- by Amol Kulkarni and Harshit Tripathi
"We need banking but we don't need banks anymore" -- Bill Gates, 1997
Almost 20 years on and Bill Gates' prediction regarding the biggest transformation in the banking sector seems ever so true. It is disruptive and radical to think of banking without banks, but who knew that one day technology could undermine the existence of banking institutions themselves. Though it is just the beginning, but CMA directives to implement open banking over application programming interfaces (APIs) is set to mark a milestone in this journey.
The Competition and Markets Authority (CMA) launched an investigation and analysis of current accounts and associated services to individuals and small and medium-sized enterprises (SMEs) on November 6, 2014, costing five million pounds, to further the intention towards open banking over API that was being evangelized by the Open Data Institute (ODI) and Open Banking Working Group (OBWG).
While the CMA has set the course in the right direction, there are still a few areas where the CMA could have done better.
Key measures in the right direction:-
• Simpler charges and intimations on overdrafts
• Disclosure of service quality measures, which can be meaningful if key performance indicators (KPIs) are shaped with inputs from customers instead of banks
• Providing a common platform for price comparison and selection
• Encouraging credit agencies and banks to share the transaction history of customers, resulting in better credit deals especially for SMEs
There is a need to do more...
• Rather than attempting to refine and add value to 'what is being offered', the CMA directive is more focused on 'how it is being offered'
• It is an old ball game for banks to charge customers one way or the other. Restricting income from overdraft charges will push banks to increase charges elsewhere. There cannot be directives to avoid this fallout
• The CMA views the market in just two segments -- retail and business banking customers -- while in reality, the market is lot more segmented. Tech-savvy versus technologically-challenged are two such segments the CMA should have considered before mandating these directives
From its final set of directives, the CMA aims to promote greater market competition and enable customers to leverage open APIs and leverage the best deals for their banking needs.
The directives will not only allow customers to view all their bank accounts in just one application but will also enable them to easily compare products and services from different banks, as well as receive personalized financial advice and get the best deals. Moreover, for banks, it is not just going to be about giving the best offers and deals, but also to publish their service quality indicators, which will allow customers to evaluate between competitive price offers and quality of service.
The CMA has made it a top priority to empower tech-savvy customers in both the retail and business banking segments with more insights into pricing structure and enabled comparison. There seems to be marginal impact and empowerment for less tech-savvy customers. With this, the CMA has targeted the 'cost focused' section of Michael Porter's strategy and has ignored the 'differentiation' factor in order to gain a competitive advantage. The CMA directives seem to have ignored the fact that value addition to the existing range of products and services could also drive competition.
The directives have shifted the focus on how to make switching banks an easier task without losing your history and Nesta's challenge for price comparison will ensure customers get the best deal. We believe this will actually result in more of a comparative advantage, rather than a competitive advantage.
It is still early to assess the impact of the CMA's directives since a lot is dependent on how innovatively technology is used to build the new open banking ecosystem. While there are still many positives which should be encouraged; however, the timing is still in question since banks are looking to replace their legacy systems and a low interest rate environment is already marring their earnings. To top it all, open banking APIs are set to trigger aggressive price competition, which might push banks further towards lower margins of profit.
However, open banking will find its force as FinTechs and other market forces make it inevitable. Open banking over API will create immense possibilities in delivering banking services over ALEXA like AI-based assistants who can, in turn, call banking APIs that have been exposed. We can expect banking services to truly permeate our lives over unimagined touch points.