The open banking paradigm has been around from quite some time now. Open banking was supposed to have arrived and adopted conveniently and sufficiently by now, but in reality, the uptake is slow. There are multiple reasons for this: from too stringent or too ambiguous regulations to resistance on the part of players involved, especially banks, which are reluctant to share their customers’ data with anyone. This is natural as banks have been the primary custodian of customer data for ages and it is not easy for them to part with it.
Adoption and full utilization of open banking depends highly on the prevailing regulations and enforcement plan. EU and UK are leading in this space with detailed PSD2 and UK open banking specifications in place. Many countries in the EU have started implementing the standard but there are countries such as the Netherlands where PSD2 guidelines have not been adopted completely due to delay on the part of local legislation, and hence the subsequent delay in implementation.
Fintechs are more than ready to embrace the open banking phenomenon given their digital agility, but they also need to become a part of the right ecosystems for driving new realities. The overall evolution of ecosystems will highly, if not solely, depend on the approach banks adopt. We look at a few of them below:
Here the intention of bank will be to meet the basic guidelines laid out by the regulator. Bank will share very basic stuff and nothing substantial that will add incremental value to the ecosystem. Banks are likely to focus on aligning their business model to one of the roles in the banking value chain instead of spreading themselves thin across manufacturing, distribution, and marketplace capabilities.
This approach, though a possibility, will be adopted by very few banks. By now banks have realized that to hold a substantial position in the future of financial services, they, along with basic enablement, need to fully utilize the power of the ecosystem and build on it with their traditional hold on customer data.
Just playing along will not be an option for banks, they need to be the playmakers.
One of the possible models could be where banks open their customer data to fintechs and act as an aggregator of all kinds of services to the end customer. The services offered will be a combination of in-house services as well as specialized offerings by third parties. In this case, banks will hold the customer relationship but will fulfill the demands through partner offerings. The third party can even be another bank whose data the home bank accesses to provide value added services through own or other partner applications. Overall, the partner services will be built on top of the bank’s core services so there is a lot in it for banks.
This is expected to be the most widely adopted approach in the near to mid-term.
In this model, banks will act as a platform that will have producers and consumers. The producers will be the fintechs and other service providers that will use bank’s open banking APIs to provide value-added services to end consumers. In this case the bank may or may not hold the relationship with the end customer. The end customer might download the third party app which is powered by bank’s core services.
For any platform to be successful, there are a couple of important points that need to be catered to: the right mix of players and quality of value created on platform. Banks have the traditional customer base so one part of the mix is there. Platform banks should work towards attracting high quality producers who can augment and enhance the value of bank’s offerings rather than just providing their own version of same old services. Hackathons would be a good starting point in this regard.
In terms of quality of services, the platform must monitor the producers stringently and incorporate ranking systems like we have in well-known platforms such as Android and iOS. They should set QoS standards and prevent producers that do not meet the QoS from participating in their platforms.
The value for banks in this model lies in the power of the network effect. Once there is critical mass of high quality producers on the platform, new customers gravitate towards it. Ultimately everything is served through the bank’s core services so it is a win-win situation where the bank’s platform consummates matches, producers expand their reach, both the parties earn revenue, and customers benefit from greater choice.
This model goes one step further than the platform bank and adds the possibility of offloading few of the banks’ development tasks to selected partners through open APIs. UI development is a prime candidate for this. It is said that a UI becomes outdated in less than 12 months. While banks can focus on enhancing the core offerings, tasks such as UI development can be taken up by firms specializing in the domain.
The evolution of open banking greatly depends on API standardization. The regulation has fully detailed API specifications in the UK, but in other regions there is still a need to arrive at a common agreed standard. To this end, collaborative ecosystems would be of great help. One such ecosystem is the Banking Industry Architecture Network (BIAN) which is dedicated to speeding up innovation in the industry.
There are many proposed models which are being tried currently for monetization of Open APIs. While this is a separate topic in its own right, few of the models being considered are subscription based, usage based or freemium models where basic services are free and advanced services are charged. With many regions going live, we will be getting a good idea of some widely adopted and accepted models.
As with any new paradigm, open banking unlocks endless possibilities. But the adoption and full utilization depends on multiple factors including regulations, willingness of players and optimum business models. In the near term, it seems that, banks will move towards full compliance and start offering third party services through open APIs. Based on customer feedback and market evolution, banks are expected to slowly move towards the platform model. But whatever approach banks choose, the focus should be on creating and enhancing value for customers through their services. Monetizing these services, although central to any business model, is secondary.