The financial industry is betting on open banking as the enabler of meaningful customer interaction and new business models. Yet, as much as open banking is characterised by its opportunities, it also sparks profound challenges for incumbent companies. Requiring fundamental cultural and operational paradigm shifts, open banking has shown to be an uphill battle for financial incumbents on many fronts. In response, the industry has realised that cooperation with Fintech companies could potentially relieve many of the challenges and help incumbents accelerate the transition to open banking. This article reflects on the benefits that Fintechs can provide to financial institutions in order to win the open banking battle.
Closer customer interaction
The winners of the open banking race will largely depend on how well their proposition resonates with customer’s everyday financial challenges. Financial institutions however struggle to articulate their customers’ lifestyles due to a lack of periodical and meaningful interaction. Missing the mark on customer interaction could lead to an adverse reaction to open banking propositions, like the critique on ING’s recent proposition to supply customers with advertisement based on transaction data. On the contrary, close customer interaction is inherent to the lean method in which start-ups operate. For example at Bittiq, we strive to directly interact with at least 100 people before developing a new feature. Fintechs can therefore increase a company’s access to continuous customer interaction in the development of their open banking proposition. The fact is that they also have easy access to more experimentation channels, like going out into the street or long in-depth interviews with their user base – something that financial companies just do not do.
Additionally, experimenting with in-app features can in itself be a bottleneck as the backlog of the mobile app is often filled for years ahead. Although beta apps provide a possible testing channel, Fintech companies can cycle through in-app experiments at a much faster rate. All in all, Fintech companies provide a potential fast-track for acquiring thorough customer knowledge and testing propositions, which are both essential in defining the winning open banking strategy.
Using existing infrastructure
A fair share of companies will embark on the open banking proposition internally, but this leaves the need for a complex technical infrastructure. Companies are initially looking to API aggregators for cooperation, but even after API aggregation significant technical operations are required on the side of the third-party provider (TPP). Additional activities for the TPP include consent flow management, payment initiation, account aggregation or data transformation. Complicating the matter is that the bank API’s released so far have shown that the way in which data is supplied by API’s can vary significantly per bank.
Cooperation with specialised Fintech companies can supply companies with different components of the infrastructure, tailored to their needs. This helps companies build a full open banking foundation more effectively. TPP’s may even be inclined to work with different Fintech parties for different components like data analysis, API aggregation and post-aggregation management. Where companies for now tend to focus mainly on aggregators, this can help them to avoid the risk of spending valuable resources on post-aggregation processes.
A race for the deadlines
The implementation of PSD2 plainly brings along stringent short-term deadlines. Among the first hurdles to overcome are compliance requirements, legal and administrative challenges and API development- and testing. Related to this is the need for attracting and allocating the right workforce talent to reach these deadlines. Naturally, such requirements have the short-term priority over developing new open banking propositions. But as companies are nearing their deadlines, the race towards developing the winning open banking proposition has already started. Cooperation with Fintech companies offers a channel to get this momentum going and already experiment with propositions that lie outside the core competencies of financial institutions. As a result, they can facilitate proposition development in parallel to the financial institutions working on making their imminent deadlines and attracting the right workforce.
Open banking consultancy
The consequences of integrating an open banking strategy are extensive. A cooperation with a Fintech party therefore often goes beyond simply adopting a product or service, but rather tends to be a longer term process involving piloting, testing, launching and finally the integration. Fintechs tend to provide dedicated account managers who actively interact with different departments within the company. Companies benefit from such account managers because they allow an agile and holistic way of working in different layers of the company. In many ways, the Fintech takes up a consultative role in the implementation process. This smoothens the transition from pilot to integration, a leap which is known to strand in financial institutions. Companies are realising the importance of the consultative aspect in moving cooperation from idea into execution.
As they are establishing their open banking strategy, financial institutions are faced with a lack of customer interaction, fierce legal and technical challenges and extensive organisational transitions. The broad scope of these challenges makes it infeasible – or in any case unwise – to embark on everything themselves. Since the financial industry has seen an emergence of Fintech companies on each of these fronts, financial incumbents can benefit from their freedom to innovate quickly, close interaction with consumers and their ready-to-implement infrastructures. Rather than merely providing a product, Fintechs can further act as an agile consultative partner in the implementation process. These aspects give financial institutions breathing room to tackle their technological and organisational transformation, while keeping up with – or getting ahead of – competition.