Consumers benefit from fintech boom—how can banks profit?

Data and analytics are starting to transform retail banking as standardized application programming interfaces (APIs) and data-enabled product comparisons become mainstream. The impact on banks that fail to react could be huge, but customers will benefit from a range of new services that could transform the way they manage—and even think about—their money. This article looks at how the transformation is progressing.

The first financial technology (fintech) boom, from which few start-ups other than PayPal survived, is now being succeeded by another wave of players, many of which are awash with investment. Entrepreneurs are taking advantage of access to funding from banks, angel investors, and the private-equity markets. Start-ups now focus on an array of specialties covering everything from blockchain technologies to online investing, to the use of social media sentiment data feeds for trading.¹ There’s one innovation that hints at lucrative potential for would-be fintech entrepreneurs: the implementation of standardized API frameworks for retail banking. In the United Kingdom, those frameworks are driven by the demands of the Competition and Markets Authority. Similarly, the forthcoming European Payment Services Directive 2 is providing the impetus for new and open banking API standards throughout the European Union. Both have the potential to bring positive change to millions of bank account holders.This article examines how such changes might occur as the movement toward standardized, open APIs gains momentum (figure 1).

An explosion in third-party applications: The imaginations and ingenuity of app developers are limited only by the devices that host apps and by the data available to feed their creations. In a world in which customers have simultaneous access to all of their financial transaction data from all of their banking products via standardized APIs, app developers will have detailed and accurate data about:

• The amounts, types, locations, and times of spending
• People’s physical movements, which can indicate exactly where money is actually spent (e.g., specific shops) and where it isn’t
• The cost of banking products (e.g., account costs) across the wider market
• User-entered data regarding budget keeping and spending limits

What this means from a functionality perspective remains to be seen, but it seems inevitable that customers will have an unrivaled view of their real-time financial positions across their various bank accounts, credit cards, and mortgages. Customers are also likely to use functionality to understand, visualize, and therefore adjust their spending in ways never previously available. For example, it’s possible some apps could offer customized alerts: Say you entered a coffee shop, and an app could notify you that you’re about to reach your monthly limit on coffee expenditures. Or perhaps you’re about to use your overdraft facility, and an app tells you to transfer some money into your checking account from your savings because it would provide a cheaper option. APIs such as the Open Bank Project (www.openbankproject.com) are already addressing some of those possibilities.

Price comparison: Part of the reason for customer inertia when it comes to checking account switching is the problem of comparing checking accounts. Bank overdraft charges are particularly complex, and customers cannot easily understand what they would have paid with an alternative provider. Giving customers access to machine-readable files of their transaction data would facilitate straightforward comparisons and enable customers to make better-informed choices about where they can get best value. Reconstructing bank account transaction data under alternative terms and conditions is complicated, and for comparisons to be meaningful, it is essential that standard rules be applied so as to avoid multiple comparison engines’ reaching various different conclusions.

Impact on the market: The impact on existing banks is hard to predict. But it’s very likely that some or all of the following will occur.

• The end of overdrafts. Overdrafts are expensive (20% APR being typical for a personal checking account in the United Kingdom).² APIs that provide account balance information, apps that alert users to low or $0 balances, and specialist lenders that provide immediate, automated top-ups of funds—at competitive rates—could make overdrafts redundant. Such a system would significantly change consumer banking economics related to personal checking accounts, which rely heavily on overdrafts for their profitability.³
• The growth of robo-advice. Apps with access to all of a customer’s finances can run algorithms and test scenarios that help customers optimize their use of financial products and alert them to options from other providers. Over time, that type of advice would drive down margins in retail banks as consumers become increasingly savvy about their financial behavior.
• Personal analytics. The data that consumers would have at their fingertips would give them visibility into their finances like never before. The consequences might vary, but it’s likely that for some consumers, expenditures on casual purchases such as coffee, water, and meals could drop significantly when they see their annual totals. Customers would also be able to share expenditure data anonymously (or not) and see how they compare with others.

The list of examples of industries that have been disrupted by data is growing, and consumers armed with data may soon add banking to the list.

At a minimum, banks must:

• Embrace the challenge by engaging customers through anticipation of the insights that third-party apps and open APIs could provide and then delivering them to customers proactively.
• Put the customer at the center because any one individual’s financial makeup is usually complex, so it makes sense for banks to try to manage the full financial position coherently. If banks are to retain customer relationships, then they have to provide such service.
• Understand the impact of comparison on the bank’s current account book because once standardized, open APIs emerge, apps that facilitate comparison could be adopted rapidly. Banks have to know what the apps will tell their customers, and therefore how customers might react.
• Recognize the impact this could have on the bank’s liquidity now that customers can move their money between accounts at great speed. Therefore, the stability of deposits as sources of funding may have to be reconsidered.

Preparation is key. This second wave of transaction-data-enabled fintech innovation will bring challenges as well as opportunities for banks, but if banks evaluate the potential changes, then retaining—and collaborating with—their newly empowered customers could lead to enhanced long-term relationships.