Open banking as a business model – the implications for banks
Open banking, if it is intelligently positioned and implemented as part of a digital transformation strategy, can give banks the tools to survive and compete in the future. There are also cultural issues to contend with.
Put simply, open banking is internet banking between two computers, rather than between a computer and a person. A computer program run by a third-party provider can securely access a bank’s services via technical interfaces, known as application programming interfaces (APIs).
In Europe, the main driver of the switch to open banking is the EU Payment Services Directive 2 (PSD2). This requires all EU banks to provide APIs for access to account information services and payment initiation services by September 2019 at the latest. The aim of this regulation is to increase competition between banks, and to provide customers with self-determination with respect to their customer data. If the customer requests it, the bank must enable access to the APIs for all licensed third parties at cost price.
The UK and the US are leading the way
Open banking has received a mixed welcome in the various markets within Europe. The UK is currently leading the way, with its diverse ecosystem of fintech companies. Part of the reason for the speed of success here was that comprehensive specifications for the APIs were already in place in 2018, although this was not required under PSD2.
In the US, in contrast, the market was the driving force. 1999 saw the foundation of Yodlee, a firm that pioneered the idea of account aggregation. There are now a whole range of companies offering millions of customers access to tens of thousands of banks.
To date, there are no regulations requiring open banking in Switzerland, nor is there a market for account aggregation. However, there is a Swiss tradition of undertaking joint projects to determine and implement standards across multiple banks. Among others, SIX and Swisscom have launched open banking services with b.Link and the Open Banking Hub. The solution from SIX is aligned substantially with the PSD2 model, offering account information and payment initiation as preliminary services. Other banks are in the process of implementing these interfaces via b.Link. We are likely to see the initial offerings this year. The Swisscom solution is more of a marketplace where fintech companies can offer a range of services for banks.
Banks and the platform economy
From a strategic perspective, open banking is described as a business model for the network economy – and often also for the platform economy. Digital platforms connect providers with purchasers of products and services. Platforms such as these become more and more useful as they grow, as network effects mean improved benefits for all participants. What’s more, the incremental costs for additional participants are very small. However, both these factors also benefit monopolies or oligopolies.
Overall, digital platforms may well turn out to be the most powerful business model of the age – the biggest companies in the world in terms of market capitalization today are all digital platforms. The most highly valued company in the financial sector is Visa Inc., with its classic, global platform business model. They have succeeded in attaining a globally monopolistic position through the use of digital platforms.
Banks need to ask themselves the following ques¬tions in order to find a suitable strategic response to the challenges of the platform economy:
- How quickly will the platform economy develop in my market?
- What role do I want to play as a platform provider?
- Do I want to build my own platform?
- Do I want to participate in one or more platforms?
- Do I want to be an orchestrator, provider, consumer, or all of the above?
- Am I going to position myself differently for different customer segments and services?
- Is it essential for me to control the digital customer interface, or would selling my services via a third party suffice?
- Should I simply comply with the regulatory minimum (in the EU) or actively develop the business model further?
- Can I make use of open banking APIs to benefit from the innovative power of fintech companies?
Technological success factors and challenges in implementing open banking
For many banks, the answer will be that they need to offer open banking APIs in one form or another. In principle, by making this decision they will become a provider of software services. However, if the aim is simply to offer open banking APIs with no further ambitions, it is often possible to find a provider who can solve the problem without having any great influence on internal organization or technology.
But if a bank wants to compete with its APIs, more work is required. In cultural terms, this means becoming a software organization. IT is no longer an aid, but a software product that you sell.
Google and their ilk have created very high expectations in relation to the availability and scalability of internet services. You can resolve this by using the same infrastructure for banking that the big internet firms use. They even offer this for general use, in the form of the pub¬lic cloud (AWS, Microsoft Azure, Google Cloud Platform, and others). These infrastructures are optimized for the construction of always-on, scalable solutions. In a bank, the existing internal infrastructure is often not up to this standard.
A weak point in the architecture is usually the bank’s core system itself; its architecture has often been in place for several decades and cannot easily be adapted to the increase in expectations. Solutions for extracting data from the core systems and replicating it in databases for the front-end are of only limited help. Replacing at least parts of the core systems and transferring them to the cloud is therefore unavoidable.
At the same time, banks are often looking to increase their speed of innovation through open banking. To do this, they are turning to agile development methodologies and DevOps. This involves small teams developing and operating individual software products independently and under their own steam. This also includes the use of APIs internally to provide separation between the individual products so they can be replaced independently of one another.
Working with fintechs and the war for talent
The open banking business model also affects the way banks market themselves. In the future, the banks will not only need to impress customers with their services; they will also need to impress fintech companies with regard to the benefits of their APIs. Alongside the price, important factors here will be the number of customers they can reach and the availability of their services. One key criterion is developer convenience, which refers to the ease and speed with which a new application can be developed for the provided APIs. This is crucial, since fintech start-ups often have limited resources and are under significant time pressure.
In addition to technologies, methodologies, and processes, high-quality IT also requires suitable employees. Banks need to present themselves as interesting and forward-looking employers in order to attract the best candidates. In my opin¬ion, the ability to attract and retain the best people and offer them a productive working culture is the biggest challenge in the switch to open banking.
For the above reasons, banks must take an in-depth look at open banking in the context of the digital transformation and in particular as a platform strategy. They will have to decide for themselves what this means for them. If a bank decides to adopt this business model, IT will become a pivotal issue. The bank will suddenly find itself competing with the big internet companies in terms of service quality, security, speed of innovation, and scalability. To be successful in this environment, the organization must align itself – its technologies, its methodologies, and its culture – with the pioneers of the digital economy.
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