A recent report made by American global management consulting firm A.T. Kearney predicts that roughly 10% of the currently operating banks will disappear from the European map by the year 2023. The report shows that overall revenues per customer have decreased by over 11% compared to 2008. Shutting down numerous physical branches of these banks may be a saving grace, but only for a short period of time. If banks were to move forward, they’d have to think about heavily transforming their business into the digital field, where they would have to face and fight many other modern competitive options, like neobanks for example. The situation looks quite viable, and many believe that this is a done or die moment, and buying yourself more time would be as good as losing.
A number of people who are using these so-called “challenger banks” is somewhere around 15 million now, but in the year 2023, this number is predicted to rise to 85 million. Doing quick math, it means that almost every fifth resident of the European Union, older than 14 years old, will be a customer of these new financial institution options. This is where I see the further development of open banking (many financial software developers are busy with) is the key element in this new changing environment. Banks need to apply their current strategy and offers to the current reality, in which clients expect more than just a simplified bank account access system and cheaper bills.
The game changer
Open banking in its core is a rather broad term that covers all of the technologies, processes and other related services and products that have one common distinctive feature. All of them are based on open application programming interfaces, or simply API. They enable access to certain amounts of data collected by the banks, with the help of which other companies can create new products and services. As the system continues working, a brand new ecosystem of entities will emerge, offering new solutions for the clients. Sounds promising, isn’t it?
The same was said by the number of financial experts, as they have marked the beginning of the previous year the new landmark in the retail banking history. Previously the European market was heavily regulated and banks simply could not share their information even within the frames of the Open API. This is where the Payment Services Directive 2 (PSD2) legislation came into play, which was designed to force providers of payment services in order to make serious improvement to clients authentication processes. The legislation has also brought new regulation terms in regards to third-party involvement with banks and their clients’ personal information. This directive was sort of a catalyst for the change towards the open banking system. It introduced a new category of providers into the payment services market, which was called the Third Party Providers, or TPP’s.
TPP’s were given the opportunity to provide new services, the most important of which were the Payment Initiation Service and the Account Information Service. Enabling new entities to offer services based on information flowing from the client’s transaction history was the first important step towards open banking and the creation of a completely new ecosystem based on innovative financial products.
But despite all of the promises, it seems that both banks and customers do not embrace the changes that much, judging by the results at least. The legislation schedule was pretty uptight, requiring banks to open brand new facilities so that they can then be tested by the third-party organizations for functionality in a specifically simulated banking environment. The deadline was scheduled for March 2019, and when it arrived it had some serious number discrepancies. The survey of 442 European banks across ten countries found that fewer than six in ten banks managed to complete the task in a required time window, which is a pretty poor result, with an overall 59% completion rate.
The public was not quite happy with the changes as well. And not for the lack of knowledge, but again, for the lack of trust. For many of them, the idea of open banking just did not make sense. People feel strange that in order for the new players to earn their trust, they should be the first ones trusting them their transactions history with full details. And for what? Just for the sake of a “better offer” term? Getting your clients to feel like they are at risk is definitely not the best way to start innovation.
The founder/CEO of the UK’s Starling was very upset about the whole Open banking blowout. She blamed big banks for pushing the project’s implementation schedule, stating that: “Open banking has not taken off yet, not because big banks are actively blocking it but due to huge organizational complexity, and ultimately the ability to transform is not there in mainstream banking”.
But a missed opportunity for one may promise a new opportunity for the other. If Europe can’t handle the “banking problem” by itself, there are many other players that want to dominate the market with their solutions. And you probably already know where I am going. You see, those Open API interfaces we were talking about are actually have been already successfully implemented and used for many years by “small and unknown” companies like Facebook and Google.
Thanks to the use of technology, these players were able to offer their users a wide range of services that they would not be able to create on their own. Inclusion of those additional services has helped Facebook, for instance, to keep their existed users as well as gaining the new ones. On one hand, these technology giants are the sole beneficiaries of the Open API, but on the other, they simply act as service providers, on the work basis of which other companies can build their advantage. The best example here would be Uber, which uses Google maps and their open interface to benefit their business.
So what do you think, would these two Goliaths, considering their level of appetite, just pass by on the new and sweet emerging opportunity?
