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Open Banking a Platform-Based Business Approach That Came to Stay Open Banking Is Ubiquitous and a Trend That Has Come to Stay

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Open Banking a Platform-Based Business Approach That Came to Stay Open Banking Is Ubiquitous and a Trend That Has Come to Stay Open Banking A platform-based business approach that came to stay Open Banking is ubiquitous and a trend that has come to stay. At the same time, it has recently become quite a buzzword. It is therefore worth providing in this point of view a short definition of the term as we understand it. We understand Open Banking to mean a platform-based business approach in which data, processes, and business functionalities are made available in an ecosystem of banks, customers, third-party developers, FinTech companies, and partners. The services provided are financial and may come from banks as well as from third parties. 02 Open Banking | A platform-based business approach that came to stay Drivers and forces behind the recent development 04 The need for change and how to strategically tackle the challenges 06 Market insights and how Open Banking successfully becomes an integral part of the ecosystem 10 The platform can benefit every bank – “Client” and “Product” banks 12 Some banks have already taken first steps and succeeded in implementing great Open Banking solutions (an excerpt of case studies) 14 Consider Open Banking as part of a holistic business transformation 16 03 Drivers and forces behind the recent development 04 Open Banking | A platform-based business approach that came to stay Financial Services (FS) institutions have tomer needs and not only those of its (2) Digital technology has been a catalyst been facing major challenges over the last own product development department. for radical innovation, as previously few years and they will certainly continue Just because a product feature is pos- closed industrial systems have become to do so. At the same time, opportunities sible does not mean that the customer networked and open, providing ideal emerge and shape current and future profit also requires it. FS providers are thus conditions for Open Banking to flourish. pools. We identify three main factors that moving from a product-centric to a cus- In general, advances in exponential have led many institutions to open up to this tomer-centric approach when rethinking technologies, e.g., AI, real-time analytics, innovative development: customers change their products and services, e.g., by in- machine learning, or blockchain enable their behavior and want it (1), advanced volving the customer in the product de- FS providers to improve their processes, technology enables it (2), and regulation velopment process. Furthermore, cus- services, and products at all levels, i.e. fosters it (3): tomers today enjoy an unprecedented in the front office, the middle office but level of market transparency and are no also in the back office. (1) Different and newly emerging gener- longer satisfied with a limited choice of ations, such as Generation Z or even products offered by their main bank. At (3) Regulation specifically fosters innovation Generation Alpha, lead to a change of the same time – educated by frictionless by naming ‘Open’ as an explicit policy customer behavior and requirements, user experiences in other tech-based goal that needs to be considered by forcing FS companies to rethink the services – they are increasingly able to every financial institution. Directives way they create and sell products and differentiate between a good and a bad such as PSD2 or the Open Banking Initi- services to end-customers. A bank, for customer experience and will not accept ative in the UK lead as prime examples. example, has to ask itself whether the laborious processes when it comes to product or service really answers cus- their needs. 05 The need for change and how to strategically tackle the challenges 06 Open Banking | A platform-based business approach that came to stay These forces combined will require a paradigm shift by traditional financial institutions to redefine their role in their ecosystem. Customer relationships tend to move towards the best offering, especially when switching costs diminish. As a result, banks can no longer rely on closed-shop offerings but should rather embrace the opportunities of opening up. This way, the Open Banking movement is no longer a threat but rather it allows access to new profit pools and enables future growth. Financial Service providers should actively FS companies have emphasized this strat- 3. Open up to FinTech and start-up eco- address the drivers and challenges de- egy in the last 5–10 years through three systems by using their customer-centric scribed above with a holistic approach, if general models: sales interfaces to better understand they want them to become opportunities current customer requirements and to instead of threats. Deloitte sees two general 1. Core digitalization: improve the current draw first conclusions about the exist- – and not mutually exclusive – strategies to processes for existing products and ing product and service portfolio. face the challenges (see Figure 1): services by rethinking them with a more customer-centric