MEDICI has been at the center of several discussions on FinTech trends and developments around the globe. While there are a lot of events, conferences and talks happening around the world, the commercial angle of these discussions leads to a lot of noise, because of which there has been a real gap when it comes to the quality and depth of insights that come out of such discussion. MEDICI’s newest initiative – a roundtable with some of the select thought leaders across the ecosystem – is a proactive step which aims at bridging this gap and bringing out the best of insights stemming from both the industry side as well as the observatory side. By having a small number of panelists sitting together and brainstorming on key areas, – without having the marketing and PR perspective around the discussion – we look forward to bringing out some fresh, deep, and holistic insights for the FinTech community.
The first in the series of many more to come, MEDICI’s roundtable on Open Banking saw some of the prominent thought leaders coming together at our mini-innovation lab and discussing the nuances of open banking in the wake EU’s PSD2 implementation on January 13. Here is the list of panelists that participated in the roundtable discussion:
Salil Ravindran: Global Lead of Digital Banking Center of Excellence, Oracle
Diwakar Mandal: Senior Industry Analyst, LTP
Bhushan Sonkusare: Vice President of Financial Services (FS) Advisory, Digital Business Transformation (DBT) & FinTech, Sapient
Rajat Deshpande: CEO, Finbox
Ricardo Geromel: Author of bestseller “Billionaires,” Forbes columnist & Head of Investments of StartSe
Amit Goel: CIO & Co-Founder, LTP
Chiranth Patil: Angel Investor
In the two-hour-long discussion, we covered the entire spectrum of open banking in depth from multiple perspectives – from that of a bank, FinTech, TechFin, merchants, and customers. In this article, we present some of the key themes that were discussed.
What is PSD2? Is it the same as open banking?
PSD2 and open banking – though spoken about in the same context – are essentially two different initiative. PSD2, which is the revised payment service directive by EU, brings clear guidelines and national laws to the EU countries which mandate banks – based on customer’s consent – to comply with the demand of opening their APIs and customer data for licensed third-party players (TPPs). The EU member states have implemented PSD2 in their national regulations with effect from January 13, 2018.
On the other hand, open banking is an industry-led initiative by the Competition and Markets Authority (CMA) in the UK, with the nine largest banks being mandated to open up their APIs. The banks were given a deadline of January 13, 2018, by which they were expected to be ready with their open APIs. As of today, only five of these nine banks are ready.
Why did the open banking launch on January 13 go relatively unnoticed and was not celebrated as one of the biggest landmarks in the banking history should have been?
Salil attributed this to the unpreparedness of banks from a compliance perspective. Though the dates were set long ago, it was only a year ago that the banks began to realize the granular nitty-gritties of this initiative including data sharing, security frameworks, consent architecture, authentication challenges, etc. In hindsight, the January 13 deadline was more of a checking-the-box event, and thus went unnoticed. We will need to wait longer for a comprehensive open banking rollout as the banks have been given another deadline of 18 months to meet the new security and data standards.
Consent for data sharing & authentication as the pivotal blocks in the open banking puzzle.
The underlying idea of open banking is to place the consent and choice in the hands of the customers. The onus lies on the regulators, stakeholder groups (CMA), and the banks to design a robust consent architecture at a fine-grained level. There also have been ongoing measures for eliminating some of the conflicts with GDPR on the P2P payment data front, where the consent of not one but both the parties is required. So far, there has not been a robust system built yet and there is still much work left to be done in this space before we get a clarity on the consent framework. This also calls for an increased effort on privacy, security, and fraud prevention aspects of data sharing.
Going beyond consent, a robust and channel-independent multi-factor authentication remains one of the crucial building blocks for the open banking experience.
What are the banks most anxious about in this open banking scenario?
With a growing number of PISPs, the biggest anxieties are around revenue loss and the prospect of losing a chunk of customer relationships to the FinTechs/TechFins. Ricardo highlighted that the real challenge for the big banks is not the technology, but the people and their perception towards change. Also, banks have never been able to fully utilize their data resources, and once the data is made available to TechFins/FinTechs, they will be in a better position to leverage this data to come up with better services.
