When challenger banks arrived on the financial services scene in the mid-2010s, they earned a reputation for interrupting the banking status quo. Compared with incumbent banks and the CMA9, challengers offered a more streamlined, digitally driven and personalized experience, from offering Saturday banking hours, to providing water for customers’ dogs.

With their history of continuously innovating bold new ways to attract new customers, it’s no surprise that challenger banks seem ready to embrace open finance. In our recent study “The open finance paradox,” 76% of challenger bank respondents say their organization is turning to open finance to develop new products and services, and 94% believe open finance is important to their future success (see sidebar for more information on our study).

The challengers’ attitude toward open finance is very similar to that of the neo banks (which unlike challenger banks are 100% digital, with no physical presence), as both see open finance and its attendant innovations as major draws for new customers.

However, our research also shows a couple of stumbling blocks facing challenger banks when it comes to executing on their open finance ambitions. They continue to prioritize customer experience over open finance-based products and services, and they’re more likely than their competitors to let their security concerns get in the way of their open finance pursuits.

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.

Huge customer financial data helps us provide more personalized services to customers. Traditionally, banks used to provide very limited services to their customers, but now with open finance, customer behavior can be predicted easily, and a wide array of services are provided. Innovating to provide the best services in one platform is the need of the hour.” – Director of Compliance, UK Challenger Bank


Building on the challenge

Unlike neo banks, challenger banks maintain a branch focus, with many looking to use this as a point of differentiation alongside their digital offer. Perhaps because challenger banks are more established than neo banks, they seem less focused on increasing their product offerings than on other priorities, such as improving customer experience (56%), helping with their ESG footprint (56%) and accelerating digital transformation (50%).

While challenger banks plan to boost their open finance product offerings from two to four by 2025, neo banks are well ahead of those ambitions, with seven new offerings on the horizon, up from five today (see Figure 1). The CMA9 is close behind, boosting its offerings from three to five.


Figure 1

Source: Cognizant

As vital as it is to be successful, we also want to become a profitable and sustainable bank. To do this, we are deciding to join the Tech Zero Taskforce, a coalition of companies aiming to accelerate the transition to net zero. We are also improving our governance and risk management policies, which have always been our top priority.” – Director of Compliance, UK Challenger Bank


And while the products that challenger banks offer are better priced and more attractively branded than those of CMA9 banks and so may appear more innovative, the CMA9 banks are further ahead in adopting open finance. This is likely due to their increased investment and the regulatory “push” provided by the original PSD2 regulations of 2018. CMA9s also have the capital to invest in getting their products and services done right the first time, so challenger banks might find reaching their ambitious targets more difficult.

Challenger banks candidly admit they could stand to increase their understanding of open finance. While nearly all (94%) have reasonably good knowledge of open finance benefits, only 30% feel they’re fully up to speed, and the remaining 64% acknowledge gaps in their understanding (see Figure 2). Neo banks are three times more likely to have a full understanding of the benefits.

 

Figure 2

Source: Cognizant 

Unlike building societies, CMA9s and incumbent banks, challenger banks aren’t caught in the investment risk-reward conundrum; only 18% feel that it’s too risky for them to fully commit to open finance. However, they are concerned about data security (see Figure 3). 

At 76%, the number of challenger banks citing security as a top concern is higher even than the presumably more conservatively-minded CMA9 when it comes to security issues. While only 52% of challenger banks feel there's a lack of customer consent, authentication and authorization for their data to be used, they are 100% confident that the majority of their customers want open finance products and services: Not a single challenger bank agreed with the statement that “Only a minority of customers want open finance so it is not a priority for our business.” 


Figure 3

Source: Cognizant

We want our consumers to feel highly secure as we prioritize safety and security… Some areas, such as enhancing our governance and risk management policies, call for constant improvement.Director of Compliance, UK Challenger Bank


The way forward

Challenger banks need to resolve their data security concerns and mind the gap that is growing between their open finance ambitions and those of neo banks.

  1. Resolve conflict at the top. Senior leadership support is essential. To encourage buy-in, develop a small number of use cases that demonstrate how open finance can transform the business, and how it could benefit customers and colleagues.

  2. Encourage discussion and understanding. Build a long-term business case with several potential scenarios to build understanding of the benefits of open finance and potential risks of not investing.

  3. Develop an open finance ecosystem and roadmap. Use your understanding of benefits and priority use cases and identify a clear delivery roadmap so third parties that have proven, scalable solutions will be able to support this ecosystem.

  4. Resolve data security concerns. Be proactive and address security concerns early on in the open finance process. Involve data security roles/functions in the design process rather than waiting to address security issues post-launch. They’ll need new capabilities and, in some instances, new talent to help manage the data volumes.

  5. Assess the readiness of the underlying infrastructure and applications for open finance and develop a plan to resolve any areas of weakness.

  6. Identify and resolve operating model hurdles by identifying a clear business owner and KPIs and developing the capability to partner with both fintechs and other distribution partners. While challengers are likely to be more sophisticated than building societies and incumbents, most won’t have partnered at the intensity that's required to deliver open finance products.

  7. Be willing to partner with experts in other fields. Challenger banks have fewer resources than incumbents and CMA9 when it comes to investment budgets and technology delivery capabilities. Consider partnering early in the transformation process to benefit from the investment that technology providers have made in creating white-label products. Where possible, resist the allure of customization to accelerate delivery timescales and deliver more impressive investment cases.

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