Open banking is forcing banks to rethink their business models and decide whether they want to be manufacturers or distributors of financial products or both, said Kanika Hope, Chief Strategy Officer at Temenos.
“The report tells us that banks are truly recognizing that the future lies in coexisting, collaborating and co-evolving with a wide array of participants in a busy ecosystem of fintechs, neo banks, disruptors, technology giants, the e-commerce giants and, indeed other banks.”
Customers Want Convenience
Post Covid-19 we are seeing a sharp rise in embedded finance, said Hope.
Users want a unified customer-centric digital platform, like with Amazon and other e-commerce players, that delivers both financial and non-financial products and services through a single platform.
“As embedded finance spreads to customer-facing brands, we’re seeing this particular new trend of banking as a service (BaaS). It falls under the umbrella of the open banking framework, but it offers a radically different approach to financial services because it deconstructs the traditional model, replaces its building blocks and puts them in the hands of a much wider range of stakeholders.
What is it? Hope explains, “It’s the provision of complete banking services — deposits, loans, payments, for example — as a service from a specialist cloud-based API platform. They use a bank’s licensed, secure and regulated infrastructure to deliver financial services at the point of customer need – like on Amazon or the fintech facing the client. We’re seeing a lot of innovative providers in the space, like Solarisbank, mBanq and Railsbank, challenger banks branching out into BAAS as a new revenue stream, and even some Tier One giants — Goldman Sachs, JP Morgan and BBVA. US community banks, in particular, are finding BAAS partnerships very profitable.”
The Post-Pandemic Popularity of BAAS Providers
Since the start of the pandemic, many businesses have been forced to serve the majority of their customers through digital channels. Following the rising demand for personalized, seamless and convenient digital experiences, both financial and non-financial companies have taken the opportunity to extend their services to include financial services via an ecosystem approach. For businesses, BAAS offers the prospect of bringing products to market faster and extending their reach to new markets; whilst for banks it allows them to attract new customers and offer a range of greater services to existing clients.
The promise of a fast and effective route to market for financial products embedded in digital channels has driven a surge in interest for BAAS providers like Solarisbank and Railsbank who have both completed successful funding rounds of $67.5 million and $37 million, respectively, over the last 12 months.
Are Banks Surrendering the Customer Relationship?
In cases where a bank customer chooses to transact through Google or Amazon, the tech company becomes the front and owns the customer relationship. But in many cases, the Google customer will not have an existing relationship with the bank.
“On the other hand, a lot of banks are developing digital ecosystems of their own. One interesting use case is around buying a house. A bank may offer an app that provides a complete platform for buying a house, from exploring properties available to conveyancing, home insurance, and of course a mortgage. In this instance, the house buying app is owned by the bank. With all these different strategies to choose from, it really depends on the play the bank wants to make.
“You could surrender the customer relationship and opt to be a manufacturer or a BaaS provider. Or you can consciously own the customer and source services beyond banking to also offer non-banking services and embed them in your portal.”
Open Banking — the Stealthy Infrastructure
The UK is a leader in open banking, said David Beardmore, Ecosystem Development Director, Open Banking Implementation Entity, even as many of three million consumers and businesses who use open banking say they have never heard of it. Eighty-four banks or account holding firms are making data available, following the UK’s very prescriptive API standards which make connectivity easy.
And leading banks are taking notice. Jan van Vonno, Research Director at Tink, said that Tier One banks are realizing that consolidating the customer interface is going to be critical if they want to retain their millions of customers over the next couple of decades.
Fred Cook – Chief Information Officer at BlueShore Financial in the Vancouver area, said Canada has been able to observe how open banking works in other countries, and incorporate it into a broader conversation around digital transformation that can also incorporate innovations like payment modernization, digital consumer ID, privacy and security.
Cook added a financial institution must define its value proposition and competitive stance.
“The opportunities will not be one size fits all…we need to use our size to be agile and figure out how we play around these giants.”
BlueShore – A Real-World Example
BlueShore has combined the latest technology with welcoming design at its Financial Spas™ emphasizing wealth management and financial wellness and made customer relationships a top priority.
“Open banking is a journey which starts with a conversation internally around digital transformation and thinking about how you’re going to build out a robust digital foundation to then leverage what’s coming down the pipe with open banking. You need to look internally to make sure your platform is robust, agile and nimble enough to take advantage of that.
“For BlueShore it really started with making sure that our core Temenos Transact banking engine was open-banking ready. With that foundational piece done, it allowed us to turn our attention to retooling our whole digital platform as we look forward to open banking and the other components in Canada, such as payment modernization and digital identification, all happening in parallel.”
From Transactional to Transformational
Hope added, “The link between open banking and transformation is critical. Open banking requires technology to be open and interoperable, obviously, but it also places huge demands on resilience, availability, hyper-scalability and the ability of the core systems to aggregate and have command of data — where the real value comes is in the analysis. Banks need modern digital architectures for real success.”
“You really need to understand what your clients are doing, what their needs are and how you are fulfilling those needs. Having all that data integrated is going to be hugely important,” Cook said.
Obviously, a bank needs transactional data, but if its view of customers is only transactional it will not fully understand their needs.
Cook added, “Do you have a business intelligence strategy program in your organization? Because understanding your data is understanding your clients’ needs and then being able to provide better services for them. It’s critical for gaining insights into the open banking opportunity.
“I also believe that open banking is owned by the whole organization. You have to bring alignment to the organization and be able to understand how you can weave your products and services into those open banking opportunities.”
Open banking has the potential to open doors to new products, services and markets, improved customer journeys and innovative banking models. But to benefit, banks must open their eyes to technology transformation and organizational change.