Bhushan touched upon some of the basic challenges traditional banks face. Many of the banks, who are still tangled in the complexities of legacy modernization have a huge task ahead of them to be able to match the modern technological and data standards the open banking demands. There is a huge cultural gap between the banks and the Amazons/Googles of the world which – along with the superior tech/resource/data leverage – gives these tech giants a huge advantage over banks.
However, there are many opportunities for banks to re-invent themselves.
Banks are the smartest incumbents. Many of them have reacted to the FinTech disruption quite early on. They were quick to identify the collaborative potential of FinTech, while also working on launching their own next-gen experiences. E.g. SBI, one of India’s largest and oldest traditional bank, has recently launched a digital bank called “Yono.”
Open banking provides a rich opportunity for banks to re-invent themselves, foster collaborative innovation by being a key provider as well as consumer of open APIs, and explore newer business models – e.g. marketplace/distributor/BaaS. There have been discussions around whether the banks in the EU will take a progressive step and innovate, or if they’ll just comply with PSD2 on a bare minimum level. While we expect most of the banks to take the former route, some banks who take the later route are likely to lose their grip on customer relationships.
Banks can easily obtain the AISP license and can leverage the APIs of their rival banks using their customer’s consent – where their customers have additional accounts – to understand certain aspects of their business. E.g. HSBC bank is already doing something similar through its partnership with an account aggregator, Bud.
It will also give banks a deeper insight into their customer’s financial lives which will enable them to understand – and thus service – their needs better. This, however, again falls under the zone of uncertainty where the guidelines and nitty-gritty regarding data sharing are yet to be clearly put in place.
Open banking may pave way for – not a FinTech, but – a TechFin monopoly.
With their stronghold on customer experience and data/tech/resource leverage, tech giants such as Google, Apple, and Ant Financial have a strong case of emerging as the next big invaders and driving the customer relationships away from the banks by consuming their APIs and building services on top. Rajat pointed out a possibility that the competition may begin with collaboration.
The tech giants, such as Amazon, Google may begin to collaborate with banks through their APIs and over time, will look to develop some of the key domain expertise in a very stealthy way by leveraging the crucial customer data which they have always considered to be sacrosanct. However, some time down the line, there might be an inflection point where once they have developed enough expertise, they may take the lead and drive the collaboration on their own terms or simply declare themselves as a competitor. In such a situation, banks who adapt to the situation by tweaking their business models and serving as a provider of banking service modules will go a long way.
Also, the data leverage that these tech giants enjoy will eventually lead to a data-driven monopoly, which will make it difficult for other players – banks and FinTechs – to compete with them. With the high information density of this data and a plethora of touchpoints, this will enable these tech giants to read through the financial lives of their customers. Any of these players getting to such a data monopoly stage will be ready to dominate the financial services stage.
We may see the emergence of newer business models in the banking space.
Banks can adopt several newer business models. E.g. Aggregator, marketplace, banking-as-a-service, etc. Out of these, the most immediately realizable business model looks to be the one where banks play the role of a distributor/marketplace for FinTech solutions. A classic example is Starling Bank, which provides best-in-class services financial services to its customers by means of a plug-and-play collaborative model with leading players from various FinTech segments, embedding their services on its own platform – e.g. TransferWise for remittance, Moneybox for PFM, etc. This is a classic case of the much-revered unbundling of banks being followed by re-bundling.
This business model makes the most sense in a market like India with the emergence of payment banks. Payment banks have a limited portfolio of offerings, which they can expand through similar partnership arrangements. E.g. Paytm and ICICI coming together to provide micro-loans for a ‘buy now, pay later’ use case.
To sum up: Pros & cons of open banking
- Dashboarding/visualization of their financial activities
- Better choice for services
- Enhanced transparency
- Bundled services
- Data security
- Uncertainty over fraud/error accountability
- Access to rich consumer data
- Additional revenue streams by going deep into payments
- Compliance overhead costs for data sharing norms
- News business models
- New revenue streams
- Deep insights into customer needs
- Revenue loss
- Disintermediation of customer relationships
- Higher churn rates
- High cost of change management
- Impact on profit margins of smaller banks