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COLLABORATION, AGILITY AND OPENNESS: HOW BANKS CAN SEED THE GROUND FOR TRANSFORMATIVE FINANCIAL SERVICES

FINANCIAL SERVICES

Sarah Maber, Managing Consultant at World Wide Technology (WWT).

The introduction of Open Banking and the Payment Services Directive 2 (PSD2) disrupted the financial services space, unlocking the potential for a wave of innovation, by opening up swathes of anonymised customer data to third parties. Banks now have the opportunity to collaborate in the creation of truly ground-breaking services. But they’re failing to seize it.

 

Learning from fintech

Open Banking and PSD2 could put banks at the forefront of a revolution in consumer financial services. New capabilities enabled by the legislation are already giving people control of their finances in ways previously impossible. Consider the ability to view the status of multiple financial services in one place, or to make quick and easy payments direct from your bank. Customer experiences such as these, and the further innovations that Open Banking enable, can support banks in expanding their customer bases, especially among the lucrative 24-35 demographic who are currently being courted so successfully by the fintechs.

This understanding that the “mobile generation” expect convenience, speed and transparency in digital financial services has seen mobile banking start-up Revolut acquire eight million customers to date. Indeed, to capitalise further, it has recently created an offering for children aged between 7 and 17, which provides the functionality of a bank account (a current account, a Visa card and transaction push notifications), but is delivered under the watchful eye of a parent or guardian, who can set up a regular allowance.

But while Open Banking and PSD2 offer the chance for banks to collaborate with these exciting fintech players, and bring their expertise and agility into organisations, they are mostly failing to take it. One reason is that banks differ so markedly from fintechs. They typically move more slowly and have such different cultures that competitive tensions are inevitable.

 

Building blocks for big tech

Technology giants such as Apple, Google, Alibaba and Facebook have also entered this sector through the launch of financial products such as Facebook’s Libra and Apple’s Card. These companies are innovating through an aggregator model, leveraging the capabilities of fintechs and banks to build new financial products and services.

In a rare sign of things to come, HSBC recently partnered with Chinese logistics firm Cainiao to offer rapid trade finance loans to online merchants through Alibaba’s Tmall platform[1]. HSBC uses third-party data on customer background, real-time inventory and operational status provided by Cainiao to approve the loans. This innovative partnership enables HSBC to get a greater share of its product into the market much more rapidly using an existing technology platform.

What is often misunderstood by the banks is that technology players don’t want to become banking operations. They prefer to offer the consumer-facing services for which they are so well known. Unfortunately, the majority of banks are unlikely to see the situation as HSBC does, viewing the moves of technology players as land grabs. This means many opportunities to expand their offerings through collaboration are being missed.

 

Thinking different

If they are to seize the opportunity presented by Open Banking and PSD2, banks need to change how they think and act. They need to shift mindset to realise that they are no longer perceived as the innovators of the financial services market, as consumers can gain access to the services they need from a far greater ecosystem of businesses. If banks want to prosper in this new reality, they must be more open, agile, flexible and collaborative.

One essential step to opening up collaboration is for banks to provide more APIs – and crucially, more useful ones. These are the tools upon which third parties can build the next generation of financial application and services, using the financial institution’s service backend and transactional capability as a foundation.

Consider SMEs, whose owners want automatic and simple integration between their software and their financial accounts. Banks have the opportunity to support that link between business accounting software and financial accounts by introducing the right API. The benefit to banks of developing an interface of this sort is that it’ll increase the probability that SMEs continue to bank with them.

The example above illustrates how APIs enable collaboration but can also foster much greater service innovation. Rather than seeing APIs as a tick-box exercise to satisfy the financial regulator, banks need to think of them as their opportunity to drive the collaboration and innovation necessary to retain and expand their customer bases.

 

Embracing agility

The financial products that will emerge from partnerships between banks, fintechs and the tech giants represent a lucrative opportunity for all stakeholders. To create them, each will need to be tolerant of different ways of working and open to new business models. Banks, in particular, must learn to embrace agility and collaborative thinking.

A good example of what could be achieved is UK-based Metro Bank’s recently forged partnership with Lending-as-a-Service (LaaS) provider ezbob. Ezbob applies AI to Metro Bank’s data to provide fast and secure access to finance, enabling Metro to deliver a seamless, web-based lending process to its business customers. Applications take minutes, and funds can be made available the same day.

