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Banking

WHY OPEN BANKING SHOULD BE EVERY MARKETER’S BEST FRIEND

By Kathryn Wright, CSO, Upside

 

To date, Open Banking has been mainly utilised to help consumers with account switching and account aggregation. Being able to have a birds-eye-view of our spending always helps us realise how much money might be slowly ‘leaking out’ of our pockets. As useful as some of the applications have been so far, they are somewhat passive in nature and there is a bigger opportunity at play with Open Banking.

Personalisation has been the holy grail in sales and marketing for some time now, often twinned with omni-channel propositions. According to a study by Gartner in 2018, the brands who personalised discounts and calls-to-action outperform their competitors in revenue by at least 20%. The demand for a completely personalised customer experience has seen many SaaS offerings come to market, promising a complete understanding of your customer.

Many of these technologies are riddled with challenges though, such as customers flitting between devices, moving from mobile to tablet to laptop, and all at different IP locations – which is where omni-channel solutions are needed, but only work reliably when a customer is ‘logged in’. Cookie tracking, or the lack of it, also impacts what is shown to a customer. There’s nothing worse for a customer than clicking through an email and landing on a website just to see a large pop-over asking them to sign up to emails and offers. That’s clear evidence and an example of personalisation not working!

Another bad example in basic segmentation is generalisation. Businesses often take a few pieces of demographic data and then make wildly inaccurate assumptions about the customer. No retailer or marketer needs more data. They need actionable data with insights which can drive action and engagement.

And this is when Open Banking comes into play. By pairing past spending data through Open Banking, marketing teams can better understand their customer base, and brands can personalise which products and offers are shown and when. The end-result is an all-round better experience for the customer, which in turn means an increase in their brand loyalty.

 

Single Source Of Truth

Businesses currently struggle to know who really is a new customer. It’s kind of tricky when all of the largest discounts are designed to get a new customer on board and marketing teams are heavily focused on new customer acquisition and the cost per new customer.

So who is a new customer? Someone with a new email address that you haven’t seen before? But what about a different delivery address or using PayPal one time and then a card the next time. One customer can potentially register as a ‘new customer’ up to around seven times. Additionally, if I leave my broadband provider this year and come back after a year, am I a repeat or new customer? Brian Dunne from Gift Card Consulting, advisor and investor to Upside puts it well: “There is no such thing as new customers, they’ve all seen you at some point. You are just not getting all their spend most of the time.”

False customer categorisation affects all other business metrics. CAC, CLTV, Repeat purchase rate, customer churn – and these are not trivial metrics, these are metrics upon which huge budgets are committed to or culled. The answer to these questions and challenges in customer personalisation lies in Open Banking. The single source of truth where money can only come out once. Of course, there are credit cards and multiple bank accounts, but the idea is for the customer to have all of these linked.

A new world of data analysis opens up when Open Banking is applied. Retailers can see the frequency of spend, location and average order value. Most brands have this information, but only for themselves. Outside of their walled-garden, it’s more of a mystery. Open Banking allows businesses to benchmark all of these metrics against the rest of their industry, showing what percentage of wallet share they have, which is more meaningful as a metric than an incorrect measure of new customer sign-ups.

For Open Banking to fully show its potential, the conversation with customers needs to change. Brands need to reward repeat purchases and loyalty, instead of offering all of the best discounts to ‘new customers’. Leveraging new fintechs and Open Banking, retailers will be able to know for sure who is a new customer, which will allow them to attract new, win back old and delight their most loyal customers more accurately.

 

Open Banking – Fiction or the Future of Retail? 

Pairing machine learning with Open Banking brings personalisation to a whole new level above simple segmentation and improves the customer experience. Machine learning and AI, combined with Open Banking, are ways to create insights from the masses of data that businesses have. As an example, over time, businesses will be able to recognise when a particular customer looks like they are going to lapse into no longer shopping there, or shop less regularly, and suggest to the brand that at this stage, they offer a special cashback rate. Rather than a ‘spray and pray’ attitude to marketing it means brands can give customers what they need at the right time and ensure their communications are relevant.

Does this sound like a dream? It is not – the technology is ready. Open banking and machine learning can change the way marketing and sales work for any industry. Estimates sit around 95% for the prediction of future revenue which will come from as little as 5% of a brand’s existing customer base. A study by the Center for Generational Kinetics reveals 80% of consumers would visit a store they hadn’t visited before if given a direct cashback. Given statistics like these, retention through delighting and rewarding existing customers, as well as new user acquisition, is imperative.