perspective; • Defense: generally speaking, FS providers can react to the challenges described by 2. Launch direct and online sales channels defending their current business model as an additional channel to sell existing (i.e., “pure” banking, “pure” insurance, etc.). products and services; Fig. 1 – Strategic playing field eene Offense 2 5 irect and latforms online bans 1 ore diitaliation 4 3 iital an real-time serice omparison non-leacy ortals inechs conomies of scale network effects 07 This defensive strategy supports the pres- The right combination of these strategies ervation of the status quo. However, this will depends on the general maturity of the not be sufficient to increase future revenues company as well as on the existing capabili- and profits. To achieve that, FS companies ties within it. After having methodologically have to go from defense to… assessed the above-mentioned aspects and decided on a way to proceed, it might • Offense: following this strategy, FS pro- be necessary to challenge the current viders have to strongly pursue not only operating model and prepare for potential the core business model but also explore transformation. and develop adjacent business models, e.g., commerce business models. We see Based on this strategic approach, institu- two developments towards achieving this tions, especially banks, can leverage the development or evolution: Open Banking paradigm as a tool to switch from “Defense” to “Offense” mode, as they 1. Establishment of green-field entities suddenly become able to react to many of to completely rethink the current the challenges ahead and to explore new product and service portfolio from a profit pools. customer-centric perspective. Such efforts are often pursued through new legal entities and with new branding to protect the core brand if anything goes wrong. 2. Participation in platform business models to integrate current or en- “If you want something hanced product and service portfolios in a comprehensive platform business model. Such a business model ad- new, you have to stop dresses end-consumers, not merely in respect of a stand-alone product need: doing something old” the objective is to understand com- plete customer journeys and life cycles Peter F. Drucker in order to provide the right product or service at the right time. FS compa- nies can play different roles in these platform-based business models, from product provider to relationship owner. 08 Open Banking | A platform-based business approach that came to stay 09 Market insights and how Open Banking successfully becomes an integral part of the ecosystem 10 Open Banking | A platform-based business approach that came to stay Many established financial institutions as well as new players in the market have already joined the “open revolution”. Fields of ap- plication range from a “minimum approach” that allows third-party access through APIs solely to share select data up to a “maximum implementation” enabling the integration of various functionalities in form of a Banking-as-a-Service platform. The former is often rooted in the need to Deposit Solutions, a pan-European FinTech comply with regulations such as PSD2 that company, follows this far-reaching approach requires banks to allow third-party access, towards Open Banking. The company or follows a sales-driven approach focusing partners with banks across Europe to bring on front-end improvements. HSBC’s recently Open Banking to the deposits business. Any launched aggregator solution that allows bank can easily connect to Deposit Solu- customers to see all the accounts they have tions’ Open Banking platform through APIs. with different providers is a prominent Once connected, banks can either source example, for which HSBC has secured the deposits to deepen and diversify their participation of 21 different banks. funding base or offer their own customers a choice of attractive deposit products ‘True’ Open Banking that goes beyond an from other banks within the existing bank exchange of information requires solutions relationship. Bank customers benefit from that touch the core of financial service a broader choice of deposit products that providers, potentially impacting established they can access through their main bank processes and legacy core banking systems. instead of having to open new accounts at At the same time, such solutions hold tre- other banks. mendous potential. They permit the connec- tion of players with different needs, thereby In several product categories such as benefitting different types of banks and the mutual funds, mortgage loans or structured financial industry in a broader sense. products, adding third-party products has already been a common practice for banks for decades. This logic is now also applied to the deposits business, one of the most widely used products among bank custom- ers and a key source of funding for banks. 11 The platform can benefit every bank – “Client” and “Product” banks 12 Open Banking | A platform-based business approach that came to stay An effective allocation mechanism for deposits has further gained relevance, since banks can increasingly be divided into two cat- egories: “Client banks” focus on business with retail customers and want to maintain exclusive customer relationships.
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