As collaboration increases, it is very likely the culture of banks will move towards that of fintechs. Banks can never be start-ups, but they can be fleeter of foot and to embrace innovation more deeply, which, in turn, will seed the ground for a stronger ecosystem.

 

An exciting future

Open Banking and PSD2 will deliver services that consumers may not realise they want but will soon find they cannot bear to be without. The driving force behind Open Banking is the fact that customers are willing to hand over their data if they get tangible benefits in return. What has worked so well for the likes of Facebook and Google is also the case for financial services – and beyond Open Banking, this truth is underpinning a longer-term journey towards Open Finance.

Open Finance enables organisations beyond banks to provide the same level of access to data that PSD2 has provided for Open Banking. By facilitating easier switching between financial products and financial transfers, it could for example see the development of services that promote consumers’ financial health, automatically optimising the products they use to match their financial standing.

A new Open Finance regulation – the Pan European Pension Product – will also provide interesting opportunities. Its aim is to eliminate the barriers to customers moving their pension between European providers, finally elevating a very traditional service into the modern world.

Just as is the case with Open Banking, ambitious partnerships will need to be formed between relevant stakeholders to make services like these a reality. Ultimately, whatever is done must serve the needs of the customer. The organisations that evolve fastest to deliver the most painless and seamless ways to meet those needs will see the greatest success in future.

[1] https://www.finextra.com/newsarticle/35491/hsbc-to-use-third-party-data-to-approve-rapid-loans-for-alibaba-merchants

 

Banking

SEIZING THE OPEN BANKING OPPORTUNITY

Nick Maynard is a Lead Analyst at Juniper Research

 

Open Banking has made significant progress in 2020, having recently launched across much of Europe and now starting to emerge in other markets too. And there are two primary reasons why Open Banking is disrupting the banking industry so much:

  • Banks have begun to discover the real competitive advantage of a more open approach to banking. Offering a superior Open Banking experience to customers can be a compelling differentiator from other competitors as part of a wider digital app experience. Open Banking also creates a level playing field in markets where regulatory intervention has led to Open Banking deployment. As all banks are required to deploy APIs in this scenario, the situation is the same and does not put any one particular bank at a disadvantage.
  • Legislation – for example, in October 2015, the European Parliament adopted PSD2 (the revised Payment Services Directive). By early 2020, major banks in the EU had adopted Open APIs. There have however been many cases of late deployments of APIs and problems with the availability of APIs.

 

Nick Maynard

The Disruption Factor

Open Banking is a major disruptive factor for banks. The reason for this being that it opens up account data to both AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers), which can attempt to carve out a role in the banking area.

  • AISPs: These new vendors are able to access transaction data and balance information, as well as related information. This has, in particular, led to the rise of vendors such as Emma, Yolt and Connected Money. These vendors combine information from multiple sources, adding value to the user.
  • PISPs: In this case, the vendors are able to leverage Open Banking API connections to initiate payments directly from the bank accounts in question. This means that these players are able to bypass traditional payment methods, such as cards. Vendors such as American Express and PayPal have already launched solutions that have taken full advantage of this action.

 

PSD2 Changes

Generally, the implementation of the new PSD2 European regulation for electronic payment services effectively reduces the entry barriers for new digital players. It also opens up banks to the potential for competition, enabled by their own APIs. This allows these players to compete with existing services in fields currently offered by the banks. In the case of AISPs, it is possible that third-party applications could displace the role of the apps from incumbent players, which would dilute the bank’s relationship with their users.

As with any fundamental change to markets in the banking area, there is the potential to bring a number of both opportunities and challenges to consider with Open Banking.

Open Banking Opportunities & Challenges to Consider

Source: Juniper Research

Banks and other parties that are looking to become involved in the Open Banking ecosystem must weigh these opportunities and challenges carefully. Open Banking certainly needs a more collaborative approach than traditional banking models, which will require significant effort to make them successful.

 

The Forecast for Open Banking

The total number of Open Banking users is set to double between 2019 and 2021, reaching 40 million in 2021 from 18 million in 2019. The ongoing Coronavirus pandemic is increasing the need for consumers to have the clarity of combining their accounts and gaining insight on their financial health, and also boosting momentum in the adoption of Open Banking.

