Keeping up with innovation and disruptive competitors is a strategic necessity for all financial service providers. Open banking should be more than just a buzzword for Swiss financial institutions. While regulation in Europe is forcing banks to innovate and open their systems towards third parties, banks in Switzerland appear to fear the impact on their business models. Open banking can though provide banks with an opportunity to differentiate themselves by improving current services and developing new and innovative products.
With open banking, application programming interfaces (APIs) enable financial institutions to exchange data from their systems with other participants of an ecosystem. This possibility for banks to open up and share their client data creates new opportunities for the entire banking community.
In Switzerland, historically a conservative financial centre, the adoption of open banking has so far been very limited. Swiss banks have taken a rather traditional and reactive approach, waiting for open banking initiatives to be launched, successfully developed and matured in markets that are more accustomed to innovation, like the EU or USA.
Under these circumstances, it’s worth asking a number of questions about open banking:
- What are the main driving forces behind the adoption of open banking? And the sources of resistance to its adoption?
- Is open banking a hype, or is it a foundation for tangible business opportunities?
- Why are financial institutions hesitating in implementing open banking initiatives?
Driving forces: Balancing innovation versus regulation
In Europe, banks that offer payment services in the EU are required to open up their systems under the recently introduced PSD2 regulation. On client request, client account data can be shared with authorised third party providers. This enables new players (mainly challenger banks and fintechs) to start up operations in the payments value chain.
The overall trend in Switzerland has been to oppose the introduction of similar regulations that accelerate open banking – even though some Swiss banks have to implement the rules for their European subsidiaries. However, a number of initiatives are being developed in Switzerland with the aim of enhancing client experience. Various Swiss banks and other industry players are collaborating to reduce costs and explore alternative sources of revenue.
Globally, financial institutions are exposed to demands for change from clients, internal stakeholders, shareholders, regulators and disruptive new competitors. The pressure on banks to explore alternative sources of revenue will very likely lead to the adoption of open banking also in Switzerland, following its successful implementation in other countries. We expect the retail banking sector to lead the way, but anticipate that other areas such as asset management, investment banking or even areas outside the core banking offerings will follow.
Resistance due to increased risks
While various Swiss banks were implementing PSD2 programmes, we observed that the perceived increased risks are one of the main sources of concern regarding open banking. This is due to the shift away from the traditional closed to a new open data sharing model, exposing banks to financial and reputational damage if not addressed appropriately.
Banks in the EU have taken steps to address these risks on the basis of regulatory guidelines from the European Banking Authority (EBA), and have adjusted their risk management frameworks (with particular focus on the re-design of the detection, resolution and reporting of major security and operational incidents, including fraud).
With suitable reporting mechanisms being introduced, supervisory authorities will have the opportunity to monitor developments and, if necessary, implement measures to enhance security requirements. From a personal data perspective, and in line with the General Data Protection Regulation (GDPR), European banks have strengthened their data protection frameworks, in particular regarding transparency (processing activities, traceability of personal data) and data minimisation (retention and deletion).
For most Swiss banks, the journey towards an insight-driven organisation with mature data management and the capabilities to flexibly and securely share data with authorised third parties, is still ongoing as part of their digital transformation activities. As the investments in risk management and data security increase, the opportunities to share data with authorised third parties might soon outweigh the concerns.
Where do the opportunities lie?
We believe that open banking offers tangible disruptive business opportunities. By facilitating the exchange of data between banks, it creates new business initiatives that were not possible until now.
We see opportunities lying in various areas: Client acquisition and on-boarding costs, for example, can be reduced significantly by exchanging information between players. Similarly, the client retention process can benefit from exploring data obtained via APIs.
Regulators can also benefit from open banking by exploring ways to improve the reporting from banks, moving towards a proactive real-time approach and hence improving transparency and mitigating risks.
Furthermore, open banking will likely act as a catalyst for the launch of new search engines that boost the convergence of industries. We might, for example, see the banking industry link up with the retail and insurance industries to develop offerings outside the traditional core business of banks.
Overcoming fears and moving forward
The key challenge for Swiss banks is to find the right strategic answer on how to reshape their business model in order to make the best use of the opportunities open banking presents. Business opportunities arising need to be assessed, prototyped, implemented and monitored to ensure that real value is generated for banks and their clients. This implies a challenging shift that the banking community has to undergo towards a creative and innovative mind-set. This is a cultural evolution already in progress in many countries across the globe. It might be only a matter of time until Swiss clients are also increasingly interested in opening their data up towards third parties to make use of the opportunities ahead.