Open finance and the open data economy – are they essential elements for future digital banking business models?
For superior origination performance, combining artificial intelligence (AI)/machine learning (ML) models and automation are key foundational strategies for digital banks.
There is no question that open banking has empowered a growing number of consumers through providing more choice and richer banking products and services.
Early adoption regions such as Europe and UK supported by favorable regulation e.g. PSD2, and standards development groups such as the Berlin Group and UK OBIE, have accelerated market development. Innovation and competition have increased particularly, enabling regulated fintechs to utilize the open banking APIs for account information and payment initiation with customer data consent, and to launch services such as seamless payment services and account information user cases such as aggregation services, personalized scoring and personal finance management.
Banks and financial service providers have benefited in using underlying API technologies to enrich customer experience, automate operations and develop more flexible best of breed banking platforms. This has led to a transformation in services such as: personalized digital customer engagement and frictionless customer onboarding by combining open banking APIs with value-added third-party services. Additionally, removing friction from processes such as “know your customer,” expanding the range of distribution channels for banking services and extending offerings to include both financial and non-financial products (e.g. combined lending, insurance and other lifestyle services such as travel products).
In Europe alone, the open banking market is projected to reach $48bn by 2030 growing at +23% CAGR during the period.
In January 2022 the OBIE estimates 5m active users in the UK, equivalent to 10% of the daily banking users and Europe is not far behind. Market development is accelerating with new growth use cases in open finance e.g. BNPL and the Open Data Economy. The new innovations are benefiting both consumer lifestyles and corporate business models. Potentially this could lead to an expansion of market growth by a factor of x10.
In Europe alone, the open banking market is projected to reach $48bn by 2030 growing at +23% CAGR during the period.
Key market opportunities that financial institutions are considering include:
Mandating market enablers an extended open banking regulation
- Instant payments in Europe using SEPA Credit Transfers [SCT] is a key enabler and highly cost efficient for account-to-account payments – however it is not mandated across all banks in Europe with only 38% of the c. 6000 banks using SCT. Draft law has been published, when enacted will require banks to received and send SCT within 6 months and 12 months respectively.
- Expanded regulation is expected to ultimately encompass additional banking products and data, e.g. in the UK FCA regulation is considering lending product, investments, insurance etc.
- Adjusted existing customer data permission rules to simplify the consent process will help to reduce customer churn rate, e.g. UK 90 rule.
Open finance B2B use cases extend the reach and accessibility of financial services.
Banks are creating new APIs to provide new revenue generation services. Additionally, regulators such as the EU will enact an open finance framework by 2024 to enable this trend:
- Embedded banking services in customer processes such as accounts payable - HSBC corporate banking has embedded its APIs within a leading ERP solution enabling corporate finance functions to streamline access to payment and cash management services.
- Natwest in the UK recently expanded the APIs available in the Indirect Access Payments Suite to include real-time payments and reconciliation.
- Starling Bank UK is successfully offering BaaS services for accounts, payments and customer onboarding to financial services and fintechs e.g. Raisin savings products.
- Some corporate banks are extending APIs to address specific customer segment use cases, e.g. providing data for reconciliation and reporting to corporate & SME customers.
The open data economy extends beyond the financial services industry
Federated consented data from Finance, Health, Government, Travel/mobility for example can enable consumers and businesses to enrich and revolutionize societal, personal and financial wellbeing. Holistic and richer pools of data with artificial intelligence (AI)/ machine learning (ML) can enable more intelligent personalized services. For example, Atos is helping a leading telco provider to enrich its mobile money services by incorporating financial and non-financial Fintech products and services using an extendable API platform. In Europe, Atos is collaborating on uses cases for the open data economy such as developing federated data services in areas such as fraud.
Clearly, mastering open finance and the open data economy is an essential strategy for successful future digital bank business model growth. The potential for new use cases is significant as demonstrated by the BNPL market. Atos financial services value chain transformation, digital banking and data platforms expertise helps banks to evolve their operating models to gain the innovation benefits of these market development.
By Kuldip Chiheru, Atos FSI Group Industry Director – Banking Platforms
Posted on: March 14, 2023
