2020: the year of digital transformation in open banking
In recent years, the financial services industry has evolved from analogue to digital while open banking is increasingly moving from closed to open.
Even before COVID-19, the financial services industry was evolving at a rapid pace — driven by changing consumer demand, heightened competition from incumbent banks and new entrants, and significant advances in technology. The global pandemic has accelerated this evolution — forcing radical changes in customer behaviour by shifting significant aspects of the economy online and increasing customers’ willingness to go digital.
Open banking in particular is transforming the banking experience. Implemented correctly, it has the power to open up access to financial services for many more people, increasing consumer choice, widening the pool of potential customers for businesses, while improving efficiency and significantly reducing operational costs.
Over the course of the year, our 2020 open banking research has revealed an encouraging shift in attitudes from financial institutions across Europe, with 61% revealing they are more positive about open banking than ever before.
With Coronavirus accelerating the shift towards digital channels, financial institutions now have a unique opportunity to get ahead of the competition and further enhance the customer experience. Here are three things they should focus on to accomplish this:
1. Create a strong open banking strategy
It’s extremely encouraging to see this increased positivity, but our research also showed that some financial institutions still lack a clear strategy on how to drive value creation. This is holding them back from making the most of the opportunity that open banking offers. In today’s highly competitive market it’s the institutions where executives can create a clear strategy that will be best placed to start realising concrete returns.
With open banking well placed to create both short and long term opportunities, each offering their own rewards, it’s up to organisations to evaluate their business models and decide how to approach this. Ultimately, the time to act on this is now and regardless of whether an institution has a long-term or short-term strategy in place, their journey will likely start with more elementary open banking use cases — advancing to more sophisticated use cases over time.
Photo: Jan van Vonno, Research Director, Tink
2. Invest where the commercial opportunities are
Our data also revealed that financial institutions are ramping up their investments in open banking — with median open banking investment budgets for European financial institutions typically lying between €50-€100m, with spend exceeding €100m for 45% of financial institutions surveyed. This clearly shows that financial institutions are starting to look ahead to the commercial opportunities open banking can offer.
No matter how large or small their budget is, though, the priority here should be on the low-hanging fruit and operating as a third-party provider (TPP) to take full advantage of open banking.
3. Prioritise fintech partnerships
Finally, financial institutions should look to build partnerships with fintechs to accelerate innovation and provide them with the technology, expertise and vision to drive open banking value creation — helping them realise their objectives. In many cases, this is already happening — with our research revealing that 69% have increased their number of fintech partnerships in 2019, while the majority of executives are also working with more than one partner.
These partnerships need to be set up in a smart way, however, with fintechs able to navigate the complex procurement processes and onboarding requirements that many financial institutions have in place.
Harnessing open banking to boost inclusivity
In the current environment, having access to digital financial services and the ability to view and manage your finances online is more important than ever — both for individuals and businesses. Open banking opens the door to being able to do both. Looking ahead, we believe open banking will be a ten year journey and that digital transformation will continue to be at the pinnacle of this. Financial institutions that don’t embrace the shift from analogue to digital risk being left behind. As we navigate new social and economic realities of 2020 and beyond, financial institutions must therefore continue to prioritise the development of innovative open banking use cases for customers — providing accessible and inclusive financial services seamlessly over digital channels.
This article was contributed by Jan van Vonno, Research Director, Tink
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.