On Sept. 13, 2019, something fundamental changed in banking land: from then on, traditionally closed banks were obliged to share customer data with third parties - provided the customer gives permission. The open banking era had definitely arrived. We are now two years down the road. A good time to take stock: what has become of the promise of open banking so far? We asked Nicolas Darlavoix, Digital and Open Banking expert at Sopra Banking Software.
Contactless payments, sending payment requests via WhatsApp, arranging a mortgage entirely digitally, money in your account within five seconds - these are just a small sample of the countless new possibilities that banking consumers have seen come along in recent years. There has been no shortage of innovations within the banking landscape in recent years.
Open banking has undoubtedly brought about many innovations, but in a certain sense it is also a maverick. For whereas banks are usually eager to present us with the latest banking gadgets, open banking is a little different: with the introduction of PSD2, banks had to open the gates - whether they wanted to or not.
"There was virtually no interest from the banking world at the time," recalls Nicolas Darlavoix. "It was followed but banks only saw the problems and not the opportunities of open banking, which was illustrative of the attitude toward open banking and to some extent still is."
This (initial) lack of enthusiasm is not surprising. Banks are traditionally used to keeping their vaults shut. When it comes to money, of course - but in a time when data is seen as the new gold, as a bank you are not exactly eager to share your customers' data. Certainly not when other parties might try to come between you and those customers.
However, banks that are still resisting would do well to dig their heels out of the sand, according to Darlavoix. "PSD2 is a fact - including the threats associated with it - you're not going to change that. But more importantly, the flip side of every threat is an opportunity. There are indeed many opportunities for banks and other financial institutions to reap the benefits of open banking."
From Sopra, Darlavoix helps Benelux financial institutions embrace the possibilities of open banking. "An interesting example of a case we are involved in is a collaboration with Cake, a fintech that has developed an eponymous app that allows customers at numerous retailers - from Hans Anders to Vakantieveilingen to Essent - to get a percentage of their purchase price back."
In doing so, the app provides retailers with a loyalty & rewards program that allows them to enhance customer loyalty. In doing so, Sopra provides the Open Banking integration between Cake and the banks. "We have developed a model that allows banks to integrate Cake into their own banking app. When a customer has made a payment it is passed to Cake and the customer automatically receives a cashback on their purchase."
The name "Cake" also immediately illustrates what Darlavoix believes is the distinguishing strength of a good open banking-use case: all parties involved get a piece of the cake: "The retailers get additional customers and pay a percentage for that. The banks get to offer a new service to their customers and in turn get a kickback fee for that because they provide the necessary payment data. The fintech also gets a share because it makes everything technically possible. And of course the customer benefits the most, who gets a portion of their purchase price back."
The partnership with Cake is a great example of the transaction-earning model, in which the bank and other parties involved earn from open banking by pocketing a percentage of each transaction.
Another example is a "subscription scan," in which a fintech can use your transaction data to see if your subscriptions can't be cheaper, and can even negotiate for you with the providers. In turn, the bank and fintech can receive a percentage of the discount thus obtained.
However, there is another revenue model, although it is currently still a bit in its infancy: the data revenue model. Darlavoix: "We recently have an interesting partnership in this area with a fintech that offers the possibility of sharing your transaction data - only with explicit permission, of course - with that fintech. That data is then sold and you get a data dividend, a fee in euros, on that as a customer."
This makes the idea of data as capital even more tangible. However, selling data is often still somewhat sensitive in the Netherlands, which is why this model is still less common. Darlavoix does emphasize that the data sold in this use case is only sold aggregated, or anonymous and combined. "For example, interested parties can see that '10% of users between 20 and 30 are shopping at the Jumbo', but never that 'Jaap is shopping at the Jumbo at 15:10'."
Such creative applications give a taste of what is possible with open banking. "In the beginning it was still about fairly basic personal finance management solutions, now we are already seeing more interesting applications that everyone can get something out of. And nobody knows what will be there a year from now - new innovations keep coming into the market all the time."
However, open banking can also be of interest to banks and other financial service providers without directly making money from it. Just as Cake is interesting for retailers who actually make money from it: it offers the opportunity to retain customers. "As a bank, you can provide a valuable additional service that is a reason to become and stay a customer," explains Darlavoix.
To do so, however, banks must open up and actively seek cooperation - including with their competitors. "This is still sometimes considered difficult," agrees Darlavoix. "The fear is that this will give those competitors the opportunity to take your customers. But you lose those very customers if you do nothing. And those competitors need you just as much."
Moreover, by leveraging each other's strengths, financial industry players can better guard against the threat that has been hanging over the market for years: the tech giants that are slowly but surely encroaching on the financial domain.
"These are parties that are already getting between the bank and the customer through Apple and Google Pay, for example. If they expand that further into complete platforms, you can end up as a bank in the position of only facilitating the underlying infrastructure. That's a position most banks will want to avoid. So you want to preserve that customer relationship by offering added value, and for that, open banking offers great opportunities."
It is precisely in that customer relationship that lies one of the key strengths that banks bring to the open banking arena. The fintechs may be bringing the smart innovations to the table, but the banks have tied huge numbers of customers over their long existence. The tech giants may have even more customers, but companies like Amazon and Facebook don't exactly have the best reputations.
"That's where banks have a big advantage," Darlavoix argues. "They sit on huge mountains of customers AND customer data, and unlike the tech giants, they also enjoy the trust of those customers. Since open banking exists by the grace of data sharing, that's of great value."
Enough reasons, then, for banks to abandon their wait-and-see attitude and seize the opportunities of the open banking era. However, this does not seem to be equally easy for all banks: where large banks have the financial clout to develop the necessary technological innovations, their smaller peers often do not. According to Darlavoix, however, that is no reason to sit still.
"Many small banks are stuck on PSD2 compliance: they do what the law requires them to do but no more. That's a missed opportunity, because even without a large in-house IT department, you can reap the benefits of open banking just fine. Of course, you don't have to invent the wheel yourself - banks can also adopt the necessary technology from a player like Sopra. We have a state of the art cloud platform that runs on all open banking APIs."
Sopra also helps banks and other financial services companies - from small to large - with the many facets of transforming from a closed to open business model.
"As a software company, we obviously provide the technology: a central platform on which third parties and consumers can do business securely and manageably via API integrations. We also work with partners whom we can connect to the platform if required. We also offer advice: how do you partner with other parties? And - perhaps more importantly - how do you make the transformation land in your own organization?"
In a sense, this brings us back to square one - and to the biggest challenge for banks wishing to benefit from open banking: the necessary cultural change. Darlavoix: "Banks are simply not used to cooperating with other parties. If you have worked as a closed organization for decades, you can't just get rid of it. It takes time and effort. Support must be built throughout the organization - from the boardroom to the shop floor."
But for those who manage to break through that closed culture, a new world opens up, Darlavoix emphasizes in conclusion. "The developments are rapid and the opportunities are numerous. Not just for banks, but for all kinds of service providers - from insurance companies to energy suppliers. We are only at the beginning of the open banking era. This is the time to step in, the future is open."
