How Smaller Financial Services Firms Can Win With Open-Banking Disruption

Rob Hetherington

Inspired by the European Union’s second Payment Services Directive (PSD2), the open-banking business model is gaining an overwhelming amount of attention among the financial services community internationally. For eager enthusiasts, it’s an opportunity to make banks and insurers more competitive, regardless of size, because customers can freely pick those that serve them best. Industry skeptics express concerns over the security of previously private data.

If findings from a McKinsey and Company survey are correct, open banking can become one of the most significant game changers for small and midsize financial services companies. While data aggregation and account-to-account transactions are setting the stage for faster and improved settlement, clearing, and payments, regional banks can go a step further to capture new revenue and extend market share with innovative, data-intensive offerings.

This may all sound like good news, but there’s also a question that is nagging many financial services executives behind the scenes: how can their growing businesses keep pace with an onslaught of competitive disruption by differentiating themselves through offering the best products in the market?

Prosperous open-banking models call for strategic digital innovation

Even though only nine of Europe’s largest banks are required to comply with PSD2, many small and midsize financial services – as well as their much-larger rivals – are warming to the idea of opening up their customers’ transactional data. Banks and insurers like the idea of using this information to propose more compelling lending options, credit lines, and investment services to their customers. But more importantly, their customers will have the power to dictate how their information is exchanged with other institutions to find the best way to manage their financial growth.

According to Oxford Economics study “The Transformation Imperative for Small and Midsize Financial Services Firms,” sponsored by SAP, small and midsize banks and insurers seem to be on the right digital path towards open banking. Surveyed participants indicated that they are heavily investing in efficient, scalable, and connected technology that can help keep their data and systems more secure and support innovation. Most firms reported security, mobile, Big Data, and the cloud as fundamental elements of their digital strategy for evolving everything from internal operations to customer interactions. And while these technologies will likely comprise a large share of the IT budget by 2019, so too will next-generation solutions based on machine learning and distributed ledger (such as blockchain) technologies.

technologies financial services are investing in most heavily today and in two years

Source:The Transformation Imperative for Small and Midsize Financial Services Firms,” Oxford Economics, sponsored by SAP, 2017.

These investments are certainly the essential first steps towards driving value from open banking for the customers as well as the business. But what matters most is how these digital technologies are used as the foundational building blocks that form the business model over the long term. Here’s a glimpse into how small and midsize financial services can create the foundation they need for open banking. 

Building block #1: Cybersecurity

Small and midsize financial services will undoubtedly expose their data and systems to increased cyber risk. Just the number of mechanisms alone in the open-banking process can give hackers a fissure – no matter how small – to attack. But take note: this is likely only if there is an opportunity. The imperative is to stay a step ahead of hackers by constantly updating security capabilities, testing exchanges, and pinpointing and addressing potential weaknesses in the system. 

Building block #2: Mobile solutions

No matter how secure the process and IT network, the process still needs to be open and accessible to customers. Mobile technology is enabling customers to engage in self-directed processes across an increasing number of financial services products and services in a safe, secure environment. For customers to exchange and transmit data freely, they need to be confident that their information will not be misused and stolen.

Building block #3: Big Data analytics

With an increase of customer transactions, interactions, and data exchanges comes a huge wave of structured (transactional) and unstructured (social media) data that is only adding to an already massive volume of information. But now the game has changed as small and midsize banks and insurers have a front-row view into their customers – from buying habits, financial priorities, and credit history to personal preferences and future needs.

Adoption of a range of analytics, including behavioral and predictive analytics tools, to evaluate those multiple customer dimensions is becoming incredibly important as competitors rush to position themselves as the “one partner” that can deliver precisely what the customer wants, anytime and anywhere. But like mobile technology, the environment must be secure enough to make sure the data is not corrupted or ransomed by bad actors internally and externally.

Building block #4: Cloud 

While this deployment methodology may be old news for most small and midsize financial services, it is possibly more critical than ever before. Reliance on a reputable and scalable third-party cloud services provider can help ensure the entire digital landscape takes advantage of the latest security requirements. Not only will data and systems be protected from people with bad intentions, but it gives customers the confidence they need to keep using the products and services they are offered with loyalty and openness.

Wrapping all things digital with security reduces barriers to open access

The beauty of open banking is the opportunity to reduce the arms-length barriers between small and midsize financial services and their customers. But to really succeed with this highly disruptive trend, banks and insurers need to mature their digital capabilities and embed them in every aspect of the internal operation and customer-facing experience – and all of them must be wrapped with strong security.

Understand how your financial services business can gain a considerable advantage in disruptive business models such as open banking. Read the Oxford Economics executive study “The Transformation Imperative for Small and Midsize Financial Services Firms,” sponsored by SAP.


Rob Hetherington

About Rob Hetherington

Rob Hetherington is the Global General Manager of Financial Services Industries at SAP. He is an experienced, broad-based, general manager and consulting leader who has worked predominantly with major banks and other significant financial insitutions globally on critical strategic initiatives and IT-enabled transformation programmes.