Open Banking, FinTech and Platfrom The Trifecta for Banking Innovation
Senior Director and Digital Evangelist, Infosys Finacle
Banking Turns Open and Collaborative
Three years is a long time in the global banking world. During 2015 to 2017, when the FinTech trend began to take root, incumbent banks viewed the new competition with a measure of apprehension. A chief concern was how their creaking legacy systems, some of which were more than 50 years old, would compete against the nimble, innovative models of FinTech upstarts.
Gradually there has been a perceptible change in attitude and approach. In the past year or so, both banks and FinTechs have realized that there is more advantage in joining their complementary strengths than pitting them against each other in the marketplace.
The realization couldn’t have come at a better time. In several parts of the world – Europe, Australia, India and elsewhere – open banking is either being mandated or encouraged by the government, leaving banks with no choice but to share their customer data and development environment through APIs with authorized third parties, such as FinTech companies, in their financial ecosystem. To their credit, banks are responding positively: in a recent global survey on payments, 87 percent of the respondent banks claimed to have a strategy for open APIs, significantly more than the 59 percent who said the same thing a year before.
Take that as a signal of banks’ acceptance of the new reality of banking – open, collaborative, and ecosystem-driven. In this reality, incumbents are shedding their universal model of linear value chain to gradually transform into platform-based financial marketplaces with a wide set of own and rival offerings to fulfill not just the financial needs of customers but also others, ranging from travel and leisure to shopping and education. The transition to a platform model is no surprise, given that in less than a decade, the leaderboard of companies by market capitalization in the United States has changed from Exxon, GE, AT&T, Microsoft and P&G to Apple, Alphabet, Microsoft, Amazon and Facebook, all of which have very substantial platform plays.
FinTech companies are essential for a thriving financial services marketplace and for a successful platform bank. FinTech-bank relationship in today’s open API environment come in a variety of forms. In the first one, the bank itself creates a digital subsidiary with FinTech flair for its digital operations: examples include a Goldman Sachs subsidiary called Marcus, digibank from DBS, and Greenhouse by Wells Fargo.
Another model is one where a FinTech firm with a niche offering evolves into a full-fledged, digital, challenger bank. Atom Bank and Monzo in the United Kingdom, and India’s Paytm exemplify this.
The third option is collaboration between an incumbent bank and a FinTech provider that is all about taking highly innovative products and services to market. Take the case of Portland, Oregon-based Simple, which has partnered with banks BBVA Compass and the Bancorp to offer FDIC-insured checking accounts built to help customers save money, and supports smart spending with inbuilt budgeting tools. The accounts are free, and Simple doesn’t charge fees to its customers. Or that of online small business lender OnDeck, which is offering its underwriting technology to JPMorgan Chase that the bank will use to quickly approve and disburse loans to its own small business customers. Then there’s Moven, which has licensed its money management app to Canada’s TD Bank, which claims a cut in spending of 4 to 8 percent among app users, and gives customers unique insight via “spending meter”. And let’s not forget SoFi, which announced in March this year that it was partnering with 6 banks to offer a checking account that would come not only with zero fee but also a debit card, bill payment and other facilities, and an interest rate of 0.92 percent that was several times the market average.
Innovation and Insight
By allowing FinTechs and third party developers access to open APIs at the experience layer, banks can leverage their innovation expertise to acquire applications of real value. Think of Ayden, which enables banks to receive customer payments from any channel, from mobile app to bank account to Facebook, to save them the cost and effort of setting up infrastructure for that purpose. Or China’s Xero, which offers low cost business accounting services to small businesses, and a new revenue stream to their banks.
Besides innovation, FinTechs also bring valuable insights to their bank partnerships. Banks can use these insights to improve and personalize products, services and experiences, reach customers on the right channels, and target promotions to the right audience at scale. For example, Ant Financial helps its partners make personalized, contextualized recommendations to more than 800 million customers at every stage of their journey.
Platforms and the Banking Ecosystem
An open API allows banks to easily onboard FinTech partners and their innovative solutions to increase revenue and more importantly, stay relevant in a rapidly changing landscape. It is also the most important tool for building a banking ecosystem.
Banking ecosystems, with their diverse bank and non-bank participants, have the potential to completely transform banking as we know it. New models of the platform bank, other than the marketplace model mentioned earlier, will come up in the future. Examples include specialist banks that offer only one or two products that they are really strong in, and distributor banks, which focus only on delivering products sourced from other providers on every possible channel.
However, the big decision before banks is not which model to adopt, but rather, what must be the core proposition of their platform business. Just as the most successful platform companies understood that they were in the business of connecting providers of transportation and accommodation with consumers, rather than owning cars and hotels, banks too must figure out the real needs that they serve. One thing is clear – the days of transactional banking, of merely lending and borrowing money, are over. Today’s customers want their banks to enable their lifestyle through every stage of life – starting from when they enter college until the day they retire. Nothing is better suited to fulfill this expectation than the trifecta of Open Banking, FinTech, and the Platform Model.