It’s only the mindset which often holds businesses back. Those retailers, businesses and Open Banking providers who grasp this opportunity and move away from the old discounting culture will rise in the post-Covid-19 world.

 

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Banking

WHY BANKS NEED TO EMBRACE OPEN SOURCE COMMUNITIES

Nikolai Stankau, Director Business Development, EMEA Financial Services at Red Hat, the world’s largest enterprise open source solutions provider.

 

Banks and financial services have long been benefiting from using open source software, which is code that is developed in a decentralised and collaborative way. Open source software is cost-effective, flexible, is developed rapidly, and tends to have more longevity than its proprietary peers because it is developed by communities rather than a single author or company.  According to Red Hat’s own research, 93% of IT leaders in financial services state that enterprise open source is important to their organisation.

Alongside adopting open source products, which many banks already do, there’s opportunity for these organisations to have a greater influence in the development of industry software, by engaging in ‘upstream’ open source community projects.

 

The advantages of engaging in upstream communities

In open source projects, code is developed as a shared process by a community of thinkers and developers anywhere in the world. Collaborating directly with these communities – what’s known as ‘upstream’ participation – can give banks a major competitive advantage on their journey to innovate. From there, software can either be downloaded at no cost, or consumed via a trusted open source vendor that secures and stabilises the software to make it suitable for an enterprise to use. This is also known as the ‘downstream’.

A company that contributes its developers’ time and resources to an open source community gets rewarded with the output of hundreds of developers working on the same code. This leads to a magnification effect, by virtue of the fact you’re expanding your team many times over while also benefiting from a much more diverse pool of talent. The result is that organisations can be captains of the product development process and work together with the community to design features and functionalities that meet their needs and keep up with customer demands.

An added benefit for banks engaging in these communities is it provides a great access point for sourcing new talent, as well as helping to retain existing talent. Developers are attracted to organisations that engage in upstream development because it allows them to be at the forefront of open source innovation and new community-led initiatives.

It’s common for multiple organisations in the industry to come together and collaborate on a project, which can drive significant benefits for the community as a whole. A good example is Fintech Open Source Foundation (FINOS), which is a community set up by banks to promote industry collaboration, by delivering software that addresses common industry challenges and drives faster innovation. The concept had its origins in Symphony, a open sourced messaging and collaboration tool that was adapted and improved upon by developers from other banks, ultimately helping the company to become a major business valued at around $1.4bn.

 

Where to join forces versus compete

Although the benefits of engaging in upstream communities are manifold, some organisations have concerns around intellectual property as well as the productivity of developers contributing to open source projects rather than exclusively working on the bank’s own proprietary software. To this latter point – in reality, the development of new solutions and features built inhouse often requires many months, whereas product ideas shared in a community setting can be executed in much shorter time frames. As the saying goes, many hands make light work.

Regarding the essential consideration of IP and competitiveness: a lot of where banks can differentiate is at the application layer; in the services they develop and offer, rather than at the underlying operating system or middleware foundations – these tend to be common and standard, and are what empowers organizations to get to market as fast as possible. Thus the greatest opportunity for banks lies in platforms such as Linux-based Kubernetes, which is now the industry standard for container orchestration and one of the most important technologies used in the financial services industry. Kubernetes attracts many contributors from diverse organisations all over the world.

Some IT leaders also recognise structural roadblocks: transitioning an organisation to new ways of thinking and operating is a process that isn’t achieved overnight. Not all banks have the legal or tech mechanisms in place to be able to share their code externally, and company policies can prevent their employees from engaging in open source communities. In a heavily regulated industry, it takes time for some organisations to create the necessary changes before they can harness the potential of upstream communities.

 

The future is open

As the software ecosystem expands, and in the face of accelerated digital transformation driven by the ‘new normal’ of the COVID-19 pandemic, banks and financial services have the opportunity to evaluate how they can get involved in open source. There are many ways to do this: they can invest financially in communities, provide technical leadership and resources, or contribute code. With organisations under more pressure than ever to gain a competitive advantage, playing a role in open source communities will help them create better products, speed up time to market and position themselves at the forefront of financial innovation.

 

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Banking

MORE THAN REGULATION – HOW PSD2 WILL BE A KEY DRIVING FORCE FOR AN OPEN BANKING FUTURE

Ralf Ohlhausen, Executive Advisor, at PPRO

 

Whilst initially seen as simply a regulation exercise, the second Payment Service Directive, also known as PSD2, has been a key driving force behind Open Banking, an initiative that presents a hopeful vision for the future of the financial services sector. Thanks to the advancement of technology, the payments industry is currently seeing disruption to legacy banking systems, and a move towards a world of Open Data. With Open Banking, third-party providers (TPPs) can offer customers a wealth of new and automated services beyond their standard bank offerings, such as what products to buy or even advice on who to bank with.

