Today’s modern world is all about convenience, with technology transforming the way we used to do things a decade ago. Online user reviews are replacing peer feedback, virtual stores are enabling us to fulfill all our shopping needs without leaving the comfort of home, and navigation apps not only help us get from point A to B, but provide realtime feedback on traffic, nearby gas stations, and dining options along the route.
Banking, too, has digitized many customer touchpoints, yet it seldom understands the context of the consumer in order to provide real value. There’s no service that informs us if a major purchase will disturb our plans to achieve a financial goal, suggests competitors that offer a service our bank does not, or alerts us when the time is right to buy a product based on pricing trends and our unique financial situation. And that’s because banks typically do not share customer data with others, nor do their proprietary services work in tandem with other financial institutions.
Without access to a customer’s context (financial capacity and goals, challenges, and priorities) and digital footprint (location, online activity, and search data), how could banking deliver on this front? Fortunately, all of this may soon change with Open Banking.
Under Open Banking, banks are required to provide secure, customer data to any third party that has customer consent and is registered with the bank. Theoretically, it promotes competition amongst banks and FinTechs who can use available data to create improved, personalized services that span across multiple financial institutions.
Open Banking is already being implemented in the European Union and it seems likely that it will eventually be required in the U.S. as well (although it may happen on its own before regulators catch up). However, if FinTechs are able to access customer data in order to create improved, customized services that take into account consumers’ unique circumstances, will they gain an advantage over banks? To assess the threat that may soon be imposed on banks, we can look to Modularity Theory for guidance.
Banks vs. FinTechs: It’s all about the product architecture
Modularity Theory is a framework for explaining how different parts of a product’s architecture relate to one another and consequently affect metrics of production and adoption. It stipulates that there are two types of product architectures: those that are interdependent (where each component has a performance dependency on the other) and those that are modular (the different components of a product come together along standard interfaces).
To illustrate this, consider the electric light. A light bulb and a lamp have an interface between the light bulb stem and the lamp socket. This is a modular interface, enabling engineers the freedom to improve the design inside the light bulb, as long as they build the stem so that it can fit the established socket specifications. A modular architecture like this is useful when it comes to reaching the market quickly and delivering on customization according to consumer needs. However, whenever unpredictable interdependencies amongst component exist, an interdependent architecture works best.
In the case of Open Banking, FinTechs looking to create new apps and services would benefit by operating in a modular architecture, where their apps can plug and play. Using customer data provided by banks and other sources—think Amazon, Facebook, or Google—FinTechs could create personalized solutions that help us navigate our financial lives with more ease. However, the success of FinTechs rests on one key assumption: that there would be standard interfaces across the banking industry upon which developers could plug in their solutions. This is a key point, and this is where industry bodies and regulators have a role to play.
If the U.S. does not require banks to share their data and services in a standardized way, they aren’t likely to do so on their own. In this scenario, it becomes challenging for developers to create solutions that can be used across multiple financial touchpoints, giving banks the upper hand. In the absence of standardized interfaces, banks have an opportunity to integrate forward and build customer facing applications. Banks like Citibank, JP Morgan Chase and Banco Bilbao Vizcaya Argentaria (BBVA) are already gearing up for this by creating proprietary portals for developers to plug in their solutions.
Furthermore, in the absence of any mandates on format and fee, banks have the ultimate say in what data and services would be available, in what format and at what cost. This makes it difficult for developers to build one-size-fits-all applications. Consider Uber, or Airbnb. Much of their success can be attributed to the fact that digital distribution platforms like Apple’s App Store and Google Play provided standard interfaces to plug into. Along the same vein, for FinTechs to realize their potential, a standard interface must exist. And banks aren’t likely to volunteer such a platform unless it’s required.
It’s clear that the introduction of Open Banking would give rise to a new era in banking. Whether it be through new customer facing applications provided by banks, or hot new apps that compile all of our financial needs into a streamlined service, customers may soon have even more financial tools at their fingertips. And if FinTechs are able to realize their full potential, we won’t just have more convenient solutions—we’ll be better equipped to make informed decisions about our financial well being.
