we and others don’t just believe it, we can already see it happening.
“There is a new game in town today, open banking, and it promises a long-awaited revolution”. Not Deloitte’s words but those of Philip Aldrick, Economics Editor at The Times, writing on 20th June. He is completely right.
We now have the three critical factors for significant structural change in the banking sector: customer demand and demographic change; technological development; and targeted regulation that forces incumbents to open up and share their data.
Open Banking: How to flourish in an uncertain future is our first map of this emerging landscape. It lays out a future of change, opportunity, but also threat. We are entering an era we have christened “marketplace banking” and it is going to look radically different to what has come before.
Over the next 10 years, the most important question for banking providers to ask will not be what product do I build, what account perks do I offer, or even into which area can I better cross-sell. The most important question will be far more fundamental.
It will be this: do I want a direct customer relationship? And if I do, what role do I want in that relationship?
At face value, that sounds absurd. Banking is one of the most customer-centric industries in modern Britain.
But open banking is going to change this longstanding logic. In the decade ahead, there are four potential business models for incumbent banks to choose from:
- Keep being a full-service provider: Do as you’ve always done, but be sure that you do it better because the competition is going to be even more fierce. And don’t worry too much about lots of third-party integration.
- Turn yourself into a supplier: Build the best products you can, but let someone else distribute them to customers via their own platform or network.
- Become an interface: Do the polar opposite, ditch the products and become the distributor of choice to the customer for other people’s products.
- Or function as a utility: Give up entirely on both the ownership and distribution of products. Instead, operate profitably behind the scenes, providing infrastructure and services to customer-facing outfits.
Every one of these futures is possible and potentially profitable for incumbents under open banking regulations. A combination of routes may well be what they choose.
But here’s the twist. Under open banking, these futures are perfectly possible for everyone else as well. Think about it –what if you could start from a blank sheet of paper, design great products but not have to worry about the marketing and distribution costs?
Or what if you don’t have the risk modelling and financial expertise to build lending, insurance and savings vehicles, but have a stellar record selling products direct to customers?
Open Banking is going to be exactly that. Wide open.
Incumbent banks are starting from a position of incredible strength. They have a magnificent opportunity: to grow, to refine, or to build a sleek model focused purely on what they do best.
But they are not alone. Technology giants, FinTech start-ups, even price comparison websites (what was that about holding a stellar record selling to customers?). All of them already hold many of the tools necessary to be successful in the new world. All of them now have a shot at Britain’s banking customers.
Make no mistake, Open Banking is the real deal. For once, the boy crying “wolf” might just be worth listening to.
As we enter the open banking era, Deloitte will be investigating the different options for the bank of the future over the next six months via a series of articles which will explore topics such as return on equity, product development, regulatory compliance, acquisition of new customers, robotics and cyber security.