Mark Boyd - Open Finance Steps Up Where Open Banking Fails to Tread

About the Author

Writer and analyst Mark Boyd founded Platformable, a startup focused on helping businesses and governments measure the value of their ecosystems. He documents trends in open banking and open finance through Platformable’s Open Banking Quarterly Trends reports.

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Open Finance Steps Up Where Open Banking Fails to Tread

Financial services are a paradox. On the one hand, they are increasingly ubiquitous: able to be accessed anywhere, whenever we need them. On the other hand, they are fading into the background so that we don’t directly deal with them in their own right.

We can easily see this in action. Whenever we make a large purchase online, we may be offered a plan (that is, an ‘instant credit’ financial service) to pay for our purchase in instalments. Delivery is also arranged, and maybe we are even offered insurance at the point of sale. So we end up dealing with the retailer and multiple financial services all from the shopping cart, without having to engage with each business individually.

This sort of experience in which financial services are provided within our main activity process is becoming the norm, thanks to application programming interfaces (APIs) coupled with an increasing demand for remote and mobile digital engagement. Even when we do access a digital financial service directly, it takes on three or four functions at once and does much of the legwork for us.

As a result, a new wave of customer-focused services are currently being implemented or are on the horizon:

When you book travel accommodation, you can already arrange car rental, travel insurance, and even pay for additional event tickets at once. If you lease an electric vehicle, your car app could automatically book your service maintenance, copy the nearest EV charging stations into your maps and GPS, and even track your usage to recommend the optimal time to renew your lease. If you use a budget app, you could be told when to apply available coupons and discount offers, access cashbacks, or be switched to cheaper service providers automatically. For your small business, your accounting software can help you make sure you have the necessary paperwork to meet tax obligations and even submit your quarterly tax returns automatically for you.

APIs make these joined-up services possible by exposing the functionalities from each provider in a way that makes it possible to extend the customer value chain. This allows customers to personalise their experiences so they can pick and choose the elements that they need.

But this also means that the service providers need new business models to work in an ecosystem approach. If you are a credit provider, do you give the retailer a revenue share if they introduce you to a new loan applicant? If you are a budget app, can you sell the anonymised, aggregated data of all your users to an enterprise that wants to study consumer buying habits, while also entering into a partnership deal to ensure your app users get a cashback or discount offer?

Financial services infrastructure providers can be the conduit for these new business models. They offer various functionalities that can be plugged into the online experience. Often these can be provided within a digital service offering: a marketplace, softwareas-a-service, an app’s integration services, or so on. The financial services provider can be the innovator that identifies the new business models and works with partners to share revenue in ways that grow the opportunity for all stakeholders. This type of digital financial service delivery is often referred to as

‘open finance’, although newer terms like ‘embedded payments’ are also being used to describe the platform partnerships that are emerging to create end customer benefits in a more modular, personalised value chain.

Open finance requires a new management mindset and new business models in order to be beneficial for service providers. Businesses need to accept that they are working in partnership with other providers. This is more challenging than it sounds. We are often used to the idea of a business being in competition with others and therefore, as we move towards data-driven, digital systems, more traditional businesses are inclined to protect their data and their customer base lest they lose business intelligence or consumers to competitors. One of the sectors most belligerent in accepting the world of open finance is banking. New regulatory measures have been introduced globally (see Diagram 1) to ensure that banks leverage open APIs to expose core functionalities like accounts information and payments. Using open banking APIs, digital service providers and fintech startups can request consent from customers and link directly to their bank accounts. This is what makes the budget apps possible, and can allow customers to make purchases directly from their bank accounts, which in turn enables some merchants to avoid paying high card processing fees.

The open finance value chain. Icons made by freepik from flaticon.com

Banks Reluctant

But to date, banks are reluctant to give up the transactional business models that have served them well for over a hundred years. Banks often still want to own the customer relationship in its entirety and build all the financial services products for customers themselves. In some regulatory markets, they have successfully collaborated to block progress towards open finance. In Canada and Australia, they have been able to slow down regulatory changes. In Europe, they have reduced the standardised aspect of regulatory changes so that fintech still have to invest heavily in integrating each bank’s APIs in order to build a marketable solution (and even then, the data they receive via the API might only have 40% of the information they need to create a useful service for their customers).

This combative model hasn’t helped to serve banks all that much. They may have slowed down some new fintech players who wanted to enter the market. Now those new startups need to integrate individually with each bank, which creates some scalability challenges and additional early startup costs. But banks also lose out. By making it difficult for fintech to connect, banks don’t get to see the number of API calls that fintech are making, so they can’t collect any data about what products are delighting customers and driving demand. So the banks don’t get to start thinking about what new business models might look like where they share bundled APIs with fintech partners to keep customers and reach new market segments.

Customer-Centricity and Revenue

Meanwhile, those companies that have embraced open finance and that aren’t reliant on banking APIs are seeing increased revenue opportunities. For one, businesses are able to offer a wider range of customer services without actually having to build it themselves. Merchants can offer instalment plans without taking on the credit risk, for example. This makes the offer more appealing to consumers. So the sales volume goes up. Those merchants able to offer these financial services increase their transaction volume. Platforms and marketplaces that make the financial services available to the merchants generate revenue through processing fees on the sales volume (just like with payments services).

