MoneyLive: the journey from Open Banking to open banking

When you think of Spain, probably the first things that pop into your mind are flamenco, tapas, bullfights and football. However, did you know that Spain has the biggest number of fintechs per citizen in the world? For instance, the size of the Spanish Fintech market has grown from 68 fintech companies (2017) to 185 (2019), according to Fintech & Insurtech Spanish Association.

In fact, I had the opportunity to learn these (and more) during MoneyLIVE Spring 2019 | MoneyLIVE Banking & Payments Conference, held in sunny Madrid at the beginning of March. There have been three intense days in Madrid, and what struck me most was the positive vibe, the fresh perspective and the visionary ideas expressed by speakers representing leading retail banks, digital challengers, and payments providers around topics such as open banking, invisible payments, IoT, BigTechs, fighting fraud, SCA, and more.

In today’s instalment I will delve more into the open banking, open APIs, instant payments discussions, aiming to present some key takeaways from the conference.

Practical lessons in open banking

By aggregating account information, open banking adds value for businesses in a variety of ways, and open APIs have a huge potential to help banks grow revenue and attract new customers when combined. However, there has been a lot of buzz around these words, and statistics revealed that, while 9% of adults in the UK have used an app or service that uses APIs, only 22% have heard of open banking as a concept.

As 99% of a bank’s customers don’t know how to code or what an API is, challenger banks such as Monzo have tried to put a level of abstraction to the technical notion to enable everyone to use this technology via Applets. In 2018, Monzo partnered with the world’s largest automation platform, IFTTT (If This Then That) to enable Monzo customers to connect their account to whatever apps they have already downloaded. In this way, customers are empowered to write their own rulebook and determine exactly how they manage their money. There are over 2,500 000 applets developed so far.

Transferwise, the creator of the borderless bank account, follows another approach to building customer-friendly products via a three-step program. They start by choosing a painful customer problem (money transfers), then they try to figure out what customers really want (to be fast, easy and cheap), by asking the customers directly, and in the end they become obsessed about solving this problem better than anyone else, adding a flavour of emotion (they grow their business on a word of mouth strategy, listening to genuine customers’ stories).

And since we mentioned emotions, PKO Bank Polski measured overall customer satisfaction by monitoring how much people smile within bank branches, promising to donate to charities a specific amount of money to each smile recorded (coming either from personnel or customers). The results were increased customer service indexes.

During a panel discussion on surviving in the digital payments market, everyone praised the Nordic banks for the successful way they have translated open banking into their business plan. According to Linus Fugl, Head of Transaction Banking, Danske Bank, some key factors behind their strategy are the fact that 99% of the citizens in the Nordics are included in the economy, they are using technology, digitalisation plays an important role in their culture/daily life, and this region has strong regulations when it comes to payments.

New realities in financial services: embracing a marketplace and lifestyle banking model

There is no doubt that the possibilities for value realization in the open and real-time banking ecosystem abound, but do banks take advantage of it? In the last two decades, the banking industry has gone through several phases: it evolved from traditional banks to open banks, and has embraced concepts such as Banking as a Service (BaaS) and Banking as a Platform (BaaP), with some innovative banks aiming to become a marketplace.

As some of the industry drivers behind this evolution, Sophie Guibaud, Managing Director, Europe, Fidor Bank, mentioned regulation, digitalisation and the pressure on margins (P&L).

For instance, as a consequence of PSD2, banks are not the exclusive owners of customer data and customer relationships, and core banking services might become commodities. Also, by embracing the concept of digital banking, customers will take their finances into their own hands and will no longer sit in a passive position yet, by using messaging apps, reviews and feedback forms, they are expressing their ideas and needs. Financial products and services will be mainly accessed digitally, with transparent fees and rates and information and access becoming free of charge.

And last yet not least, a lower barrier of entrance in the banking industry will allow new players to further challenge margins because cost drivers will change requiring different cost structure. Overall, banks will have to focus more on core competences while meeting increasingly more dynamic customer requirements.

ACI Worldwide has recently launched a study that sets out recommendations for banks, processors and merchant acquirers, outlining services that allow all participants in the payments ecosystem to create new revenues, increase margins, and shorten the time to ROI. Therefore, in this new reconfiguration, banks can adopt 4 positions:

Full-service provider – via this model the bank can offer proprietary products through its own distributed network (a traditional model);

Utility – as ownership is dropped, the FI operates as a utility, thus the bank becomes more an infrastructure for other businesses, and can lose customer facing space and relationships;

Supplier – the FI continues to offer proprietary products and services, however distribution is handed over to third parties, who distribute those products and services, on their own platform;

Platform – the bank concentrates on the distribution of products by creating a marketplace through open APIs; third parties can offer their services within the FI’s main platform.

In this new world, the challenge for banks is more than technology. Digital transformation and working with new players require a shift in perspective, and accepting the idea that not all innovations will generate an immediate profit.

Open banking and real-time payments will force banks to change the way they think about external partnerships and collaboration. By collaborating with agile fintechs or organising hackathons that encourage creative API-enabled solutions and ideas, they can integrate new products and services, offer customers the option to use these, and capitalise on the increased transaction volumes.

Therefore, what better way of concluding, other than by quoting Kieran McHugh, Backend Engineer, Monzo Bank: “Don’t let PSD2 kill your creativity”.

About Mirela Ciobanu

Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in covering digital payments and related topics, especially in the cryptocurrency, online security and fraud prevention space. She is passionate about finding the latest news on data breaches, machine learning, digital identity, blockchain, and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor degree in English language and holds a Master’s degree in Marketing.