Jack Daly

Some time ago I was introduced to the concept of Open Banking. Back then, I had no idea what that meant. I think the name itself is so vague it can be hard to understand, even when an explanation is attempted. Anyway, to cut to the chase – I jumped in and here is what I found.

You might have noticed the financial services industry is having a bit of an identity crisis. Big old traditional banks are now describing themselves as technology companies with banking licence. But let’s be honest, these titles remain aspirational for most of them.

Banking incumbents, especially in Europe, are facing big headaches. Brexit fears now pose a very serious threat and strict lending rules imposed by central banks compounded by negative interest rates within the eurozone, continue to weigh on profits.

Open banking will depend on cultivating trusted relationships based on strict regulations and highly secure data-sharing technologies.

With all these market pressures, it seems almost impossible to rely on the traditional business as usual approaches to banking. Research  suggests that 35% of bank revenues are at risk from FinTechs for those institutions that fail to evolve at pace. Hence, the industry is experiencing a digital revolution and open banking is at the centre of this change.

So, what is Open Banking? Glad you asked. This new form of banking opens opportunities with third party providers and promises a host of fresh possibilities in the financial services industry. European banks have already started investing in their open banking to comply with new PDS2 regulations, which will fundamentally change the way banking is done. But for many, what open banking means, the potential it has and how it can be effectively implemented remains unclear.

That sounds great, but how does it work?

In simple terms, Open Banking creates the opportunity to connect banking and other services in a single integrated experience. A great example is Tencent’s WeChat – a so-called “super app” that integrates everything in one service. Companies can choose to launch mini-apps of every kind such as restaurant ratings, ride-hailing, investing and food delivery while payments are fully enabled all within the WeChat platform. You can then promote directly to WeChat’s more than 1 billion+ user base.

Sounds great, but what does this example mean for banks? If banks start allowing third-party payments (TPP) service providers to access their customers’ bank data via APIs (with their customer’s consent), banks can go beyond traditional financial service provision. This means  they can meet wider customer needs as whole journeys and in doing so, make themselves more relevant in a customer’s everyday life.

Although open banking is still in its early stages of development and frameworks vary significantly in scope and requirements, there are a few different business models that have been proposed;

1. Banking as a Platform:

Financial services (FS) marketplaces are becoming more popular as seamless one-stop-shops by white labelling or co-branding alongside partners to bring the best of FS to one place.

• Starling Bank and N26 address this in the most comprehensive examples to date through their financial services marketplaces offering savings management, pension services, mortgage brokerage and more through third parties enabled by APIs. Their stated aim is to bring the best of financial services into one place to provide the customer with a holistic view of their financial life, without the hassle or need to visit a multitude of websites and apps.
• Revolut and KBC became the first players in Ireland to launch multi-bank account aggregation services. These facilities allow customers to view current account balances held with other banks within its app, providing a complete view of their personal current accounts in one place.

2. Banking as a Service:

By leveraging the value chain of partner API networks, industry offerings can be significantly enhanced and exploited by banks in order to provide better services to its end users. Linking services together in this way leads to what are called network effects, which can combine to be greater than their individual components.

• In 2020 is planning to launch a mortgage broker platform which would streamline the application process and could link directly with bank data to assess a customer for loan qualification. This is an example of where Irish banks can leverage other companies to create value and drive new revenue growth.
• BBVA is another example in Spain which is running a pilot project where it can trial the functionality of the world’s largest e-commerce portal - Amazon, paving the way for the bank to offer other types of financial products on the platform in the future.

3. Capability as a Service:

APIs can be the key to enabling smoother interactions between customers and third parties.   Direct and seamless access to banking services and capabilities opens a huge landscape of new services for customers and business opportunities for companies.

• Capital One for instance offers services that allows customers to enrol in third party companies with their Capital One credentials. The business can then also request unique virtual card number with their customer’s consent, making it easier to get and keep a payment method on file which is immune to disruptions associated with physical cards such as reissuance.

4. Non-Finance as a Service:

Banks can create value by aligning with strategic / tactical partners in developing hyper-relevant customer experiences, tailored around key life moments. Recent examples of this are:

• Bank of Ireland’s implementation of a website for people moving back home from abroad. This service connects customers with its partners for different but relevant offerings including CPL recruitment, Settle In for relocations and Premier property for tailored mortgage services.
• AIB’s launched their smartmove app in 2016 using DAFT property website, which allows you to access a wide range of convenient features related to buying a new home and getting a mortgage on your smartphone. By extrapolating on this idea and integrating with bank via APIs, it may evolve to a stage of potentially enabling a full loan qualification.
• Singapore’s DBS already leading the industry with respect to open banking. In 2017 it launched a wide array of APIs for other brands, corporates, fintechs and software developers to plug into.  Interested parties are invited to register their interest on the DBS website where they will be given tools to connect in a development sandbox, enabling them to test their ideas.

In summary, it is evident from the examples given above that commerce through API enabled services is becoming the new norm and is being championed by the largest and most technologically capable companies in the world. Regulations have set the groundwork for banks to capitalise on these new frameworks, but they now need to take learnings from within and outside the industry to understand and implement their own best practice solutions broadly in line with the archetypes outlined above.

How then can financial institutions maximally exploit the potential promised by open banking? The next post will further explore the myriad of ways to build on these new opportunities and gain the most value from this new frontier of banking.