PSD2 has been created to ensure that banks create mechanisms to enable third-party providers (TPPs) to work securely, reliably and rapidly with the bank’s services and data on behalf of and with the consent of their customers. PSD2 requires EU member banks to give authorised, i.e. licensed TPPs, access to customers’ accounts either via Application Programme Interfaces (APIs) or their user interfaces. It also mandates the use of Strong Customer Authentication (SCA), which requires multiple factors of authentication from a customer to initiate electronic payments and grant access to transaction data.

Despite the progress of PSD2, however, there are still challenges to overcome to achieve widespread adoption and to meet Open Banking objectives. So, what are the current roadblocks that European banks and financial services need to overcome to make Open Banking a beneficial reality for all?

 

Ralf Ohlhausen

Delays to API development

A crucial factor standing in the way of the acceleration towards Open Banking has been the delay to API development. These APIs are the technology that TPPs rely on to migrate their services and customer base to remain PSD2 compliant.

One of the contributing factors was that the RTS, which apply to PSD2, left room for too many different interpretations. This ambiguity caused banks to slip behind and delay the creation of their APIs. This delay hindered European TPPs in migrating their services without losing their customer base, particularly outside the UK, where there has been no regulatory extension and where the API framework is the least advanced.

 

A lack of awareness

Levels of awareness of the new regulations and changes to how customers access bank accounts and make online payments are very low among consumers and merchants. This leads to confusion and distrust of the authentication process in advance of the SCA roll-out. Moreover, because the majority of customers don’t know about Open Banking yet, they aren’t aware of the benefits. Without customer awareness and demand it may be very hard for TPPs to generate interest and uptake for their products.

Recently some regulators and banks, such as the Central Bank of Ireland, have made decent efforts to raise awareness of the changes with PSD2 campaigns. But it isn’t reaching the general public. When it does, it’s often because of scaremongering or fear, uncertainty and doubts around data security fuelled by incumbents to protect their business. This also isn’t the right way to approach the issue as it will lead to people being more afraid, rather than aware. Instead, it is the role of payment service providers to educate their customers about Open Banking requests or opportunities, to ensure the public are aware of the changes to payment authentication procedures when SCA comes into play and are empowered to move their data.

TPPs have a real vested interest in getting customers on board with Open Banking. They should build on their customer relationships to grow trust and raise levels of education around the changes. When customers sign up for a new service, TPPs need to tell them explicitly what to expect before they have to do it, plus what explicit consent is required to access their account information in exchange for value-added services.

 

Outweighing the challenges with opportunities

Although the introduction of the PSD2 regulation hasn’t been seamless for the banking and fintech industry, it is set to offer many benefits and advantages for the end-customer, and the financial industry. In fact, the regulation will create an integrated and frictionless European payments system, that will provide the customer with more choice, control and security over their finances than ever before.

One of PSD2’s primary goals is to provide greater protection against fraud for banking customers, who may have previously been open to risk through weak authentication and unregulated data-sharing practices. The new rules insist on enhanced security requirements, including the use of Strong Customer Authentication (SCA) to protect customers while making electronic payments.

Furthermore, TPPs unencumbered by legacy technology have long been able to innovate faster than traditional banks. Now, this regulation will provide regulated and secure access to customer data, allowing them to develop products even more quickly. The new regulation also promotes technology on a European level and encourages fintechs to do what they do best: innovate.

It’s also important to not forget that PSD2 regulation increases market competition allowing customers to choose a wider range of suppliers for their banking and payment services without having to switch their bank for that. The decoupling of banking services from the underlying account infrastructure will make it easier for customers to opt for the banking services that best fit their needs. It also increases the number of financial providers, services and products which customers will be able to choose from.

 

The future of Open Banking

The financial services landscape is becoming a firmly consumer-centric environment. Across the UK and Europe, we’ll continue to see the rollout of technologies that put control in the hands of consumers. Open Banking will be pivotal in its role, opening up new avenues and opportunities for both banks and payment service providers (PSPs).

Thanks to Open Banking, the ability to share data securely in the retail banking sector has led to a sophisticated ecosystem where the customer is in charge of their payments and choice of banking services. Over the next decade, we should expect to see the same level of transformation in our digital services and data sharing, leading to a complete rebalance of services where customers will be able to actively own their data and use it the way they like.

Europe is currently leading the Open Banking race, so the successful implementation of PSD2 and SCA is extremely important to maintain the lead and build a future with Open Finance and Open Data as well.

 

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