The UK's big banks are at risk of losing their most valuable customers because of open banking, a report has found.

The Bain and Company, Salesforce and MaritzCX report, titled 'Coping with the Challenge of Open Banking', identifies high-risk customers that are more likely to abandon the traditional banks for digitally savvy fintech providers and challenger banks – people who are typically 55 or younger and with an annual household income of at least £55,000.

These are the sort of customers that are the lifeblood for challenger banks like Monzo, Starling and Atom, as well as fintechs like Revolut and Bud.

The 'big five' banks - Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander UK - still account for 80 percent of the UK retail banking market.

Of these high-risk customers the report states: "65 percent are open to sharing their personal data with other banks or non-banks in order to get better products or services. While high-risk customers account for only 15 percent to 20 percent of the total customer base, we estimate that they make up close to 45 percent of bank profits."

Read next: What is open banking? What does it mean for banks, fintech startups & consumers?

In contrast, about 25 percent of bank customers are "low risk" - that is, unlikely to switch providers or adopt new technologies in an open banking environment.

These 'safe' consumers tend to be older than 55 and have an average annual household income of less than £55,000. These conservative customers are unlikely to be aware of fintech platforms and are less willing to share their data with other banks or non-banks. The report estimates that these low-risk customers make up only about 11 percent of total bank profits though.

Bain and Company surveyed 4,000 UK banking customers for the report, which also found that 63 percent of current account customers at high street banks said they are willing to share financial information concerning their accounts with a competing bank, fintech or aggregator in pursuit of a better offer.

So what should the banks do?

The answer seems simple for the big banks: adapt or die. This is anything but simple in reality though, with banks contending with high levels of legacy technology, making it difficult for them to deliver innovative digital products at the speed of fintechs.

Gabriel Schild, executive director for digital business at Verizon, works with the majority of the UK's largest financial services firms and sees three potential approaches to open banking for the incumbent players.

"I see three types of response: 'it is a fad and will blow over', and obviously we don't see that as a very clever response," he told Computerworld UK. "Another is partnering with companies. So we see clients work with fintechs in order to take advantage of these new developments. Last, we see a large group of clients make a complete business model change and see that the future is all around the platform economy."

This last approach is clearly the one being taken by HSBC, for example. HSBC UK proved itself to be an early mover by announcing on 28 September that it will allow customers to see all of their accounts on one screen through a new Beta app, even if they are with a rival bank. The bank planned to do this through a new test-and-learn mobile banking platform ahead of introducing a new app for customers in early 2018.

Read next: How HSBC is preparing for open banking

Within the HSBC Beta platform, customers can add current, savings and mortgage accounts from up to 21 different banks, including Santander, Lloyds and Barclays.

In essence this places banks in the middle of consumers and their finances, orchestrating that journey. This is the approach that Anne Boden, CEO of challenger bank Starling, has taken since day one.

She told Computerworld UK the bank was founded on the principle of "providing the hub for your financial life".

"So, data from day-to-day transactions and allowing you to have connectivity to other providers of financial products in a marketplace and those marketplace participants connect to Starling using open APIs," she said.

It's not all bad news for the big banks

The primary advantage the big banks have in this new ecosystem comes down to trust and an existing pool of customers. As the Bain and Company report states: "Incumbents have at least one clear advantage in open banking: they already have access to a sizeable pool of customers and an opportunity to understand those customers better than their competitors do.

"The big banks also have an edge when it comes to trust. When we asked customers if they are willing to share more data with a provider in order to get a better product offering, 78 percent said they are willing to share with their primary bank, while 63 percent said they would share with another bank and just 43 percent would share with a non-bank."

Read next: How UK fintech startups are preparing for open banking

The Bain and Company report also advises banks to leverage the data they have on customers to:

  • Build a complete picture of individual customer needs and how customers choose to meet those needs at the product and episode level
  • Understand bank strengths and weaknesses in the eyes of customers relative to direct competitors and digital alternatives for key customer segments
  • Use data pools to predict customer needs, proactively avoid unpleasant experiences and recover customers when things go wrong
  • Designing experiences that delight the customer across multiple channels that are simple and easy to use, digital and straight through (i.e.,don't need human intervention)
  • Use data to personalise those experiences, such as providing propositions aligned to customer life events.

The report concludes: "The right strategy depends on the individual bank and builds in enough flexibility to accommodate some level of uncertainty. UK banks are already placing bets by investing in technology and data providers, and in some cases even developing their own aggregators. While strategies may differ, looking the other way is not an option. Banks need to develop an approach that recognises alternative banking platforms as potential disruptors."

Schild's parting piece of advice is to avoid viewing PSD2 and open banking as an IT exercise: "Some initially look at PSD2 as an IT project, saying 'I need to provide access and develop APIs and when they are ready and secured I am done'.

"That's one part of that transformation and when I meet clients with that mindset I warn them that it will probably be more of a business model change and they need to be two or three steps ahead and not be relegated to a pure administrative function.

"Some banks do see this as an IT project, but that is a minority and most see a transformational change coming."