5 Steps to Realizing the Vision of the Platform Banking Model
Product Manager, Infosys Finacle
Driven by ecosystem orchestration, reduction of marginal costs, and collaborative innovation, platform business is fast emerging as an important pillar for success in the digital world. A recent report from McKinsey says, “Platform is the preferred operating model for 7 of the world’s 12 largest corporations”. However, none of these organizations are financial institutions. Banks are lagging behind in adoption of the platform business model.
Banking executives are aware of the advantage of platform business – platforms can help banks retain their competitive edge in a world where customers are constantly resetting their expectations based on their experiences across sectors. But platform is a new business model for banks, and designing and building a platform is a new and sometimes confusing journey. Some important questions before a bank looking to build a platform business include: Shall a bank acquire a platform, or build it from scratch? Shall the platform run on the cloud? Can a bank develop its own API standard or wait for an open standard from regulators? Is an outside-in approach better than an inside-out one when designing platform interfaces? How to measure the success of platform business and how to monetize the platform?
Understanding the potential value of data is the foundation of a bank’s platform business model, as several chief architects concur by recommending a thorough data governance model as a key prerequisite. However, there are a variety of other considerations such as interface design, infrastructure and KPIs that banks must weigh in on.
This article talks about a five-step process for banks to review their platform strategy, and overcome any implementation challenges.
#1 Segmented Platform Strategy
Banks don’t need to “create a platform from scratch.”
Yes, platforms help consummate matches between suppliers and customers. But the role of a platform is more than being a modern middleman. It is about relevance, control, innovation, and monetization. Moreover, banks can use the platform to remain in control of their customer data and explore ways to monetize this data for additional revenue.
Banks do not need to create a new platform from scratch to be a matchmaker. To stay relevant to their customers’ digital journey they can partner with a digital firm’s ecosystem. To build innovative customer experience they can allow FinTechs to access their open APIs. Banks looking to gain from synergies with non-banking businesses can choose to acquire an e-commerce platform. Thus banks must zero in on their strategies according to their priorities.
Strategies segmented by data ownership and accessibility
To help banks explore strategies for platform business, we have summarized six approaches relevant in banking (refer to the Finacle document – A strategy framework for platform banks). Based on the two dimensions of data ownership and data accessibility, our segmentation model can help banks align their platform strategies and deployment models more closely to the needs of the ecosystem. Banks can choose to embed, create, curate, participate or buy a platform business. For instance, creating an API gateway, building an online car marketplace, and exchanging Amazon loyalty points.
There is no one-size-fits-all strategy. Different platform approaches come with their own unique challenges. Participating in mega-size ecosystems of digital firms could be a time-to-market hack for banks transitioning to the platform model, but it also puts them at a risk of losing data ownership. A leading bank may choose to leverage its network to curate an ecosystem, this approach may not scale as much as the bank’s open APIs. Banks may choose to create marketplaces for financial products, but may find it challenging to get a large number of participants from other banks.
Whether it is creating banks’ API gateway, building an online car marketplace, or exchanging Amazon loyalty points, banks need a careful evaluation from two critical dimensions – the ownership of data, and the accessibility of data (refer to the Finacle document – A strategy framework for platform banks). Banks can then select their best-fit strategies in the context of their ecosystem requirements and their infrastructure constraints.
#2 Scalable Infrastructure
Bankers have traditionally been and to a large extent continue to be risk-averse. Given the lack of experience in platform business, banks often choose to start small with respect to budgets and resources. An international bank is known to have started its open banking initiatives with a team of just five engineers and analysts. Apart from mitigating risk, starting small also endows the bank with an agility to innovate. For instance, banks can get an open API marketplace up and running in a couple of months and enrich the functions later.
“Start-small” often leads to cost-effective solutions, such as open source tools and simple out-of-box products. While there’s nothing wrong in adopting the open source approach, it must be ensured that the infrastructure – hardware, database, middleware, and traffic management – that fits a short-term solution in a start-small approach is scalable and manageable to meet the future demands. Platform business may grow at an unprecedented pace. A bold forecast estimates 80% of new transactions and services will initiate from platforms. Stepping back from estimates to the scenario today, Ant Financial is said to have sold over one hundred million insurance offers through Alibaba’s platform in its Single Day campaign. So, although starting small is advisable, planning small spells doom. Banks must “plan big” and ensure the scalability of their underlying infrastructure. They should explore a traffic management component for their infrastructure or run their platform on cloud.
#3 Ecosystem-centric Design
Bank CIOs have a variety of options to build platform businesses: in-house, platform vendors, ecosystem partners, and open source tools. In taking their platform businesses off the ground, banks must reach out to vendors, regulators, and partners, with an unrelenting focus on the key requirements for a good platform design: light-weight, secure, time-to-market, scalable, and importantly, ecosystem-friendly interfaces. Many of these rules could be summarized in a single design principle: easy plugin.
