Open Banking: banks need to rethink product distribution

For banks, one of the consequences of the Open Banking agenda is that, like it or not, there will be new players in the market who sit between them and their customers. Now that the debate has moved on from 'banks vs. fintechs' into a more realistic discussion of the opportunities around banks and fintechs collaborating, the new question is how will that impact on the business of selling banking products to customers?

Many commentators argue that Open Banking will change the market for banking products and services by dismantling the traditional dominance of the banks and instead make the product rule – in other words, killer products will beat customer loyalty. Open Banking helps to facilitate this by reducing the frictions associated with using anyone other than your own bank – open APIs create the rails for this.

As part of the Open Banking agenda we have been discussing the need for greater collaboration between banks and fintechs – each has something to contribute to the other: in short, banks bring brand, experience of regulation and customer trust, whereas fintechs bring agility, speed to market and fresh ideas. Related to this is the fact that fintechs engaging with bank customers introduces a new model for the sale of banking products: rather than banks selling to them direct and owning the vertical supply chain, fintechs are getting in between and breaking the link.

Banks need to decide whether they want to maximise selling opportunities by opening themselves up to new distribution models, beyond the minimum they need to do in order to comply with PSD2 and the CMA requirements.

To do that, banks, need to consider how best to sell via a distribution model. They need to consider both the fintech as a distributor and the end-customers. Banks need to think about what they need from fintechs to ensure that their products and services are being effectively distributed to customers in a way that isn't damaging the bank's brand.

To maximise the chances of success in this new world, banks need to:

• Slim down processes and make it as easy as possible for distributors to deal with them

• Ensure that technology is robust and reliable – banks cannot afford outages of their APIs, since this will make them a 'bad seller'.

• Engage with distributors who have developed 'killer products' to ensure that customers want what is on offer.

• Make it easy for customers to move between products, for example by streamlining KYC processes and making them portable.

• Consider what diligence they need to do on potential fintech partners, to ensure that this is robust but not cumbersome.

Because fintechs won't get everything their own way in this new world, there are things fintechs need to act on too:

• People are spooked by perceived risks to their data, and press coverage over the winter around Open Banking didn’t help this. Therefore, being clear about how data is going to be used, where it might be transferred to and how and where it is going to be stored is important.

• Think about incentivising customers. One reason why new initiatives do not catch fire is that customers don't feel that it's worth their while to move from the status quo. Therefore, having interesting products that are easy to use and that 'move the dial' will be important.

• Be 'bank friendly' by anticipating the concerns banks will have when engaging with fintechs and trying to address them head-on.

Open Banking ushers in a brave new world and opportunities for both banks and fintechs. The market for banking products and services will become more fragmented, with new players in the chain between customer and bank. That means that new relationships akin to distribution will become important. Banks have powerful brands and customer trust and so fintechs will want to partner with them. Successful partnerships will be about maximising the best of both worlds.

Yvonne Dunn is a specialist in financial services and technology law at Pinsent Masons, the law firm behind Out-Law.com.