11 minute read
YOUR ECOSYSTEM OR MINE?
Banks should not feel threatened or restricted by the rise of ‘partnership’ financial services, rather they can extract the nectar of success from them, writes Sue Scott
That’s Paul Le, who leads on data and platforms for Dutch multinational bank ING’s trade business.
It’s a pretty awesome statement; a ‘reset’, both of the cultural orthodoxy in banking and the technology around which it is built. At its heart is a recognition that customer behaviour, encouraged by regulators and facilitated by data and digitisation, is changing dramatically. As with every other area of their digital lives, customers are looking for ease of use, new experiences and infinite choice in their financial services. Even if one bank alone could provide all three, securely, and remain profitable, it’s unlikely that it would be rewarded with undying loyalty.
Take the famously conservative Brits. Research by Sopa last year found one in three now hold two or more current accounts with different providers – an increase of 36 per cent on the number recorded in 2015. Meanwhile, intelligence company Compelo estimates that 61 million accounts remain idle in the UK as customers move their main banking activities elsewhere. Challengers are not (yet) the main beneficiaries of this capriciousness. Only Monzo and Starling Bank showed clear gains in the BACS table of UK current account switches last year.
Nevertheless, that leaves all banks with a dilemma. If account holders continue to move between banks, looking for the sweetest service, like bees seeking nectar from the brightest flowers, the potential for
banks to track their financial habits and new ‘found money’ ecosystem, based on gain the insights they need to build open banking. The card, which runs on personalised offers is compromised, the Mastercard network, is exclusively making it harder to retain those customers. available to iPhone users and exists Meanwhile, in the retail banking sector, a physically and in the Apple wallet. whole host of other non-banking providers When a consumer uses it, they receive are offering a range of personal financial a percentage of cashback on Apple management apps that are moving Pay, while Apple benefits from the towards offering payment, loan and interchange fee that Goldman Sachs mortgage services that are a substantial collects from the merchant. But, when the part of bank’s income. There’s a similar card is used to buy Apple products, the existential threat to wealth management tech company pays no interchange fee, and trade transaction services, too. saving two per cent, which it uses to fund
As Microsoft puts it: “From an ad hoc promotional discounts. As you might digital wallet to real-time payments, expect, Apple has designed a slick the blurring of industry lines and budgeting interface for customers to encroachment into traditional banking track spending on the card. territory is the new reality.” Crucially for Goldman Sachs, which
In that case, how does Paul Le’s loaned $10million to users within the first philosophy of camaraderie translate into two months, it said the Apple Card was a business model? the most successful credit launch ever
“Anybody who’s trying (although comparisons to build something that isn’t ecosystem-led, open “ Existing financial institutions and with individual cards are hard to come by). and isn’t collaborating, banks need to adopt Lúdvíksson sees this I think they have a short this new and different and other initiatives as shelf life,” says Elliott mindset – thinking of evidence that banks are Limb, chief customer their competitors as well-positioned to compete officer for banking- and potential collaborators – not by owning the lending-as-a-service in an environment customer, but by owning provider Mambu. ”Gone are the days where ‘collaboration’ just means where consumer multi-banking is the customer interaction. Ed Maslaveckas, CEO of Bud, the AI platform a bank demands its becoming the norm for personal finance, customers pay a certain Mike Kennelly, PwC which provides banks way and the technology and others with data vendor sells what the intelligence and fulfilment bank wants. Now, we’re capabilities to create new all working a lot closer. features, believes that Composable and ‘no single institution can collaborative are offer all services to a absolutely fundamental to customer’ and that a making this market work.” competitive market is Georg Lúdvíksson, CEO the best way to deliver what and co-founder of white label digital they need. It was probably an inevitable banking solutions provider Meniga, short step, then, for the company to points to the newly minted partnership launch its own payment application between Apple and Goldman Sachs in the programming interface (API), which US, to provide the Apple Card, as an it did at the end of June this year. example of how just such collaboration Designed to provide an alternative to can deliver value to all parties. card payments and bank transfers, it
He describes the new consumer credit doesn’t require users to share card card partnership as creating an entirely details with third parties.
“People look at open banking and think about aggregation but, in many ways, that’s the least disruptive part of it,” says Maslaveckas. “The value comes when you can understand someone’s financial data and help them to act on the insight. Most of the time that action will result in a payment being made.”
Maslaveckas pointed out at the beginning of this year that ‘a million people are now connected to the open banking ecosystem and the volume of traffic on the network doubled between November and December [2019]’.
“On the supply side, 76 per cent of fintechs we are tracking have accessible APIs and 30 per cent already have full read, write, create, fulfil and transact APIs,” he said. “Pretty much anything that a customer would want to do with their finances is available via API – so the potential product catalogue either is, or will soon be, extensive’.
Banks are well-positioned to compete – not by owning the customer, but by owning the customer interaction
PwC is so convinced that legacy banks need to move towards API-driven, ecosystem banking, where they can leverage third parties like Bud to extend their customer reach and implement a new disruptive business model, that it has launched its own model bank – albeit within a new digital ecosystem bank sandbox platform that it will make available to banks and lenders.
“We have shown how this can be done with relative ease by linking to some of the most disruptive, innovative APIs available,” says Mike Kennelly, director of financial services technology consulting for PwC.
“Existing financial institutions and banks need to adopt this new and different mindset – thinking of their competitors as potential collaborators in an environment where consumer multi-banking is becoming the norm,” he adds.
