New business models in Open Banking have always been some of the greatest benefits of implementing Open Banking due to its high potential for encouraging innovation.
The main idea of Open Banking is that customers own their banking/financial data and, therefore, authorize this information to be shared with other institutions participating in this ecosystem through standardized APIs. This initiative has been adopted worldwide by countries such as the United Kingdom, Brazil, Australia, United States, and China.
Therefore, it is important that participating institutions understand that this moment is not just a regulatory milestone, but also an opportunity to innovate and create new business models in Open Banking.
There are many opportunities for innovation, but it is not possible to accurately predict the future of Open Banking; however, there are some possibilities when analyzing countries that have already implemented this solution.
With that in mind, in this post we are going to talk about some new business model trends in Open Banking that will become popular or emerge in the coming years. Check it out!
• Customer centric
• API economy
• Super apps
• New business model trends in Open Banking in the UK
Customer centric
The customer centric or “customer in the center” is not a new business model in itself, but a way for companies to guide decision-making, whose focus is the customer and their needs.
Based on the perspective of Open Banking, it is interesting to address this topic, because the trend is for a greater amount of quality data on customer behavior to be made available to participating companies.
According to the article by the consulting company Deloitte, banks and institutions have the opportunity to look at Open Banking through the eyes of the customer to identify unmet needs and think about how this transformation can be used to meet such needs and create positive changes for banks and consumers. They listed the following principles for Open Banking:
- Catalyst change that forces institutions to be customer-centric, not product-centric;
- The focus is not just on regulatory compliance;
- New and open architecture leveraged by data analysis capabilities;
- Operations outside the traditional banking system;
- Autonomy and ability to innovate in business models and value chains;
- Leverage of brand, assets, and current capabilities.
This means that institutions that gain insights from this data to improve the customer experience and offer customized products and services will be able to design successful strategies.
In line with professor Elizabeth Sheedy, a specialist in the financial environment at Macquarie University, many financial institutions have created standards and better profiled them with the help of big data techniques.
API economy
Open Banking works through open APIs, which is much more secure than the screen scraping process, currently being used by most fintechs to access client data in financial institutions, whereby clients are required to share passwords and credentials.
APIs are a technology through which computers exchange information in an organized way. In the context of Open Banking this is vital: imagine that you are trying to get a loan, but you are not happy with the conditions that Bank X offers you. So, you decide to quote with other financial institutions and fintechs. For this end, you can authorize these institutions to access your data held by Bank X. This communication between Bank X and the finance institutions and fintechs with which you have quoted will take place through Open Banking APIs.
Thus, Accenture pointed out two possible Open Banking monetization models based on the API economy, which is how companies make APIs profitable and create value.
Pursuant to consulting company Gartner, “the API economy is an enabler for turning a business or organization into a platform. Platforms multiply value creation because they enable business ecosystems inside and outside of the enterprise to consummate matches among users and facilitate the creation and/or exchange of goods, services and social currency so that all participants are able to capture value”.
There are two ways to work in this type of economy:
1) Companies can “expose their own services and data through APIs” for partners to use that information and build new offerings.
or
2) Companies can “use APIs to access third-party data and services” so they can add new offerings to the portfolio more quickly.
The Accenture research cited above points out that those who do not build business models powered by Open Banking are at risk of being left behind because of the transformative potential of this solution.
After all, APIs will continue to bring new revenue opportunities and competitive advantages in financial services, possibilities for cost optimization, improved customer retention, and accelerating innovation.
Therefore, financial institutions must:
• Organize their business differently and develop new features;
• Reassess operational models;
• Invest in open technology architecture (in the cloud);
• Rethink data and information management;
• Find new ways to work with partners in this ecosystem.
In addition, according to the research, as banks outline strategies in Open Banking, two business models have stood out in this ecosystem: bank as a platform and bank as a service.
Bank as platform
In this model, banks and financial institutions combine traditional and digital services and products from partnerships with third parties to offer new products to customers, using their own channels. It is interesting for those who want to quickly offer new services to an existing customer base or to access a new market through partnerships with participants in the Open Banking ecosystem, so that financial institutions are present in their customers’ lives at different times.