Architects sometimes design platforms based on legacy architecture and interfaces so that existing core capabilities can easily integrate into new products. Nevertheless, a platform, as an orchestrator of ecosystems extending across sectors without borders, should be able to plug in third parties easily and quickly. Easy plugin is an outside-in rather than an inside-out approach for designing ecosystem-friendly interfaces.
Business consortiums and regulators have become an important catalyst to many platform business initiatives, for instance, standards for open banking. The Association of Banks in Singapore published an API playbook in 2017, and HKMA launched a consultation on the new Hong Kong Open API Framework early this year. Needless to mention Open Banking in the UK and Australia, PSD2 in EU, and UDI in India, have already got banks transforming themselves for compliance.
All these frameworks and guidelines provide references to API security and catalogs. However, while harmonization of open banking interfaces is important, it may defeat the purpose of time-to-market, given that administering any kind of standardization in banking takes years to happen. If banks want to scale their platform business to thousands of partners and developers, it may be worth considering speaking with Fintechs, digital firms and IoT manufacturers who can help design APIs as the key consumers of banking APIs. Eventually, open banking is not just about banks opening up their data to each other for regulatory compliance, but also a key opportunity to grow their ecosystem business. Although the importance of regulatory standards can’t be emphasized less, bank executives should design open APIs not just based on exposed core banking interfaces or regulator’s API standard. What is required is an ecosystem-centric, domain-based and outside-in approach to make platform business effective, user-friendly and scalable.
#4 Driven by New KPIs
To successfully evaluate the performance of platform business initiatives, traditional value metrics of revenue, cost and risks are not sufficient. A new set of KPIs and metrics are needed to help banks measure and ascertain how well they fare on their platform strategies and API strategies. New dimensions such as traffic, conversion, and monetization are critical for effectively evaluating platform businesses.
Monetization matters but should not be a key priority at the beginning
Banking executives typically have a common question in mind before launching a platform initiative – how to monetize the platform business. Platform business is designed to reduce marginal costs so that consumers can get better products at a lower price. On the other side, monetization as a new revenue source adds extra cost for platform transactions. Experiences from other industries portend that monetization right at the start could potentially slow down the growth of platform business, and bank executives should focus on making connections and increasing traffic when starting out on their platform journey, rather than obsessing over ways to charge money from partners and third-party developers. However, banks should ensure that their infrastructure lends itself well to monetization, which might be key to the success of their platform at a later stage.
Focus on customer experience, traffic and context
Key questions that banks must answer to accurately assess the performance of a platform include – How many services and transactions pass through API gateways? How much purchasing is done by marketplace platforms?
New KPIs such as integrated customer experience, traffic, and conversion should be designed for benchmarking platform performance. Integrated customer experience gives a consolidated view of customer satisfaction. Most customer experience KPIs are measured in siloes. Measuring traffic is critical for evaluating the scalability and influence of banks’ platforms and their influence in their ecosystems. Apart from being a key indicator of monetization and innovation, conversion rate is an important metric to validate that banks offer the right services in the right digital context.
#5 Be Aggressive to Make Connections
Harvard Business Review says the success of a platform strategy is determined by three factors: connection, gravity, and flow. Connection is how easily others can plug into the platform to share and transact. Gravity is how well the platform attracts participants, both producers, and consumers. A good connection and gravity could be justified by how many connections the platform makes with partners and consumers to consummate the right matches. It requires banks to get the wheels in motion for a thorough plan to actively “sell” the platform to ecosystems.
Sell the value
A recent report from Mckinsey says “companies pursuing aggressive platform strategies yield a better payoff in both revenue and growth.” An elaborate API catalog and a flexible sandbox environment make a good first impression to partners and third-party developers. Meanwhile, banks also need to have a connection story ready, a story that tells how the matchmaker could create added value for third parties. To achieve that, a well conceptualized marketing and partnership plan needs to be in place to be able to actively sell the value of a platform, and make the right connections. Unfortunately, a platform working group is usually made of program managers, business analysts and architects. Banks should expand this composition to include marketing and sales specialists in the task force.
Target user in a bigger ecosystem
Ecosystems comprise more than consumers and FinTechs. Customers live a digital life made possible through an ecosystem of telecom operators, digital firms, social apps and IoT device makers. To effectively promote partnerships and attract more traction and traffic on platforms, banks should understand who their target users and partners in the platform business are, and should reach out to them actively. As in all initiatives, the 80/20 rule applies to platform businesses too. In this context, typically 80% of traffic is brought in by 20% of the participants of a platform. A successful partnership with major digital firms thus bodes well for quickly bringing in massive traffic to open banking platform. The story of how Alibaba fetches a sales figure of about 100 million insurance products to Ant Financial is proof of the value a great targeted partnership brings to a platform venture.
In 2018, platform business sits firmly atop the strategic agenda for banks’ digital transformation. Be it creating, curating, participating or investing, banks should formulate a platform strategy that connects well and fits just write in their ecosystem. To truly realize the vision of platform business, bank executives should: