The recent World Economic report, “Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services,” explores open banking platform models and the role of fintechs and global technology giants that are laying down the gauntlet for the banking industry. It says open banking and data cloud migration is luring big tech players to the banking space to create platforms for financial services distribution, reshaping the landscape by creating a digital marketplace, creating connected ecosystems with the customer at the core of the business, and forcing incumbent banks to reinvent their business models to compete for customer relationships.
The WEF report flagged the emerging importance of non-financial platforms as a source for underwriting data and a point of distribution for credit. It profiled Chinese tech company Tencent’s Webank platform as a feasible model for future financial services distribution. It enables retail customers to purchase products from multiple competing credit and asset management providers.
The open data platform regime, currently under government consideration in Australia, is likely to be exploited by non-financial tech firms like Amazon, which has signaled potential expansion to its retail customers to offer more bank-like services in future, ceding banks control over data by allowing customers to share it with third parties with whom they have an enmeshed relationship. This, after all, is the era where the customer is king and data is gold – open banking monetizes data and predicts customer outcomes. This presents opportunities across the industry, including neo-banking organisations that will gain better access to better -quality data, enabling an easier transition of services.
Though upstart digital fintechs are making a splash, they have yet to achieve scale. Case studies in the report suggests that the bigger disruption to banks will come from non-financial tech giants like Amazon, whose Amazon Lending launched on its platform six years ago. It is now expanding in the U.S., UK, and Japan to reach more of the 2 million small businesses on its marketplace platform, many of whom also pay Amazon to package and ship merchandise. Amazon’s small business banking move is in contrast to big bricks-and-mortar banks that have pulled back from small business lending. Amazon’s expansion into the cloud sector with Amazon Web Services is yet another example of the changing business approach they are taking, opening up a new spectrum of opportunities for the provider.
The platform banking business model is nascent and the WEF report noted that little is understood about what the model and economics will ultimately look like: “The uncertainty has discouraged incumbents and financial services software providers from investing in platform banking solutions, particularly as the incremental scale required to offset potential cannibalisation is unclear.”
Open banking: on the rise
Through this business model banks can now grow their revenue, reduce operating costs, and enhance customer experience securely and digitally. The WEF says large banks have a competitive advantage in a world of open platforms with their large customer bases and strong brand images. However, the threat from tech companies that offer strong platforms is substantial and is driving banks to make strategic choices with the consumer and collaboration at their heart.
It must not be forgotten that open banking creates a wealth of opportunity for the smaller medium players such as credit unions and mutuals. Open banking will allow smaller banks to become more competitive with customers outside of their traditional customer member base. Non-member growth is a key focus for these players.
An example of where the opportunity lies can be seen like this:
Community banking has always offered customers better engagement at a more personable level. With open banking, these organisations will now be able to offer a much easier transition of products, such as a loan, over to its prospective customers, which offers customer not only a better level of engagement, but loyalty through the delivery of relevant services in a seamless experience. This suddenly presents a big problem for the larger banking players, as they simply cannot compete against the level of engagement at their scale. Once the community banking organisations have gained a new customer, they are much more likely to retain them than the larger players.
So it’s clear there is much opportunity to be found, but who really owns the data in an open marketplace and how on top are regulatory reforms in protecting data?
A recent McKinsey blog referenced, “While incumbents still hold the keys to the vault in terms of rich transaction data as well as trusted client relationships, banks often view the opening of these data flows as more threat than opportunity. After all, it is the nonbank insurgents who have demonstrated market traction thus far, and gained valuable new customer relationships—by presenting data in new forms.
There are inherent risks in sharing data, however, which is why it is critical to develop processes and governance underpinning the technical connections.”
So data is a bank’s best friend, and they hold the key to rich data, but with open banking it certainly opens up the risks for banking brands.
Amongst third parties, banking organisation, and consumers, it is still unclear on who owns the data – but what is clear is that regulatory reforms must come into play to help protect all of the above. McKinsey also relays the concerns banks hold around any perceived disclosure missteps which relate back to their brand. We certainly look forward to understanding how regulatory associations such as APRA will come forth on this topic.
The brave pioneer
One bank willing to test the waters of open banking is Macquarie, which has taken the initiative in open platform in Australia. It has created a new open banking platform, built on top of a core banking solution, that will allow customers to securely share personal banking and transaction data with third-party services such as those offered by fintechs, via APIs. The third-party provider must meet Macquarie’s open platform standards and security criteria before it will turn over the data. Macquarie has also created a development portal and test sandbox called DevXchange where third party products can be trialed. The platform is currently at pilot stage and will be rolled out in the coming months.
To find out more on how SAP is working towards the future of banking, visit sap.com/australia/banking and explore more on the topic on open banking.