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October 26, 2022

How neo banks can retain their open finance lead

Neo banks are setting the pace in using open finance to drive growth, according to our research—but can they sustain their lead?

Neo banks—digital-only banks focused on intuitive services and experiences using modern technology platforms—are as much a product of open finance technology as they are its enthusiastic adopters. Unlike challenger banks, which predate the rise of open finance, neo banks are built from the ground up on innovation and data-driven products and services. Their digital-first and mobile-first approach makes neo banks more like apps than like traditional banks. As they develop and mature their offerings and experiences, however, neo banks may need to seek expertise outside their four walls to scale their solutions and ensure regulatory alignment.

In our recent study “The open finance paradox,” we found neo banks to be far more engaged than other banks—CMA9, incumbents, challenger banks and building societies—with open finance. When seeking to expand, 74% of neo banks said they always look first to open finance as an enabler to offer new products and services that will attract new customers (another 22% said they often do). (See sidebar for more information on our study.)

Neo banks’ current customer base, largely drawn from Millennials and Gen Z, values perks like cash-back and loyalty products that boost purpose and brand. These customers tend to be digitally savvy and more trusting of digital banking services in general.

It’s no surprise, then, that neo banks believe open finance is pivotal to their success and future growth, and they fully embrace it. Ninety-two percent believe open finance is important to their future success—seven times as many as incumbent banks.

The past six months have seen a surge in dialog surrounding the purported value of “open finance” and whether or not its potential has been realized in the UK. We see open finance as the natural evolution of finance—a collection of standards, technologies and organizations that enables consumers to access reimagined credit, asset management, insurance and pension products with greater ease and transparency from a range of bank and non-bank suppliers.

While the debate has stoked critical thinking around what financial institutions can hope to achieve through open finance, large questions remain around the potential benefits still on the table.

To better understand how financial institutions are approaching open finance, between April and July 2022, we surveyed over 200 decision makers with responsibility for open finance within their organizations. Respondents were drawn from a representative cross-section of leaders from within the CMA9, building societies and incumbent, challenger and neo banks.

Through our research, we discovered a paradox in financial institutions’ approach to open finance. The paradox is two-pronged: First, there’s a marked inconsistency in the models that different financial organizations are using to align with the concept; second, business and investment priorities are frequently misaligned in areas where open finance could help institutions achieve their goals.

In this series, we explore the differing priorities, strategies and opinions among financial institutions to investigate the current state of play and the likely direction of travel—whether they’re confidently embracing open finance or reluctantly doing the bare minimum to comply with regulation.

A full embrace of open finance

Neo banks are four times more likely than challenger banks to view open finance as essential to their business. They have a very mature understanding of its benefits and recognize that these will substantially support and enhance their business priorities, helping them to achieve their goals.

In fact, the benefits that neo banks believe they’ll attain from open finance align closely with their top business priorities: increasing their average product holding, acquiring new customers and helping customers with their ESG/carbon footprint (see Figure 1).

Figure 1
Source: Cognizant

The main driver for our open finance strategy is the ultimate user experience. With an easy and intuitive platform, the consumer will have more trust in spending online and be able to do it faster and more easily... Open finance provides us with a plethora of information about the customers who choose to provide their data. We have all of a consumer’s details like spending habits, purchasing power, borrowings, investments and even their research of any financial product or service. – Chief Risk Officer, UK neo bank

The majority of neo banks see open finance as an essential component of their transformation strategy. Being smaller and more agile, they can take advantage of open finance to reframe and expand their businesses.

This can be seen in their aggressive plans to increase their already comparatively high number of open finance-related products and services, from five today to seven by 2025. These goals are higher than any other banking group and much higher than challenger banks, which plan to increase their offerings from two today to four in 2025 (see Figure 2).

Figure 2 
Source: Cognizant

Neo banks also recognize that open finance is a revenue opportunity—a belief that others, particularly incumbent banks, do not embrace. In all, 60% of neo banks use open finance mechanisms to open new business channels, compared with 17% of incumbents. 

Unlike their more traditional counterparts, neo banks are not stuck in the risk-reward conundrum. They are confident that they can use open banking data to improve customer experience and harvest the data they capture to refine and evolve their service offerings. They don’t just rely on their own expertise and energy but work within an ecosystem to accelerate delivery.

“We have curated a strategy that focuses on uplifting virtual experiences to the next level by providing fast, simple and data-driven account creation inputs; deploying user-friendly mobile interfaces which make online banking a breeze; smart reporting; simplified international payments; and effective and advanced use of analytics supported by AI and machine learning.” – Chief Risk Officer, UK neo bank

The scaling challenge

Aggressive acceleration does come with risks, though, and neo banks would be wise to engage even further with third-party partners to gain insight into the necessary resources and regulations.

Through partnerships, for example, neo banks could overcome their greatest challenge: scaling up fast. The right partner can help neo banks bring on additional talent, facilitate relationships with innovative software providers or take over non-core activities like customer service and routine work to free them up to focus on products and services. Having a third party involved offers clarity of thinking and speeds up the delivery of solutions in a very fast-moving industry.

“We have partnered with the best in every domain; the only challenge I foresee now lies in the adoption area. Once people start adopting it at a large scale, we will encounter new difficulties to resolve. Right now, we have enough resources to cater to a small proportion of customers.” – Chief Risk Officer, UK neo bank

The way forward

It’s clear that neo banks are way ahead in terms of open banking strategy and execution. But what is innovative today ultimately becomes the status quo. To maintain their competitive advantage, neo banks must:

  1. Evaluate commercial opportunities. Neo banks should ensure their operating model allows them to explore B2B opportunities as well as directly serve their customers. Neo banks create and implement products and services that can be sold to other organizations. “White-labeling” new business lines would bring in considerable revenue to enable further growth and innovation.

  2. Choose partners wisely. Partners should be equipped to advise on how to increase customer demand for innovative new products, improve customer stickiness and stay ahead of competing neo banks in terms of innovation and enhanced customer experience to help acquire (and keep) new customers.

    Partnerships can also help guide open finance from inception to delivery—educating senior leadership on the benefits of open finance and building the business case; guiding understanding of various technology options; and helping with the design and implementation of solutions.

  3. Evaluate and develop “lighthouse” projects and services to address the next wave of open banking (open finance, non-banking needs) or adjacent geography.

  4. Do more; go harder; maintain focus. Neo banks have gotten this far by making bold moves, being prepared to take risks and focusing relentlessly on the customer. Even as they accelerate, they should take care not to lose their “special sauce”—keep pushing to do the right thing for the customer, even if it’s uncomfortable. Don't move so fast, though, that you lose focus on centering on the client.

To learn more, read our full report, “The open finance paradox” or contact us.

Cognizant Insights Team

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