The battle begins
As it turns out, both Facebook and Google were trying hard to get their hands on the European financial market for quite some time already. And this should not come as a surprise since both companies have a huge client base with a serious access to their information, financial and personal. And the moment Facebook and Google will start providing their banking services, the financial market will be changed drastically. And this is why more and more people with each day ask yourself a question, of whether or not they would use these type of services. And if they do, which of the two companies would they prefer?
The most important aspect that can help us to determine the answer to this question is the level of trust people are willing to put in these companies. Yes, Europeans are not known to be the most trusting clients, when it comes to banking – only 36% of them, according to the Global Banking survey, actually say they do trust their banks. You can compare this number to the Asia-Pacific region, where the regulatory environment is way less strict, but the percentage of people trusting the banks is around 54%.
At the same time, it is known that the possibility of bank switching in the UK, for example, is very low. And in many other European countries people statistically are more likely to get a divorce, then to change their current bank. And with more regulations, regarding web and security, coming into Europe (GDPR for example) it may prove to be quite a challenge for those tech giants to stay ahead. In the pole done by Blue Media, only 8% of poles said that they would share their banking information with huge American companies like Google or Facebook. So do these companies really have a chance?
Facebook’s attempt on conquering Europe’s financial sector
First of all, we should keep in mind that Facebook was always about P2P payment through its messenger app. In the future, this app could also be used by customers to check their account status, but that is only a plan for now. The plan, however, saw an attempt last August, when Zuckerberg asked the biggest banks in the United States to share the account information of their users. Additional features were to increase the traffic and popularity of their messenger. Eventually, Zuckerberg’s plans did not go as well as he thought they would, with banks being extra cautious about Facebook’s request.
Another hit at Facebook’s financial ambitions plan went down after the news of disabling their P2P messenger system in the UK and France, due to the low popularity of the service. It is planned to shut down completely in June this year. The primary problem turned out to be a complicated activation system, which required heavy involvement from both parties involved in the transaction. It turned out that a good old money transfer and even a hand to hand payment was much easier. And that should tell you something. You would feel that the company as experienced as Facebook would surely figure it out, but it seems that convenience was not their top priority here. The system still operates in the US, though there they have huge competition with giants like Venmo (which is owned by PayPal) and Zelle.
Overall, considering everything stated above, plus taking into the consideration Zuckerberg’s “flawless” reputation in the recent years, many may be tempted to gang up on Facebook, stating that their financial ambitions in Europe turned up to be a complete fiasco. This, of course, does not mean that the company will not come up with a new and better plan, making all of us take our words back – “If people don’t trust us, then they won’t use us,” was once said by Mark Zuckerberg himself. And I think he intends to follow his words, making Facebook’s solutions better and more transparent. For now, however, this will remain a big and intriguing question.
So, does Google has better chances?
Let us try to figure it out. Currently, the biggest move towards European banking services of the “company from Mountain Valley” was, in my opinion, the reception of a license, from Lithuanian electronic money institutions. This will allow Google to provide financial services across all EU countries, thanks to the passport rules. In addition, the American tech giant is currently looking for new employees in Lithuania, to operate their European fintech business. Country’s regulator, as well as Member of the board of the Bank of Lithuania, Marius Jurgilas stated the following: “The end of this year reflects our efforts and experience of the past few years in actively developing a FinTech-conducive ecosystem in Lithuania. Our regulatory environment and the benefits it offers have been acknowledged by both start-ups and world-class FinTech companies”.
Moreover, rumors of a new application project called Google Bank started appearing around the web. However, it is not Google who is responsible for its creation, but an independent agency called HumbleTeam. The concept of this application showcased perfectly, how a real Google Bank could work if it would ever appear. The app would simply be an aggregator for services in a variety of banks, plus additional services directly from Google. For example, if we would like to have a loan, Google can check our creditworthiness in a matter of seconds and we can then apply to several suitable banks at the same time, reviewing the best options and offers that would be tailored specifically for us.
So for now at least, it looks like Google is in the lead in this race of winning European financial markets. It currently has a better reputation then Facebook (especially after that huge scandal with Cambridge Analytica) and they have already made some serious steps towards their goal. But only time will tell. At the end of the day, you should never cross Apple from any race for dominance either. Especially with their Apple card.