The Four Open Banking Models, And The Factors Financial Institutions Must Consider
Yesterday’s banks were not designed to serve today’s customers. Overcoming legacy systems remains one of the biggest obstacles for banks looking to offer a frictionless experience. Digitization can be seen as an expense; in reality, it provides banks an opportunity for new revenue growth.
U.S. retailers are dealing with the same dilemma. With the rise of e-commerce, victims of the “retail apocalypse” failed to recognize that digital transformation is more than just a cost. Instead, it’s an opportunity to adapt to a customer-centric world.
Meanwhile, the banking industry struggles to provide the same level of convenience and ease that consumers demand. At Finastra, our platform-based approach opens the application programming interface (API) and gives third-party developers access to develop applications on the banks’ systems. When financial institutions embrace more open ecosystems, they not only provide customers with more banking options; they can create new revenue streams.
When weighing the appropriate open banking model for your organization, however, there are factors to consider.
1. The Aggregator
There has been a rapid proliferation of budgeting and wealth management apps that provide a basic value-add: aggregating data housed in disparate banks, credit cards and investment services in one convenient location. Banks that adopt an aggregator model have an opportunity to provide value to their customers and reclaim market share from fintech challengers. As a service aggregator, banks can capitalize on customer-centricity. By opening their infrastructure to seamlessly integrate third-party products into their ecosystem, banks can provide account aggregation services and experiences that extend beyond core services.
By offering account aggregation services, banks are able to monetize cross-offerings and data while simultaneously creating a frictionless experience for consumers. Based on what I’ve seen, fintechs have been champion aggregators, but by allowing fintechs to dominate this space, banks are leaving money on the table.
While the value of an aggregator model is clear, the hurdle for banks could be gaining access to the full universe of their clients’ financial data. Whether an individual or a company, clients often use more than one bank to manage their finances. As a result, a bank’s success as an aggregator hinges on its ability to collaborate effectively with potentially competitive financial institutions.
2. The Distributor
Building on the aggregator model, banks can also distribute third-party services to consumers. Banks can monetize this by funding third parties through a commission-based model where a customer would have access to third-party services that a bank would then resell.
Banks currently house massive amounts of customer data. With open banking, banks can leverage that data to offer more consumer-oriented, hyper-personalized bundled solutions. In an age where 41% of digitally savvy consumers would consider changing financial services providers if offered a better experience, banks can maintain sticky relationships with consumers by recognizing and catering to their financial needs.
As banks explore opportunities to partner with fintechs, the question becomes: What should they look for when selecting the right third-party provider? Banks today are trying to balance maintaining market share, customer loyalty and brand strength. To minimize brand erosion, collaborating with reputable fintechs will provide the ammunition a bank needs to maintain these.
3. The Platform Enabler
A platform-based approach allows banks to open their infrastructure and APIs, which are the basis of data sharing, data distribution and quick and easy integrations. By opening APIs, banks have an opportunity to monetize data and API capabilities to sell to fintechs in the ecosystem looking to collaborate, innovate and scale. And as a platform provider, banks can shift away from a product-focused strategy to a more consumer-centric strategy by allowing third parties to bring products to market faster.
One of the primary hurdles banks could face is overcoming internal misconceptions about the value of an open model. Technology is a key piece of intellectual property that financial institutions have always fiercely protected. For many institutions, the idea of opening APIs and letting the broader financial ecosystem in on their “secret sauce” could seem counterintuitive. To convert skeptics to open banking champions, executives should arm themselves with data about the changing nature of banking and projected revenue from an open API approach.
4. The Data Provider
As data service providers, banks can monetize the transaction of securely exchanging data through APIs. For example, if a customer was looking for a mortgage pre-approval, banks could monetize the transaction of sharing data that would approve or disapprove the application.
With this model, banks take more of a “back office” role and risk losing direct consumer relationships, but it allows banks to play a more significant role in the back end by focusing solely on providing efficient, end-to-end banking solutions through business-to-business partnerships.
Before Implementing A New Model, Build A Foundation
Of course, adopting any new business model to accelerate digitization is no easy feat. That’s why it’s important for banks to ensure they have in place the right nimble team that can identify and analyze the pros and cons, and challenges and risks, and can operate effectively with various business units to ensure a seamless transition. I find that banks that strengthen their internal teams first are more likely to be successful when adopting an open banking model.
The following four elements are important foundational steps when considering generating new revenue with open banking:
1. Unified Strategy: Adopt a bankwide unified data strategy, leveraging artificial intelligence and other business intelligence tools to provide truly personalized offerings to your customers.
2. Collaborative Mindset: Harness a collaborative mindset that permeates from the top down to break functional silos.
3. Open Culture: Cultivate an open culture that stimulates creativity and innovation among your employees.
4. Diligent Compliance: Embrace the changes required by staying compliant with evolving regulations such as the General Data Protection Regulation (GDPR) and the Revised Payment Service Directive (PSD2).
Open banking is more than another technology play. Beyond revenue generation, digitization is central to banks’ survival as the ecosystem of fintechs grows. Today’s banks are challenged to grasp a lesson that retailers had to learn the hard way: Digitization is vital to survival as consumers’ expectations increase.
Original article appeared on Forbes.