There is plenty of excitement among retail banks around the revised Payment Service Directive (PSD2), and the potential for open banking to revolutionize how financial services are used and offer new opportunities for efficiency and data management. The key challenge to these regulatory changes being successful is in convincing retail bank customers that they can benefit from open banking - and that they can trust it.

Customers are open to new opportunities, as long as the benefits are clear

The good news is that there are significant, compelling consumer benefits to open banking. At the heart of the open banking agenda is an aim to generate more choice for consumers; both in products and services, but also in the way that customers consume financial services.

The increase in choice and competition creates a need for financial institutions to engage differently with their customers to remain relevant. The question then becomes how to engage, and with this comes the opportunity for financial institutions to embrace a purpose-led vision of enhancing their customers' financial wellbeing.

EY Seren's experience with customers shows that when consumers learn that APIs and open banking could deliver products and services that could help them better manage their financial lives (e.g., by creating more realistic savings goals, or managing household debt, or paying down their mortgage faster) their interest in open banking jumps.

However, recent EY consumer interviews have found that most don't know what PSD2 is and, even when they find out, they don't understand why they need more payment options. Moreover, they are wary when they learn that PSD2 could allow retail banks and merchants to access their account information (with their permission) to develop and deliver products and services in an open banking environment. Their typical reaction is along the lines of, "why would I allow access to my data just to get deluged by advertisements?"

In other words, the benefits of open banking are not yet obvious to the majority of consumers, and retail banks looking to leverage PSD2 and the opportunities created by open banking need to work hard to educate and win them over.

In addition to financial institutions creating compelling offerings, the perception of open banking as a successful initiative depends on customers learning how, once embedded in their daily lives, it will put them more in control of their financial lives and help them make better decisions.

Success depends on demonstrating that customers are at the heart of decision-making

The broader ambition of open banking - to encourage digitization of financial products and services - is not unrealistic. Nor is the likelihood of consumers embracing a newly digitized financial services world, especially given the mobile phone's centrality to their lives.

UK adults spent as much as two hours a day on their smartphones in 2017. Furthermore, when we asked consumers five years ago if they would, theoretically, use a "social media bank," virtually no one said yes. By 2017, once people had become accustomed to using Facebook messenger to make payments, this figure rose to 30%.

Open banking initiatives will only be successful if they build clear value into peoples' lives. Therefore, in order to fulfill the needs of new customers, and retain existing ones, providers will need to embed an innovation and transformation method that directly places the customer at the heart of the design and creation process. This strategy has been a central recommendation of the EY Global Banking Outlook for the past several years

To become more customer-centric, banks need to bring customer research and insight into product design and change process, and adopt a more agile service design approach. To do this they must develop and test service prototypes with customers continually to refine propositions before any development takes place; adopt co-creation approaches that bring customers into the design process; and keep a relentless focus on customer KPIs for services that are live-in-market. 

Continually refining and maturing propositions in this way is the only way to meet customer needs intuitively and profitably. One bank, by working directly with customers in this way, was able to cut a list of over 100 features down to less than 10 for a new digital savings proposition; launch a new savings digital app in under six months, rather than the 18 months original planned; and see a significant uptake in account openings and NPS (net promoter score).

Being proactive about building trust

The future success of incumbent retail banking organizations will hinge on their attitude and approach toward the consumers that they serve. This means placing more emphasis on being honest about their purpose. Success depends on cultivating more than the current transactional relationships, and carving out a space where their products and services enable people to live better lives.

Providers also need to comprehensively educate the retail consumer about the benefits of open banking, and address their anxiety around security and privacy; not only to ensure rapid adoption of their new and innovative products and services, but to build trust.

Building trust will take much more on the part of retail banks than a simple mission statement or a well-funded marketing campaign. To truly give customers more control of their financial lives - one of the key benefits of open banking - retail banks will need to fundamentally alter how they interact with customers.

Our recommendation, gleaned from in-depth customer discussions, is that banks will need to be more transparent about how products work and how the bank benefits. Consumers want to know how banks gain from the changes, as well as the benefits to their own financial life that regulatory changes could yield.

Transparency, which is developed through co-creation and testing with customers, will help overcome common suspicions among consumers that they are somehow being taken advantage of, and hopefully make them more receptive longer term.

Right now, traditional retail banks do have a trust advantage over the startups and the many FinTechs that compete with them to offer products and services in an open banking environment. But it's a narrow sort of trust; it's not that consumers trust traditional banks to improve their financial lives, instead consumers trust banks more to fix problems if something goes awry. Certain sectors of the demographic (e.g., tech-savvy 25 to 34 year old) are enthusiastically embracing FinTechs – as found by the EY FinTech Adoption Index – and may lead to a move away from traditional banks.

Live use case: The Digital Passport

EY's Digital Passport application is a clear example of the ways in which open banking can tangibly benefit customers and businesses, providing significant cost reduction and simplification of laborious, but essential, tasks to all parties.

Currently, businesses spend a large amount of time manually verifying financial data, which is costly and complex. Digital Passport provides a secure site for the storage of data that can be easily verified, reducing the time and cost associated with existing processes. Watch this video to find out more about the benefits to providers and suppliers.

For customers, the application provides a digital solution to an ordinarily manual process of filling in paper forms that are sent to utility providers and other suppliers. The platform manages small business owners' data, allowing it to be shared with new providers and suppliers, or for sharing financial information with tax authorities. Watch this video to find out more about the benefits to consumers.

The application, which would not be viable without the open banking environment, demonstrates the power of digitizing financial services. Open banking provides the conditions for secure data sharing, ultimately enabling customers to live better financial lives, while remaining in control.

No time to lose

Even this advantage probably has a relatively short shelf-life. As early adopters age, and more people are willing to migrate their financial lives to their mobile devices, their reservations around nontraditional financial services providers will likely abate. So incumbent retail banks have no time to lose.

In fact, we believe that incumbent banks are at a tipping point. The incredibly fast innovations in the market, as well as the rapid turnaround in sentiment among consumers in favor of nonbank financial services, should be a wake-up call to retail banks.

The pace of implementation (and innovation requirements) is only going to accelerate and in response, retail banks need to quickly become more customer-centric to adopt new co-design thinking and share research and outcomes directly with customers. But these new ways of doing business will only generate genuine insights if retail banks truly change their philosophies and approach. If they do not, nimble FinTech players will continue to emerge and may gain dominance.

A clear call to action

Incumbent retail banks must press their advantage now by championing open banking, working diligently to educate consumers on its benefits and innovating to create products and services that enable people to enhance their financial wellbeing. To succeed, retail banks will need to demonstrate clearly that open banking is not just another way for them to profit, but a genuine opportunity to lessen consumers' burdens when managing their financial lives and help them make decisions that benefit them.

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