Last year, PwC published a report that looked at all partnership announcements between banks and third-party providers (TPPs) between 2012 and 2018 in the service. That means that it is no longer German market. Just to be clear, the vast the centre of the customer’s universe majority of these partnerships were – a deeply unsettling change of mindset, working partnership and not equity based. process and technology for a bank.
From it, researchers identified seven It could, of course, do both. layers to a financial ING recognises that services ecosystem: networks; infrastructure “ Anybody who’s trying to build people don’t need banks, they need banking, and and core banking something that isn’t has set out to ‘find ways systems; a ecosystem-led, open and to empower people transformation function; isn’t collaborating, I think and businesses on their API provider; API they have a short shelf life preferred platforms with a integrator; an aggregator; robo Elliott Limb, Mambu clear and easy experience – or become a platform advisor, and other business ourselves’. customer services. Meanwhile, BBVA has Each had its own already planted a foot in discrete capabilities both camps. It has its and revenue model. Open Platform in the
With so many providers US, allowing fintechs now involved in the act and others to plug into of ‘banking’, it begs the its services, and an API question ‘where does the bank make any Marketplace in Europe through which money?’ That, PwC suggests, depends customers can access TPP products. on where it chooses to position itself. Such open-minded attitudes to Either it can try to scale its own ecosystem adapting the business model to a new with third-party services or it can expand environment might be the exception. into the broader financial services ecosystem, selling its unique capabilities as a
Sweet success:
Could collaboration see banks bloom in an ecosystem future?
According to the Banking Circle white paper, Ready For The Rebuild? Rethinking The Value Of Digital Infrastructure, only one in five of the financial services organisations it surveyed said they were worried about competition from new entrants.
It may be true that challengers are, as one commentator puts it, still just a ‘fly on the backside’ of banking, and that the GAFAs (Google, Amazon, Facebook and Apple) have no interest in becoming fully fledged financial services providers (as Apple VP of internet services Jennifer Bailey insisted last year, ‘we’re not interested in being a bank and particularly not the regulated part of that’), but most are nevertheless looking for banks to, in effect, white label their financial packages for
As far back as 2012, accountancy and professional services giant
PricewaterhouseCoopers (PwC) warned that traditional banking was at a tipping point, with digital at its fulcrum.
And in what, even then, was a fast-changing industry, PwC urged banks to acquire or partner with innovators that were acting as ‘catalysts for change’.
The alternative was to develop those capabilities alone – both an expensive and risky effort, it cautioned in its
The New Digital Tipping Point report, published in January 2012.
Fast-forward nearly a decade and PwC has taken its own advice to heart by forging partnerships with a group of carefully selected fintechs that are experts in their fields to develop a platform banking ecosystem, which will be made available to banks and other lenders in a sandbox environment.
As you might expect, the wealth of opportunities enabled by open banking and open APIs are at the centre of the project designed to allow PwC’s customers. If they are not exactly worried about the new entrants, banks should at least be figuring out a way to gain some value from partnering with them, given the fragmentation and disintermediation that’s already being seen in financial services.
There’s another motivation for partnering up, too: sometimes it’s just the right thing to do. As the COVID-19 pandemic escalated there were numerous examples of fintechs and banks coming together spontaneously to help – there were, of course, also some glaring examples of where better co-operation could have put things right a lot sooner.
Among the former was Swiss payment technology giant BPC, escalating plans to spin out a new ecosystem of partners, including banks, to improve the incomes of customers to attract more business . Importantly, PwC says its sandbox ecosystem demonstrates the ease with which a legacy bank model can switch to a partnership bank model.
The financial advantages of doing so are clear. Analysis by PwC estimates that technological step changes in the banking sector could bring a boost of more than £34.6billion to the UK’s economy by 2030.
PwC’s digital banking ecosystem is founded on a network of Cloud-based platforms using software-as-a-service APIs. Among its key fintech partners is Credit Kudos, a challenger credit bureau which hit the headlines during the COVID-19 pandemic by developing, in the course of a single weekend, an app to enable the UK’s five million plus sole traders to self-certify their projected loss of incomes using open banking data.
Credit Kudos plays its part in PwC’s ecosystem by delivering more precise and refined risk and affordability measurements to lenders, thereby allowing them to make faster decisions, increase acceptances and thousands of poor farmers in India with the Safal Fasal (Successful Harvest) marketplace platform. The aim now is to use the same model to positively impact the lives of 10 million producers across the world.
The company’s Santiago Egas says the ecosystems it’s building ‘will be part of digital banking at the next level’, with the marketplace generating its own credit scoring, based on data and insights.
Fintech author Ruth Wandhöfer believes the next few years will deliver many more such business models and solutions through ‘a rebirth of infrastructures and a large-scale digitisation of value’. Meanwhile, the benefit of being part of an ecosystem is the resilience it confers on its constituent
PwC HELPS JOIN THE DOTS
parts: both flowers and bees benefit. reduce defaults. In turn, people searching for credit, including the traditionally underserved, can quickly and easily access new, bespoke products by securely sharing data from their bank accounts.
Another of PwC’s key partners is Salt Edge, a leader in open banking solutions. PwC uses its data aggregation technology to automatically structure and categorise bank data fetched through open banking channels for tracking, budgeting, payment and planning purposes. Additionally, the ecosystem incorporates Salt Edge’s personal finance management app that connects bank and e-wallet accounts.
“The third wave of digitisation is emerging where open APIs and open platform banking are rapidly changing the shape of financial services,” says Mike Kennelly, PwC’s director of financial services technology consulting.
Only connect:
Ecosystem banking will become a profitable new normal