This October’s #hackingfinance breakfast concerned Open Banking: what it is and how startups and incumbents alike can maximize its opportunities. More than 70 carefully curated financial services professionals attended to share their views and exchange experiences in the space.
We sat down with the breakfast’s host, Anthemis Director John Egan, to help us understand the complexities of Open Banking and fill in those who were unable to join.
John, what is ‘Open Banking’?
Open banking is a term being referenced with increasing frequency in fintech and financial services. It refers to a model of finance where multiple agents work in tandem to provide augmented financial products and services through an API infrastructure. It is an extraordinary shift in traditional business model of banking, focused more on transactions than product, that will gradually shift banks away from manufacturing and towards platform development.
What will happen to banks?
Large banks, with significant customer franchises, are well positioned to develop and deploy successful platforms. They will look to fintech and adjacent enterprise to manufacture the products sold through these walled gardens, facilitating their success through the delivery of capital, compliance, security and data infrastructure.
How does the business model work?
This shifts the traditional revenue streams of the bank away from capital arbitrage towards intermediary fees in the form of platform listing fees, transaction fees, capital access fees, compliance and identity fees, and so on. In essence, the banks will provide a very profitable utility. This is significant because it aligns platform interests with user interests. The platform benefits by maximising transactions, which can only be done by creating a significantly value adding experience for users. Ostensibly, it also moves the bank from having a slice of every financial interaction a customer has with their bank to having a slice of every financial interaction that a user has with anyone, anywhere. It is an incredible opportunity for a few banks to massively expand their revenue pools.
Is that the only model? What about smaller players?
This is the equivalent of the Apple model. The Google equivalent we are likely to see is a federated model of interconnected apps where I may not have a traditional bank account but pay subscriptions to brands who provide financial dashboard facilities but sit on top of white-labeled regulated balance sheets like neobanks. Both are likely to emerge. However, the former will have security protocols and scaling capabilities way beyond the later.
Does that mean banks will have App Stores?
Not in the traditional sense. Established digital platform experiences like the Apple app store or Google Play create a walled garden by creating the device or the OS. Even real-world platform plays like supermarkets have a walled garden in the form of the physical store. Financial service companies can’t do that unless they want to create a device or browser themselves. Instead, they must do it through data and identity. Identity is the skeleton key to Open Banking. Whoever controls identity, controls the data and capital associated with it and as a regulated institution banks are well positioned to play a leading role in the development of identity infrastructure. Without identity competence, there is no way to keep people within a platform environment. It is the single most frequent misunderstanding when it comes to Open Banking.
What role does PSD2 play?
PSD2 will expedite the adoption of Open Banking models by mandating the use of certain standardised payment APIs. Right now, PSD2 is a significant pain point for banks. It’s ambiguous in places, costly to implement and insinuates capability requirements banks are broadly unfamiliar with. What people might not realise is that PSD2 is ultimately a grand strategic play from the European Union to reduce capital flows out of the E.U. to the U.S and encourage new financial and digital innovation in Europe. PSD2, whilst clunky, will force openness in banking, provide new white spaces for financial innovation, shift a lot of customer data away from merchants to licensed balance sheets, upskill European regulators, provide opportunities in adjacent industries and set Europe apart as the leader in integrated finance.
How does all this effect fintech? Is it an opportunity?
Yes. But not as much as people think it is. There is enormous demand for new product manufacturing across the financial services landscape and incumbents are not at all capable of delivering it. Most fintech, on the other hand, require access to the incumbents large customer franchises to survive and scale; imagine building mobile apps without the Apple app store or Google Play. Open models, whether platform based or federated will facilitate access to unfamiliar customers and revenue. It will, however, be more difficult than most seem to realise. These manufacturers will require some sort of license, which is expensive. Their growth potential will be limited to that of single products within the customer franchises they have access to and that will impact investment, which in turn impacts talent acquisition, technical competency, and so forth. There will also be significantly more innovation from institutions in adjacent spaces who want to have access to financial data, big tech who want to see your transaction history as well as your identity data and the KYC, AML, authentication and authorisation functions related to it, and foreign companies who want to circumvent the card schemes and access direct deposit to deposit payment mechanisms. All this is to say that the opportunity for fintech is obviously growing, but so too are the number of interested participants. And, as usual, it’s likely big banks that will win big.
For more information on #hackingfinance Breakfasts, sign up for the #hackingfinance mailing list. John will also be taking part in a webinar on Friday 18th November to discuss, with speakers from Moven and ATOS plus our own Yann Ranchere, PSD2 and other European banking initiatives.