In the second installment of the Open Banking, Embracing Change series, Strander Mario Bricio recaps the new roles banks can play in the Open Banking-PSD2 space. From offering new services to other financial institutions to providing more secure utility services, banks seem to have a stimulating, fruitful path ahead. Let’s dive into it.
1. Bank as a platform provider (centralising and processing information)
Platform-related business models will allow banks to own the end-to-end customer experience of traditional and non-traditional touchpoints. Banks could contribute their capabilities in the fields of security, compliance and, more importantly, data consolidation and enrichment to the platform. FinTechs and other regulated third-parties, as well as the bank itself, will be able to take advantage of these platform-related capabilities and provide highly customer-focused solutions.
This model supports no-fee or low-fee products and services that threaten traditional banks’ fees and margin revenues. FinTechs are leading the way in this field, mostly by using fast development methodologies and launching new products and services not yet offered by banks, such as easy-to-use retirement or student loan repayment plans. FinTech companies can provide these banking products and services without the legacy costs structures of traditional banks, but more importantly, without the regulatory barriers.
Operating in such a model, banks can generate massive economies of scale, potentially servicing millions of customers and generating network effects, which could lead to an increasing returns to scale. There is a data network effect: The more banks know about their customers, the better services they can provide; and the better services banks offer, the more data they can collect. And so on.
2. Bank as a channel provider (payments and transactional services)
Some banks might want to specialize in customer-interface design by leveraging their front-end, customer experience capabilities. This will make it easier to source best-of-breed products either from the bank or from different entities and FinTechs. Banks that act as channel providers will also be able to offer platform solutions related to an increasing number of FinTech and industry-wide utilities, like money transfers or foreign exchange.
Customers, especially millennials, are now open to use multiple channels for interactions, so banks have to adopt a multi-channel strategy and a business model that are adapted to the current landscape. This banking channel would be vertically integrated to take advantage of banks’ execution capabilities and, by extension, their ability to offer superior levels of customer fulfilment.
3. Bank as a service provider (access new markets and niches)
Unbundling and recombining bank services will allow entities to define entirely new business models. So, another option for banks in the open banking space is to become a service provider to other banks or FinTech companies. The value proposition of such a model is to eliminate heavily regulated activities and take on the associated compliance burden, or even to apply for a banking license.
API-based banking platforms bring transparency, automation and simplicity when delivering back-office services such as account opening, multi-currency accounts, accounting, etc. while complying with KYC, AML and open banking regulation.
This Banking-as-a-Service model offers the “plumbing” of financial services in terms of--underground, hidden--access to the clearing system, current accounts openings or prepaid debit cards programs, as a simple consumable API for separate customer-facing value propositions. It productizes white-label back-office functions of banking, allowing other banks or FinTechs to build on top of them to create new and exciting customer experiences.
This business model could be very lucrative if the service provider is able to achieve significant economies of scale, spreading the fixed compliance costs across a much larger volume of banking end customers. Even digital-only banks acting as a platform or channel provider can leverage on this type of business model if they have an existing built-in core system platform that supports white label back-office banking operations. The most known example of a digital-only bank offering white-label accounts and domestic clearing access is Starling Bank.
4. Bank as a utility provider (drawing on their positive brand image and data security)
In some cases, banks that are struggling to find a clear affinity with any customer segment or product may be interested in specialising in back-end processes and infrastructures, such as cloud computing, cybersecurity, AML / CTF, account administration or protection from financial crime.
Since regulators are demanding financial institutions to adopt KYC standardisation and enforce stricter controls around customer on-boarding, customer assessment and due diligence to fight the growing instances of AML events, cyber crime, terrorist financing and fraud schemes, banks can also leverage on their existing infrastructure to provide added-value utility services for the financial ecosystem.
Adopting these growing demands from regulators is one of the biggest concerns for banks in order to comply with domestic and regional banking regulations. In most cases, costs associated with these regulatory changes are considered sunk costs for the bank.However, by leveraging on this business model, banks can transform these sunk costs into revenue.
