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Ahead of a new report from Wavestone, we asked Joël Nadjar, Financial Services Worldwide Executive Partner, about how open banking has developed in the last two years and what comes next.
One and a half years ago, Efma and Wavestone released a paper on the first steps of open banking. How would you describe the evolution of open banking since then?
In spite of the Covid situation, the open banking agenda is moving forward for the most part at financial institutions. Banks realize that providing a seamless and valuable customer experience is key while taking advantage of innovations generated by new players such as fintech or tech companies. The ability to sell products and services through improving customer experiences and/or to generate additional revenues embedding financial services into other customer experiences will become crucial. That is possible only if IT architectures shift from silo/rigid frameworks to flexible components that can be easily integrated. This is what open banking is all about. (download your free copy of Building the bank of the future Part 1)
The 2019 paper ends with the following sentence “Currently, no single model really stands out in terms of economic profitability.” Looking back now, has it changed?
Obviously, the revenue model is still unclear. Many banks may believe it is easy to sell their products or services through open architecture but those new components need to be cost effective and scalable with a high level of quality. For the time being we have to admit that banks over estimate the value of the services they deliver or, in the opposite way, tend to sell cheaper than the standard cost to get market shares. Open banking business models are not stabilized yet and financial institutions are currently experimenting with different schemes.
What are the main barriers to a fluid adoption of open banking?
The cost of initial investment to fully transform a current rigid architecture into flexible open components is high and banks are reluctant to really invest at the required level to reach a critical size that increases the pace of transformation. For example, when we compare the investment from large major players in Europe or Asia such as ING, BBVA, or PinYan with the investment of the French banks, we have to admit that the gap is becoming a clear barrier.
As a consequence of open banking, we are witnessing the emergence of super apps that go beyond banking. What is your vision on these apps? Is it the future of mobile banking or is it a dangerous gamble for banks?
Super apps are parts of what we call “digital solutions.” Digital solutions are what fintech companies produce and deliver. They see a gap in the market from what traditional banks offer and they create an intelligent digital solution that is focused on a niche part of the market. Using advanced technology, they solve an unmet need. They solve some real problems that consumer or business customers encounter. everybody knows these companies very well. They are all the top neobanks and fintech companies that are talked about in the media.
Indeed, some of the traditional banks have started to create their own advanced digital solutions like Aladdin from Blackrock. Those types of intelligent digital solutions have the ability to expand into more multi-sided platforms as they grow because they use the latest technology. Developers can develop on top of them and they can add and bundle in more capabilities. We have an interesting case study of a company called Moneylion, which is a personal finance company in the US. It has re-bundled banking capabilities into a very powerful personalized service for customers. It is serving the unmet needs that the traditional banks were not serving very well.
To learn more about the transition to open banking, pre-order your copy today of Wavestone’s upcoming report: Building the bank of the future Part 2.