Those who opt for the platform model can use Open Banking to increase their customer base, reduce operating costs, and improve efficiency.
Bank as a service
In this model, APIs can be used to distribute key financial products and services through third-party or partner channels. It is interesting for those who want to quickly expand their distribution reach and access new markets.
Banks with efficient product manufacturing capabilities, strong operational processes, and robust back-end capabilities are best served by this model, which is often very popular in the payment, credit product, and transaction industries.
It is important to highlight that, regardless of the models presented above, one item in common should evolve in the coming years of Open Banking: partnerships with other companies and fintechs with the purpose of innovating when offering services, especially those that are not part of the core of the financial institutions.
A survey by British digital bank Zopa revealed that the partnership between the bank and ClearScore, a fintech company, resulted in a 37% increase in the number of users eligible to apply for credit proposals on Zopa. In just one week, more than 43,000 ClearScore users were able to view Zopa’s proposals, something that was not previously available in a pre-Open Baking credit review.
Super apps
Based on the survey by the digital bank Zopa mentioned above, most English users currently use Open Banking to:
• View all bank accounts in one place – 34%
• Keep an eye on all savings and investments – 28%
• Move money between bank accounts and savings – 27%
In other words, the interest in aggregator applications is evident, because it is easy to perform multiple operations in one place. This fact draws attention to the popularization of super apps.
This type of application, as the name suggests, brings together a number of features in one place. Super apps have become very popular on the Asian continent, thanks to WeChat, an instant messaging app that is offering other services to its users, such as online shopping and payments. As this application has become one of the most used in China, the government has chosen it to host citizens’ digital identity document.
This evolution shows that super apps can become increasingly popular on other continents, because it is possible to meet users’ needs more quickly, considering our cell phones are already full of applications with the most different functions.
In the context of Open Banking, this means it is possible to combine personal finance control, access to bank data such as a checking account or credit card, insurance or even financial management of companies in the same application. The possibilities are countless.
With that in mind, HSBC Hong Kong has developed Payme, the super app based on Open Banking. The robust strategy of this application is to use big data to provide consumer insights, empowering the omnichannel digital experience, while analyzing consumer behavior in real time.
It has been created because HSBC needed to compete with other players in the market and reduce the high cost of operations, in addition to complying with several Open Banking regulations. Thus, they developed a standalone mobile app that offers P2P payment via social media.
As of May 2020, Payme already had over 2 million active users, around 23% of Hong Kong’s population.
New business model trends in Open Banking in the UK
As it was implemented in 2018, Open Banking UK is used as a reference for processes and trends. According to the aforementioned Zopa bank survey, currently around 4 million users are active in UK Open Banking.
Consonant with an article from the Fintech Magazine portal, one of the most interesting things about the UK Open Banking is the Request to Pay (RtP), which allows users to request payments from other bank accounts. Even though it is possible to make payments in real time, RtP has innovated regular payments and invoices, which is very useful for merchants and self-employed business owners.
In this system, payers receive a notification with the amount due, which increases the visibility and control of personal finances, and beneficiaries can monitor all accounts and invoices in a single device in a simple and efficient way, which considerably reduces the time spent searching for overdue invoices, as Open Banking provides a 360-degree view of payments on a single platform.
Open Banking technology is also expected to replace BACS payments, which is currently the most widely used method in the UK, accounting for around 90% of all regular monthly payments made in direct debit transactions, especially for payroll.
However, Open Banking has simplified this process, because employers (or vendors using payroll) can make payments directly to employees’ bank accounts instead of sending complex files through a bank for BACS processing, which will also allow companies to comprehensively analyze their accounting.
The other benefit for merchants is real-time payments enhanced with instant transactions between retailers and consumers, which is interesting for e-commerce, given the constant desire to reduce transaction costs and conflicts.
Dan Weaver, UK Equifax Open Banking expert, in an interview with Raconteur Publishing, said investment in innovation is likely to continue, especially in mortgage management apps. He believes that real-time access to bank account information and payment data could improve the identity verification process, as well as provide more timely and accurate views of complex accessibility cases compared to current methods, which can make processes safer, fairer, faster and less susceptible to fraud, says Weaver.
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