DIFFERENCES IN TECHNOLOGY AND INFRASTRUCTURE FOR EACH ROLE
On the technology side, each of these business models can lean on different technology stacks in order to harness the whole potential of interacting within the financial ecosystem. Banking is subject to the same technology-driven change as other industries, however this changes have a bigger impact on financial services, making possible for the industry to become an economy creator. New technologies have provided a complete, global and cross-industry platform for distributing goods and services, thus opening up banking to outside competition, especially from internet platforms such as Amazon, Alibaba, Google, etc.
Advancements in data science and AI make it possible to give faster and constantly improved levels of online and offline customer experience across a much larger customer base. Banks with the best algorithms, and especially the most data, can dominate the market and enjoy an important competitive advantage. Mobile technology has increased internet usage exponentially by increasing the amount of time we spend online, making this the main channel for customer engagement and extending the rewards to the platforms that succeed.
Since data, algorithms, mobile and transactional capabilities seem to be the key drivers for differentiation in the new financial ecosystem, banks will have to put more effort into developing more innovative capabilities related to the open banking role they want to play:
1. Platform-based business model (data, algorithms, mobile)
With PSD2 and open banking regulations, banks are in the position of managing the UX of their clients, moving away from a product business to a need/journey business.
In order to make this business model successful, banks need to become a virtual financial advisor, using customers’ data to help them better manage their finances and operational decisions. Effectively providing customers with the right advice at the right time and across the right channel --through PFM visualization and interaction techniques that help customers act smarter with their finances-- will be the winning step into market dominance. That way, banks can achieve optimal benefits from a platform-based business model.
Creating a single view of customers’ finance is crucial to enable targeted products and other interfaces within the platform offering. The challenge for operating such a model is not only mobile technology, but data. Without access to customers’ transactional data, it is difficult to provide truly added-value financial advice based on financial behaviour. However, without the right algorithms, providing truly valuable insights is practically impossible. For example, in order to help customers set budgets, it would be useful to give them personal advice on how to save money (and invest it), or on how to take advantage of customized offers based on their past spending behaviour.
2. Channel-based business model (mobile, transactional)
Under the channel-based business model, banks need to use technology stacks and development technologies similar to those used by FinTech or e-Commerce companies. By experimenting with minimum viable product (MVP) and rapid prototyping, banks will be able to push out new channel features and enhancements to customers as part of a continuous feedback loop with customers to understand what works and what does not.
Banks that continuously improve their digital channels experiences will get more customers, attracted by the ease of use and the possibility of making transactions and operations digitally. This, combined with a convenient mix of product and services, will make the difference amongst the other players players in the market. Banks competing under this role will pay special attention to combine both mobile and transactional capabilities. Middleware capabilities will be a critical part when combining both front and back-end operations. API-based middleware platforms with monitoring (ensuring service availability) and brokerage (simultaneously interacting with different microservices from different applications) capabilities will be a key technology differentiator in this market space.
3. Service-based business model (transactional, data)
For big banks, replacing a core banking system is like changing the engine of a Boeing 767 in midair. Banks with out-of-date core systems will have to decide where to invest in terms of their long-term strategy for their legacy systems. Systems of records, financial positions, general ledger and payments need to be processed on high availability infrastructures that support their operations. Cloud platforms allow solutions to be deployed quicker and easier, reducing TCO by decreasing the cost of infrastructure and pursuing process automation.
Streamlining operations for existing manual processes and data operations will allow banks to share their core capabilities, delivered through APIs as services for FinTechs or other banks, at the lowest cost by leveraging on economies of scale. Banks competing under this role must put especial efforts into maintaining open banking APIs and providing managed third-party access to bank and customer data, making easy for FinTech companies and other financial institutions to integrate and test their apps in a sandbox environment, and easily move to production.
4. Utility-based business model (data, algorithms)
Despite the financial crisis, banks still have numerous competitive advantages in terms of trust, larger customer base, lots of data and strong execution capabilities across the value chain, that can be leveraged to offer value-added services to the whole ecosystem. A re-engineered, KYC-centric business model with aggregated customer view will streamline regulatory compliance and reporting. Banks competing under this role must adopt technologies for data aggregation and model creation (for credit scoring, AML events detection, etc.) ensuring compatibility with advanced services by deploying a flexible IT infrastructure that enables open collaboration with partners, customers and employees.
Stay tuned for Volume III: Open Banking Delivery Maturity. In the meantime, have you read the first part of this series?