This extraordinary growth is being driven by Europe, where the regulator-led approach to Open Banking has created a standardised market, with low barriers to entry. This contrasts with markets like the US, where a lack of central regulatory intervention is limiting growth potential.

 

Open Banking – Delivering Opportunities and Threats

It is worth noting that Open Banking can be both a threat and an opportunity for traditional banks. While Open Banking exposes user information and access to potential competitors, this threat has the potential to affect all players in the market equally. Consequently, established banks must create innovative Open Banking services that will provide benefits for the user, while also attracting customers from less innovative competitors.

Payments will be critical to the emerging Open Banking ecosystem; accounting for over $9 billion in transaction value in 2024. However, payments in this ecosystem are at a particularly early stage. While eCommerce is dominated by card networks, there is the potential that this role will be eroded over time by ‘direct from account’ payments. Consequently, card networks should look to offer Open Banking-enabled payment services, in order to offset the risk of future disruption.

Open Banking Users in 2021 (m), Split by 8 Key Regions: 40 Million

Source: Juniper Research

 

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Banking

2021: THE NEW-NORMAL LIFECYCLE FOR BANKING

Laura Crozier, Global Director of Industry Solutions, Financial Services at Software AG

 

It would be impossible to talk about predictions for the banking industry in 2021 without mentioning the cataclysmic impact that 2020 and the pandemic has had on people, businesses and countries.

Unlike with the global financial crisis, banks have been able to step up as “good guys” this time around, rebuilding their reputations as well as accelerating digital transformation. One of the main outcomes is increasingly smart, efficient online payments.

In 2020, the banking industry innovated like never before. This is the new normal. Overall, customers and society will be the beneficiaries from the changing industry. Here are my predictions:

 

Reputations are reborn

Banks across the globe pulled out the stops to integrate and adapt systems and processes to help customers during the pandemic. They offered accommodations in loans, assisted governments with the distribution of financial relief, and supported consumers by upping contactless spending limits and virtual deposits.

In 2021, banks will risk losing that rosy glow as economic circumstances drive them to deal with non-performing loans, mortgage foreclosures, layoffs etc. But, beyond their role in society as providers of capital and liquidity, banks will invest to sustain their reputations as trusted and good corporate citizens and use their power to persuade their customers and providers to adopt higher environmental and ethical standards. This will be in the areas of bank carbon-neutrality, sustainable financing, serving the unbanked, diversity and gender equality (as the number of women running a major global bank will double from one (Jane Fraser at Citi) to two). It’s a start.

 

Coming of age in the way of working

Back in Q1, when bank employees cranked up their laptops on their dining room tables, banks that were strategically undertaking business transformation accelerated their efforts. Those that were tactical, or on the fence, now understand with painful clarity that this work must be undertaken strategically.

Cracks in process and the way of working and their resulting risks can be crippling. Especially from a back-office perspective, it is not enough to rely on “organisational memory” and collegial proximity for work to get done right. Advanced banks pushed the boundaries of remote work, and the proof of concept was successful. So, they’re doubling down on developing digital twins and moving to the cloud. They’re adopting the hybrid office/WFH approach to reduce health risks and reduce cost permanently. The watercooler will never be the same.

 

The death of cash

Ok, maybe the rumours of the death of cash are a bit exaggerated since there will always be the need for cash (and, to some extent checks; the USA, for example, cannot seem to live without them). But the pandemic has permanently changed the way that consumers and small businesses bank, and the demotion of cash has been accelerated by a decade by the pandemic. For example, the Norwegian central bank said that cash payments in that country have plummeted to just 4% of transactions since March.

Implications? It will be critical to continue evolving payments to be smart, safe and flexible to compete in new world, in both retail and commercial banking. Also, the permanent change in the mix of channels will see banks’ face-to-face engagement with customers fade. Branches aren’t going to go away entirely, but they will be reserved for high value activities – by appointment only. To compensate, the personal touch has to be delivered digitally and intelligently.

The role of the bank as a “financial wellness partner” is being born. Banks will use customers’ data, not just to personalise and differentiate banking experiences, but to make recommendations for products and services beyond traditional banking from across their ecosystem to serve their customers well. Just as customers own their cash (physical or digital), in the future they will demand that they own their data (and can share it with whom they choose). Then retail and commercial clients will share their data in return for value.

 

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