As the number of new market entrants in finance increases and technically savvy and less loyal customers grow in number, traditional institutions, already saddled with high operating costs, will continue the migration from running the end-to-end manufacturing and distribution of financial services entirely in-house.
Look for the unbundling of financial services to continue, along with more partnerships between traditional and non-traditional players (and some collaborations with other conventional players too).
Banks need to consider the value delivered at every step of their processes, along with their associated costs, Hope said. Based on the results of those analyses, they may outsource, partner, or keep some services in-house.
New business models
The rise of open banking presents financial institutions with new business models, Hope said. The process is, of course, much more mature in the United Kingdom, and looking to their experience can provide North American institutions with an accurate roadmap for the next few years.
Banks are realizing they too can benefit from access to third-party data, Hope said. They leverage application programming interfaces (API) to leverage additional data from outside entities.
It’s given rise to new models, Hope explained. The first is Banking-as-a-Service (BaaS), where an entity provides the rails and products, renting out the license to other customer-facing players. The originators are not necessarily owning the customers, just providing the service.
More than 60% of executives say their open banking spend increased since 2019, and 73% of UK executives now have a favorable view of open banking, up from 48% in 2019.
Some banks also develop platforms to serve their customers, Hope said. They develop banking services and benefit from the network effect.
There are unique examples from across the world, Hope said. Citibank launched a digital lending platform for SMEs seeking up to $10 million.
They connect seekers with regional, local, and community banks. Polish bank Idea has done something similar but extends the concept by providing accounting, analytics, promotional support, and even bookkeeping for Uber drivers.
“Open banking also highlights the challenges related to legacy infrastructure,” Hope said. “Banks are not standing still, but they have systems which can be 30 or 40 years old.”
Many of those who have updated their systems may still be behind if those upgrades occurred before the digital revolution, Hope cautioned.
Those banks still deploying legacy systems are struggling with the transition as they are faced with high risks, expensive bills, and slow times to market, Hope said. Looking to the United Kingdom, almost all large banks have seen outages over the last two years.
Regulators are calling out the risk of these legacy systems. With new systems requiring real-time data exchange, modularity, plug-and-play capability, and hyper-personalization, legacy systems do not cut it.
“It really creates a need for the move beyond legacy systems which cannot cope with this system,” Hope said.
When the United Kingdom originally mandated open banking, they chose nine banks to begin the process, Hope said. Only four could pull it off when it was time to go live.
Federal government support is a key to shaping the path to open banking in their jurisdiction will take, Hope said.
Australia is one of the most expansive nations, as they are mandating a phased implementation of open banking in conjunction with its Consumer Data Right. Canada’s path is beginning with digital identities.
A nation’s open banking efforts will only be successful if consumers are aware of the benefits and view those benefits as worth any efforts required in switching behavior, Hope said.
Whoever is providing the service has to ensure an appropriate level of value beyond what consumers receive from their current alternatives.
“Why share data unless you get something from it?” Hope asked. “Innovation is about coming up with products and services which benefit consumers.”
SMEs, long underserved by traditional institutions, stand to benefit from open banking too, Hope said. The use cases are many, beginning with different services that can help startups and small businesses expand into new regions and product lines while helping them with daily functions such as payroll and taxes.
Hope said climate change is top of mind for banks and businesses today, and the use of third-party data can help clients reduce their carbon footprints. Sustainable investing is another hot topic, as younger consumers seek investments that align with their values.
Smart banks are quickly catching on, Hope noted. One, Standard Chartered, late last year, launched Shoal, a digital offering powered by Starling Banking Services that will let customers address climate change by choosing which types of projects their money supports.
Ant Financial has worked with the United Nations to provide loans to farmers in developing regions who use sustainable practices. Remote sensors and satellite technology are deployed.
BNPL continues to be one of the hottest topics in the industry, Hope said. It disrupts consumer lending and should grow at a high rate. BNPL rates are expected to quadruple from 2020 to 2021. She writes in the report at the heart of its success is a better UX.
“This is changing the economics of traditional lending from lending spreads taken from customers to earning commissions from merchants. The trend has arisen from the 20% boost to POS lending at the expense of physical cards since the COVID-19 pandemic.
It appeals both to financially stressed and/or younger consumers who feel unfairly charged by credit card companies as well as to merchants as it helps them acquire new customers faster and cheaply, improve loyalty and increase average order value.”
“Why is it so successful?” Hope asked. “It’s appealing to customers and merchants and is 100% cent embedded into the banking journey.”
Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.