Banking is no longer the same as it was, with the emergence of open banking. How should banks prepare for the new world?
What has historically been a closed, protected customer's account information environment that was exclusive just to the customer's bank, has now been opened up, with the obligation to provide the information to third-party providers, as a result of the new Payment Systems Directive 2 (PSD2). It has opened up the entire EU payments market and has set the tone for the rest of the world as well. The shared economy is now replacing protected markets, with disruption taking centre stage.
The shift from the closed to an open ecosystem has many implications. The flow of data access is now bi-directional. The business model, where banking is now a platform or a service fabric, makes the ownership distributed. The context of Open Banking is simple. Banks are required to provide Third-Party Providers (TPPs) access to their data through Application Programming Interfaces (APIs), which allows the TPPs, including fintech players, to innovate, create and offer new services to its customers. This is a watershed moment for banks, new players and the industry.
Not only does this context of Open Banking bring about a new paradigm in the approach to customer experience, but it also requires banks to revisit their business model, to become established for this new era. In essence, this poses four different sets of questions that banks would need to reflect upon:
- What are the revenue model implications of Open Banking for the industry players?
- What does open banking and PSD2 mean to my customer segments?
- How would the products and services strategy change in the context of Open Banking?
- What are the technology architecture implications in the long run?
This is a quick snapshot of Cedar-IBSI perspective on the above questions, also reflecting the implications of the Open Banking landscape for banks, using the Balanced Scorecard framework.
Financials: emerging revenue models
While the focus is to build on newer revenue models, the more pertinent question that haunts most boardrooms is this: “How much would the bank stand to lose, if it does not put in place a new business model?” And the answer is not very hard: if banks were to approach this just as a regulatory compliance requirement, then the big picture has been missed. Open Banking has opened up new vistas for players: it would be the early bird of this arena that would stand to gain in the digital world, and those who are late would indeed have missed the bus: no matter how big or small the bank is.
The revenue is directly proportionate to the number of new streams launched, the number of APIs established, and the adoption of services through those APIs by the customers. Players such as Amazon offer 100+ APIs for third-party consumption. A logical corollary to this development is also the maturity of the pricing models, where developers/TPPs need to pay, based on the APIs used. In return, developers seek a better API environment, including lifecycle documentation, compatibility, security and performance standards from banks who provide these.
Customer: redefining segments
Just as other players have access to one's own customers, so does each bank have access to other bank's data. When banks build strong multi-banking services, they stand to attract customers from other banks as well, resulting in the need to redefine the customer segments that are being serviced. More importantly, customer segments are no longer defined into three or four sections classified by their income or demographics. The opportunity to have a highly tailormade, niche offering has also resulted in approaching customers through a much more fragmented, micro-segment based perspective. The offering is therefore aligned to the expectations of that micro-segment, a tightly interwoven service that is contextual to the day-to-day lives of customers in that micro-segment, driven by digital and mobility, with a clear focus on enhancing their overall banking experience. That API banking allows for developing and deploying modular services meant for each of these micro-segments, helps ensure that the offerings are unique and rapid to launch.
Products and services: the changing gamut
The essence of Open Banking's core proposition is the ability and opportunity to collaborate, and offer specific, tailor-made offerings to different ‘micro-segments' of its portfolio. Be it online lending or PFM solutions or cross-border payments, while banks can provide the platform and customer relationships, the ecosystem of TPPs bring in the innovation and new products. It is the ability of the bank to effectively participate in this new model, that brings in the differentiation. A good example of this is Monzo's strategy, where the core current account offering is from the bank's stables, but the suite of other non-core services are rendered by collaborating with other players in the market. Engaging with alternative payment providers integrating with the bank networks, for example, could open up a whole new plethora of offerings, to a hitherto underserved or unserved segment.
A distinct and yet very plausible strategy for larger banks would be to become TPPs themselves, offering aggregation services to its customers. The approach of building developer communities, augmented by periodic hackathons helps banks to expand on their API-based service offerings. Larger banks such as Barclays and BBVA have been more regular in embracing this approach. An even more critical aspect to the API-enabled framework is having a forward looking, proactive strategy that helps identify and distribute APIs across the business lines of the bank. The idea is to unbundle the offering and defining the core competencies to be focused by the bank while allowing TPPs and fintech partners to fill in the gaps.
Technology: architecture implications
One critical implication for leaders in Open Banking is the need to have partner friendly development portals and sandboxes that provide for an environment of a collaborative and inter-operable ecosystem. The name of the game is not just about innovation, but also about on-demand technical integration that is supported by a flexible, easy to adapt environment. These go beyond just providing the sandbox portal but also building a community that has well-designed guidelines and a prescriptive approach to the well-planned ecosystem including API platform management, API distribution and documentation. Capital One, for example, offers a full range of DevOps, tools and frameworks to help work on its APIs. Fidor's approach in having an online forum of API developments is to engage in a participative model of discussions, product ideas and innovations.
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Open Banking also comes with its own responsibilities. The other side of the coin is security. With increase proliferation of multi-national collaboration across players to offer an inter-operable, component-based services model, technology architecture definition needs to balance between both openness and security, which in itself is a fine balance.
So what does this have in store for the industry as a whole? Industry analysts see the emergence of what would be a new digital marketplace, that allows customers to shop for new products and services powered by API-enabled Open Banking, matching needs with offers. This would also see aggregators converging complex APIs to universal standards, with a stamp of security delivered through industry directories and trustedparty certifications. More flexible business models, reduced time to market and improved usability are the more likely visible changes, but the driving undercurrent eventually leads to one common goalpost: better customer experience. Ultimately, no matter what the era was, is or will be, the writing is always on the wall: the customer is king.