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

 

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