Open banking: A playbook for banks and fintechs

The landscape for financial services is changing, and the jury is still out as to how the endgame is going to play out. One of the concepts shaping this future is open banking. This development emerged out of the payment area where a perfect storm of shifting customer behavior, regulatory changes, the threat from the tech behemoths like Facebook, and the quest for new business models are driving banks towards open banking.

After looking into the subject, it is becoming clear that there is no one size fits all open banking strategy. Rather, there are several tactical moves that are being played aout by a variety of both banks and fintechs. I will attempt to describe some of the widely applied moves, as well as give some examples of type of players that are conducting theses moves.

Move #1 The API marketplace

Becoming a fintech app store is for many banks the prefered alternative to open but, but still maintain control over customer relationship and customer data. BBVA pioneered this move though their API marketplace, and has seen several followers. Nordea recently announced that they will launch a fully functioning developer portal and community hub as a first iteration of their open banking strategy. The move makes Nordea one of the first movers in the Nordics to openly state their Open Banking vision. This is not limited to big banks, as Starling is launching an API marketplace of their own. Starling’s public API enables third-parties to access customer data and build on top of the Starling Platform to create products and services such as chatbots, spending analytics, or connections with the Internet of Things.

Move #2 The account aggregators

The ability to create a unified overview of your bank accounts is for many one of the key strategic possibilities under the XS2A rule in PSD2. This move need no further elaboration, as we already see examples of players like Swedish fintech-startup Tink attempting to gain an early position through «screen scraping» prior to PSD2. In order to succeed in this game, a contextual relevant user experience is crucial, and merely presenting aggregated account balances in a retrospective fashion will not make the cut.

As the directive gets implemented, this is likely to become the new normal for every online and mobile banking service out there, effectively shifting focus for banks from attempting to be your customers main or only bank towards attempting to be your customers favorite bank.

Move #3 The trusted financial advisor

Building on the account aggregator, the trusted financial advisor also includes data from other sources such as rewards and loyalty points, utility bills, insurance, total cost of car ownership. The ability to give a holistic view of everyday finances will  further strengthen the customer relationship. Op Financial Group in Finland is following this strategy, and has launched an electric car leasing service. Players seeking to follow this move should also be prepared to include competing products and services from competitors if these are the best solutions for the customer in order to build and maintain trust.

Move #4 Cross industry collaboration

Hana Financial and SK Telecom in South Korea has formed a joint venture with the goal of developing a mobile financial services platform. The joint venture is aiming to combine SK Telecom’s mobile technologies and big data analytics with Hana Financial Group’s experience in financial products and mobile financial services to build an open fintech ecosystem. When launched, the platform will offer a variety of mobile financial services – such as payments, remittance and asset management through a single mobile app. Norwegian banks and Telenor previously attempted to collaborate on the mobile payment platform Vayou, as well as Polish bank mBank has launched a mobile banking services directed at SMEs in collaboration with Orange.

Move #5 Hackathons/crowdsourcing

Opening up and allowing approved third parties to build innovative solutions on top of various banks APIs has become a popular choice to test the waters before moving towards the open banking deep end. But hackathons can also be used beyond simple exploration. ICICI Bank in India is now hosting their second season of their «appathon». The mobile app development initiative offers access of over 250 diverse APIs from both ICICI Bank, IBM Bluemix, VISA and National Payments Council og India to the participants. The programme aims to create the next generation of banking applications on mobile and web space by attracting developers, technology companies, start-ups, technopreneurs and students across the globe.

Move #6 Bank/fintech collaboration

Almost every open banking initiative has some element for fintech/bank collaboration. In order to distinguish this as a separate move I am specifically addressing bilateral collaboration efforts between one single bank and one fintech. The Financial Brand has provided som good examples of how BBVA and Dwolla collaborates on payments, USAA collaborates with Coinbase to include cryptocurrencies in their product offerings. Here in the Nordics, the latest development is a collaboration between Nordea and fintech-startup Spiff, which aims to make savings fun and easy.

Move #7 Banking as a service

For many incumbent banks, the idea of becoming a wholesale provider of commodity utilities is considered a worst case scenario.However, this is absolutely a viable strategic option for some. Germany-based Solaris bank was the first to provide a fully licensed banking platform aimed at fintechs. The platform offers payments, transaction services, deposit and credit services, as well as compliance and KYC/AML solutions.  Privatbank in Ukraine is offering a similar service through the Corezoid process engine. Railsbank in the UK is another banking as a service player that provides finTech companies a range of wholesale banking services, including IBANs, receiving money, sending money, converting money, direct debit, issuing cards, and managing credit through APIs.

Move #8 The white label product vendor

Similar to providing the whole bank as a service, some banks and fintechs have partnered up with the bank as a silent white label provider of products and services that often require a banking license to deliver. Notable examples include Webbank in Utah issuing loans for P2P lenders like LendingClub and Prosper as well as providing lines of credit for Paypal. As a result, Webbank was able to generate a return on equity of 44 percent based on a profit base of only $15,5 million. CBW Bank was also a fairly unknown bank out of kansas before it was known as the initial bank partner for Moven.

Move #9 Openness at the core

In order to build an open, fully digital bank, legacy core banking systems is often pointed out as one of the key obstacles. These systems are closed and monolithic by nature, while open banking requires openness and real-time processing. Though Machine is building their core banking solution on a blockchain-style technology that is said to be ideal for interfacing with open banks. Temenos has also established a marketplace in order to connect fintech providers to financial institutions using Temenos banking software.

No matter which strategic option(s) you choose to follow, open banking will fundamentally change banking the same way internet banking once did. As banks become integrated parts of digital ecosystems, the distribution of banking products will change and in the end become more valuable in the right context for the end customer.