The ecommerce platform Shopify is a good example. They had substantial revenue growth in the first half of 2020 as more consumers moved to online shopping. Shopify increased the number of merchants as a result (and therefore increased sales volume). But the real revenue growth for Shopify was from offering “Merchant Solutions” (that is, financial services) to businesses on their platform. Payments processing, instalment services, and drop-shipping all helped accelerate Shopify’s merchant solutions growth to $USD517.9 million revenue in the second quarter of 2020.

Analysts like Andressen Horowitz estimate that this type of embedded, open finance can help online services increase revenue by 2-5 times per customer. When software services are coupled with financial services, value to the end customer multiplies. According to Simon Torrance, from the World Economic Forum, embedded payments (just one type of these embedded finance services) are expected to account for 40% of the payments market within 10-12 years. Banks could easily dominate this market. After all, they have the functionalities already built and have even undertaken vast digitisation processes over recent years which would allow them to package up many of their functionalities as APIs that could be embedded into third-party providers. But they often lack the vision to take this advantage: they are so fearful of losing their exclusive relationship with the customer that they are unable to embrace a platform mindset.

This is obvious when looking at open banking platforms around the globe. By the end of June 2020, there were 293 open banking platforms globally, collectively releasing 2,029 API products. While regulations in the UK, Europe, Australia and Singapore require banks to open up payments and account information, banks are doing what they must, instead of bundling these functionalities in ways that could spark new ecosystems of providers around their banking services.

The low number of API products in areas such as credit scoring and loan pre-approvals, data products and loyalty/rewards (all together accounting for just 8% of the global API products available) demonstrate that banks aren’t yet in a headspace where they are thinking about what banking capabilities third parties could make use of to build new digital products and services.

Over the past five years, new market entrants have created vast opportunities for themselves. Stripe, for example, offers payment services via APIs. Their whole business is built on a functionality banks could have offered. Instead, Stripe is valued at $36 billion today.

Some banks are catching on: Permata Bank in Indonesia, ABN AMRO in The Netherlands, BBVA in Spain, Commerzbank in Germany, Goldman Sachs in the United States, Erste Group in Eastern Europe, and both OCBC and DBS in Singapore all stand out as examples of banks keen to open up their payments and other functionalities and work with external partners to ensure financial services are available wherever consumers need them.

Emerging Markets

But in many emerging markets, banks are completely missing from the open finance conversation, leaving payments providers to lead on sparking the platform economy. Adyen in Latin America, Flutterwave’s operations in parts of Africa, and Paystack in India all demonstrate how payments infrastructure providers are embracing the opportunities of open finance.

Adyen - which operates directly in US & Canada, Brazil, Europe and parts of Asia - has already built the sort of payments infrastructure that would enable another Shopify or marketplace provider to share revenue models between themselves, SaaS offerings and the financial services providers. Adyen for Platforms describes itself as “an end-to-end payment solution for peer-topeer marketplaces, on-demand services, crowdfunding platforms, and any other platform business models.”

Flutterwave, which operates in US and has grown a large footprint across most of Africa, started with traditional payments services but now offers business invoicing and virtual card issuing. Their most recent product offering is a Store service aimed at helping small business and individual merchants transition to digital channels in a time of COVID-19. Users can sign up for an account, create a store and immediately start selling products and offerings. The store service integrates with ecommerce platforms and links to delivery options so that merchants can ship their sales immediately. There are even automatic price setting tools available so new merchants can set pricing that matches market standards.

Setu, based in India, is a more recent offering that started with a bill payments service. They have built out payment links so that billers can offer their customers QR codes and whatsapp links to pay bills directly via social media and mobile. They have now onboarded tool operators so that users can pay tolls directly from their mobile, and have created a range of “whatsapp banking” services so that customers can apply for loans direct via text. They are currently working on new digital credit, account budgeting and investment management APIs to extend their digital offerings. Setu’s competitors like Open Bank are following a similar trajectory to replace traditional banks with a suite of connectable financial services that, at the end of the day, integrate to the user’s bank account to move money, but all of the value

between the customer and the services they use is generated on the fintech platform, relegating the bank to being little more than the backend infrastructure.

Open finance and payments infrastructure are moving fast to be everywhere that the customer needs them. They are working out how to partner with the sorts of services and platforms that the customers want to use, and then offering their financial services during that value chain rather than as a separate process.

This is how open finance is sweeping the banks aside. Already in emerging markets, it is clear that open finance has the upper hand in engaging with the 2 billion users who have been poorly serviced by banks in the past. But now, with COVID-19, digital channels are becoming the primary channel. With mobile and online business engagement, customers expect a more seamless flow and when that happens, sales volume goes up and the generated revenue can be shared between all players that made the transaction possible. Payments providers understand the platform mindset. They are perfectly positioned to innovate and expand their financial services offerings now, while banks still cling to an old world order.