Banks and fintechs have long been portrayed as adversaries in the battle for control of the financial services industry, but the advent of open banking has both parties realising they have more to gain from working together.
Fintechs are often young, highly nimble, with little cash and even less access to large customer bases. Some have huge investment dollars but struggle to produce a good return on investment. Banks have the customers, but lack the agility with which fintechs are able to develop technology. By joining forces, they can deliver better, cheaper, faster and more innovative payment solutions. And if they have a modern core or payments engine, they can do considerably more through the use of simple APIs (application programming interfaces), which allow diverse software components to communicate.
In Europe, this approach has been championed by the payment services directive known as PSD2, which regulates payment services and service providers across the union. South African banks are known for being innovative, and aren’t waiting to be regulated before embracing the change.
It’s easy to understand why. Open banking represents a fundamental shift in the concept of banking. It enables customers to offer their data in a secure manner to permitted third parties in return for more personalised services. Used effectively, it enables banks to offer new services to improve customer experience, build loyalty and develop new sources of revenue. Globally, the shift to open banking is imminent. According to the Accenture Open Banking Pulse Survey of 2017, of 100 executives at large banks interviewed, 99 said they plan to invest in open banking initiatives by 2020. But why are banks outside of Europe considering open banking when it isn’t mandatory yet?
With PSD2 in Europe, open banking adoption is mandated by regulation. However, PSD2 is also being watched closely in South Africa. If it proves successful, the feeling is that South African regulation may follow, particularly because the use of API banking for financial inclusion is gaining traction. At the moment, South African banks can decide if, how and when they will implement open banking and the benefits of this new approach can be realised easier. And when we look at recent examples like Yolt, a fintech owned by Dutch bank ING, we can see why.
The Yolt app lets users manage their money with different banks for different financial services in one place. According to the Financial Times, Yolt is one of the first examples of a UK bank providing a platform for customers to manage money held by competitors.
Nine of the UK’s biggest banks and building societies have signed up to Yolt’s bank-account aggregation service which is delivered via an API. It allows users to optimise their money management by letting them see the balances of their bank accounts (from multiple banks) individually, or as a total (in a single view). Although Yolt is owned by ING, it is licensed as a third-party provider, and aggregates accounts from different banks. In theory, having a complete view allows consumers to remain in credit by moving money into accounts with a low or negative balance.
To benefit from these types of services, banks need real-time payment capabilities. If it takes hours to transfer money, retail customers may miss the window to avoid a fee, for example, and slip further into debt. And the same applies to corporate customers from a cash management perspective. Efficient liquidity management can now be achieved by having a single view of accounts with multiple banking relationships and reacting immediately by making instant transfers; thus ensuring all accounts can be balanced and reducing the need for unnecessary corporate loans. In theory, this isn’t a problem in South Africa, where real-time payments has been available to bank customers since 2006.
However, to survive, banks must offer a superior level of service that isn’t solely limited to the quality of processing. Banks will need to provide all the services that contribute to a successful transaction, including use of and access to transactional data in real time. Real-time payments present an opportunity for banks to utilise this data to offer real-time enquiry management and real-time payments tracking, giving customers automatic status updates via email or full payment journey visibility with real-time updates. Such visibility would allow customers to improve supply chain automation and provide greater overall clarity. The added value of these services could result in customers placing more trust in their bank, enhance the sense of security and knowledge felt by customers, and engender stronger feelings of loyalty to the bank.
A raft of innovations
Open banking is opening up payment services and ushering in a raft of innovations such as peer-to-peer payments and aggregated accounts. If payment apps can prove their security and ease of use, they are likely to replace cash (and cheques) altogether, with banks ultimately benefiting from greater balances and lower associated administration costs. But only if they have true real-time functionality, beyond mere processing.
Providing these services demands a modern digital core-banking platform, one that seamlessly connects to a modern payments system. Of course, there’s more to a digital core than providing state-of-the-art payment services. Time and again, successful collaboration between banks and fintechs is predicated on banks being fully digital. Only a digital core can be agile enough to allow banks to add new services delivered via APIs quickly and efficiently. And with all the corporates in South Africa interviewed in the Temenos and Ovum 2017 Transaction Banking Survey believing that “Trusted third parties will offer improvements over existing bank payment services”, having the right payments platform to support this new environment has never been more important.
First published on Moneyweb.co.za