In 1980, the Deutsch Bundespost (German Federal Post) conducted a pilot “on-line banking experiment” with 5 external computers and 2,000 logged-in users who could transfer money to each other using a code specific transaction. With a touch of prescience, they baptized the initiative “My bank in the living room”. But it will take several decades for the concept to take root, only after regulations, such as PSD2 in Europe and Open Banking in the UK, have allowed the conceptual foundations laid by the German experience to evolve into what we call the modern day, open and ecosystem banking models.
Open Banking – what, so what
For banks, which traditionally exercise complete control over their customer data and relationships, open banking is nothing short of revolutionary. This model effectively breaks the industry’s monopoly on customers and their information by allowing third parties – financiers and others – to use banking data to build theirs services to provide added value to customers. Think of travel booking, online shopping, etc.
But why should incumbent merchant banks embrace this trend?
Well, simply because they can see it’s the future of the business. Imagine all the banks operating in a much larger ecosystem, breaking down the silos between them. They feature an almost seamless flow for a wide variety of transactions. For example, a purchasing manager at a clothing store can buy a lot online through a wholesaler’s site and seamlessly connect to their local bank for a letter of credit application, with all relevant data transferred. automatically. Or an AP office can get the latest balance and credit limits available to use. Next-generation digital players are leveraging the open ecosystems model to deliver innovative propositions in several traditional areas of transaction banking, from treasury management to liquidity management, lending, customer onboarding to the supply chain.
In a recent survey of digital innovation in business banking, conducted jointly by Infosys Finacle, Strategic Treasurer and RedHat, 45% of respondents said fintech companies would lead innovation in connectivity and related solutions. APIs (application programming interfaces), the main drivers of the open ecosystem model, support real-time information flows in corporate banking, thereby not only creating new revenue opportunities for banks , but also deeper and stronger relationships. More than a third of respondents said reimagined business areas such as cash management, payments, and trade and supply chain finance with an open banking lens would boost the economy. company with strong double-digit growth (11-25 percent) over the next three years.
How it changes corporate banking
Non-standard data formats, disparate processes, inconsistent information, across multiple intermediaries have been age-old challenges around banking transactions. The new model streamlines the fact that, to some extent, clients benefit from a clear and unified view of transactions, total cash resources or other operational information across their entire business and intermediaries. This helps them make faster and more informed business decisions based on real-time information. Operationally, it also reduces costs and improves the overall customer experience.
The greatest impact of open banking is seen in innovation around payments and account-related services; they have undergone huge changes, first due to the onset of the digitization wave about 5-6 years ago, and then by disruptive innovations around the Open APIs model. However, this is really just the tip of the iceberg, and we expect to see this trend spread to other areas related to lending, microfinance and supply chain over the next 1-3 years.
What the banks say
In the survey above, 84% of respondents acknowledged the importance of APIs; the drag however was that only 10% had achieved significant success with them. When it comes to open banking business models, the study indicated that adoption is underway with universal banking players testing the waters of platform gaming and ecosystem orchestration. But again, the reality on the ground was more muted – while 40% of respondents had rolled out their open finance strategies at scale, their success was largely limited to meeting compliance requirements, in regions where this was made compulsory. When it comes to the “real” goals of open banking – product innovation, customer engagement and data monetization, etc. – about a quarter of the respondents managed to fully deploy it and produce results.
So, while the model is still in a nascent stage at an industry level, we expect full adoption in the near future at an increasing rate.
Where to go ?
For the most part, while some of the early use cases around payments laid the groundwork for the model and concept, the new mutations of the model are already beginning to emerge. As the banking-as-a-service model gains traction, some banks are fragmenting it into sub-variants such as transaction banking-as-a-service, risk-as-a-service, and payments-as-a-service. We are seeing new age entities in the market that offer banking services, but they are very different from traditional brick and mortar banks and perform the same functions through open API rails. It’s innovation at its best with top disruptive innovators transforming the industry. It’s only a matter of time before the others catch up.