Tony McLaughlin, Citi: Banks must focus on the ‘must-win’ battles to become the financial layer of the platform economy, and that means approaching Open Banking with new eyes
Open Banking might be seen by some as an unwelcome regulation that forces banks to open up capabilities to fintechs, leading to disintermediation. But this does not encapsulate the true meaning of Open Banking and the strategic rationale for banks to engage more positively. Open Banking should be viewed by banks as their entrée to the API economy. A bank’s physical presence on the high street is tangible, but their position on the information superhighway cannot be taken for granted. Electronic and mobile banking will continue, but we are about to see the rise of ‘platform banking’. Platform banking is the engagement by consumers and businesses with financial services delivered through digital platforms.
We get an inkling of the future of platform banking by observing the tight integration of Ant Financial services into the Alibaba ecosystem. If software is eating the world, then platforms have the greatest appetite. McKinsey estimates that around USD 60 trillion of economic activity will migrate to digital platforms by 2025.
Banks struggling with compliance with PSD2 might miss seeing both the wood and the trees. In a world of platforms, we are going to see financial services tightly integrated into the platform itself. The only question is who will provide these financial services – the bank, the bigtech, or the fintech?
Here are a few near certainties that are likely to be confirmed as the world of platforms unfolds. The first is that the only way to integrate financial services into platforms is through API. If banks cannot deliver their full suite of retail and wholesale banking services
through API, then they risk becoming irrelevant. Banks need to wholly embrace Open Banking and realise that being able to deliver services through API is the digital economy equivalent to opening physical branches in earlier times.
The next certainty is that if the banking community leaves a vacuum of financial services available through API, then it will be filled by fintechs and bigtechs. In bigtechs, the most valuable commodity is engineering resource, which is always scarce. Bigtechs do not necessarily want to develop financial services, but they will do so if they are needed to drive platform growth. The bank’s best defense against bigtech disintermediation is to show up with the APIs that bigtech needs to propel its business.
On the same theme, bigtech will sooner go to fintech partners if the banks each produce their proprietary APIs. Banks should not assume that connectivity is a means of competitive advantage. Bigtech does not want to use up its engineering resources to plug into hundreds of different bank APIs that keep changing. So, banks must come together to agree on standards for retail and wholesale banking APIs. API standardisation belongs at the global rather than the national level, which is why SWIFT is a good choice, given its network of over 10k banks and stewardship of the ISO20022 standard.
If banks realise the opportunities that Open Banking and the API economy can offer, then the growth potential is huge. Digital platforms are great venues to create new financial services.
Every digital platform has three components: the demand side, the supply side, and the platform sitting in the middle. There are a host of financial needs that can be served in each of these locations. Banks should think hard about these needs and deliver the APIs that meet them.
There is more work for the banks to do if they want to be central to the future of digital money and digital platforms. Banks need to make sure that, going forward, it is the bank account that remains the primary store of value, and the bank balance sheet that is the primary source of lending. There is one more critical component – banks must work together to equip the digital economy with a sound digital ID.
Sweden and other Nordic countries have been the pathfinders for federated bank ID schemes and they have proven their effectiveness. Banks cannot give up ID to the bigtech players, this would be a critical error because it can be argued that payments really means only ID plus accounting entries, and the accounting entries are the easy part.
Open Banking in Europe has demonstrated that Strong Customer Authentication is a major issue in rationalising payments. The truth is that SCA would be greatly facilitated by a Pan-European federated bank ID scheme. Take what is working in the Nordics and apply it to the whole continent. This would not only solve for payments, but banks would help secure their position at the bedrock of the digital economy.
Regulators are to be commended for kick-starting the move by banks into the API economy. The current hesitance and compliance based approach needs to be replaced by determined action at the level of the individual bank and through collaboration between banks. Banks face a stark choice but are all too often distracted by ‘fear of missing out’ on the latest technology trends. They must focus on the ‘must-win’ battles to become the financial layer of the platform economy, and that means approaching Open Banking with new eyes.
The editorial was first published in the Open Banking Report 2019, which offers insightful editorials, interviews and expert analyses that paint an exhaustive picture of the Open Banking regulatory shifts and the important extents in which this impact the industry.
Tony McLaughlin is in charge of Emerging Payments & Business Development Treasury & Trade Solutions at Citi. He is responsible for Emerging Payments and Business Development in Citi’s Treasury and Trade Solutions (TTS) business. Tony works on Citi’s ‘Future of Money’ strategy, is responsible for the TTS ecommerce proposition, and is deeply involved in new methods of payment, distributed ledger, and fintech engagements. He provides advice on the future of payments to governments, regulators, fintechs, big techs, corporates, and financial institutions.
Citi Treasury and Trade Solutions (TTS) enables our clients’ success by providing an integrated suite of innovative and tailored cash management and trade finance services to multinational corporations, financial institutions, and public sector organisations across the globe. Based on the foundation of the industry’s largest proprietary network with banking licenses in over 90 countries and globally integrated technology platforms, TTS continues to lead the way in offering the industry’s most comprehensive range of digitally enabled treasury, trade, and liquidity management solutions.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now