The new world of Open Banking stems from new EU payment services laws and, in the UK, an Order which implements market remedies intended by the Competition and Markets Authority (CMA) to address competition concerns amongst retail banks. This new regulatory regime promises innovative services developed by businesses enabled by new rights to access to data held in payment accounts.
Banks and fintechs that work together can both gain from the opportunities Open Banking presents.
Why collaboration is needed in open banking
Bud, which describes itself as ‘part fintech app store, part financial marketplace, part search engine’, told Pinsent Masons why it believes collaboration between banks and fintechs is needed.
“Forward-thinking banks recognise that collaboration between banks and fintechs is the way forward," Bud said. "These tech-focused products have what the bank needs: agility, low cost base and great, low friction experiences. The banks have what the fintechs need: credibility, trust, and a large customer base. Combining the two will lead to better banking experiences in all sectors.”
Banks and fintechs will need each other to thrive in the world of Open Banking, according to third party payment specialists MANGOPAY.
“It is now understood by banks and fintechs that collaboration is key for mutual success, and the future of banking depends on Open Banking APIs,” MANGOPAY said. “As fintechs have shown during recent years that they are able to succeed thanks to their great capacity for innovation and their ability to design products that respond better to users’ needs, banks have started to collaborate closely with fintechs. They don’t see them as competitors anymore, but invest in them or buy them.”
“The time of the eternal fight between newcomers and big organisations is coming to an end because both banks and fintechs realise now that they need each other to grow – for the fintechs, or survive – for the banks,” it said.
The shift towards a collegiate approach was also identified by one senior staff member at a leading retail bank.
“Many banks have for some time looked to have a dialogue with fintechs through the likes of hosting hackathons. In recent years I would say the engagement has shifted away from competition to one of collaboration, where banks look to leverage their strengths, such as consumer trust, data, and scale, with that of a fintech, for example their agility, speed and often niche products on offer." they said.
However, it’s not just single partnerships between banks and fintechs where the opportunities lie. The best collaboration might take the form of multi-party arrangements or a syndicated approach.
Priviti, a provider of secure digital authentication services, said banks will need to collaborate with different partners in different market segments, from small business banking to consumer banking, private banking or corporate banking.
“To work closely and dynamically with different partners in each segment, banks will need to equip small and multidisciplinary teams of staff inside these lines of business with versatile tools to securely exchange many types of data with partners, obtaining and retaining records of the end customers’ consent,” Priviti said. “These generic processes will underpin a huge number of new business model innovations in the Open Banking era.”
A representative from a second major bank told Pinsent Masons that “an ecosystem of collaboration is crucial.”
They said: “We’ve been looking at third party suppliers for opportunities and potential joint ventures to leverage good ideas. For Open Banking, collaboration with fintechs is key to get the most out of it. However, it is a balance. We want to be as competitive as possible ourselves, but we are mindful that some of the risks are better managed by fintech partners.”
“Some customer-facing teams are delivering the changes and working with customers more directly. This has not filtered through so much to the back office functions. So there is still a way to go, but collaboration is certainly happening at the coal face,” they said.
The opportunities collaboration presents in open banking
There are already examples of collaboration happening in the sphere of Open Banking, with benefits for both banks and fintechs. Close to the time of writing this paper, HSBC announced that it is partnering with Bud, to offer users of its online only brand First Direct Bud’s financial management tools. Barclays is working with Flux, a UK fintech making receipts digital and paperless, initially trialling 10,000 customers and NatWest has partnered with FreeAgent, which allows small businesses to track their finances and report their taxes digitally.
Credit Kudos, a credit scoring platform, said: “We’re already seeing deals announced by the likes of HSBC and can expect more in the pipeline. With so much potential coming with the advent of Open Banking, it’s likely that many major banks will favour a partnership/collaboration model in order to invest in as many different business models and opportunities as possible. From the fintech perspective, the brand value and associated trust brought by partnering with an established player cannot be overlooked, especially when facing a significant trust barrier with new customers.”
Greater collaboration offers the potential for innovation.
Curve, which provides customers with a single payment card to use for all their payment accounts, and which is part of the government’s steering group on Open Banking, said the regulatory changes have helped change banks’ attitudes towards collaboration.
Curve said: “Banks have traditionally kept their data ‘guarded’. But with Open Banking, sharing their data and users with third parties will become standardised. The move will eliminate a key reason they may have avoided partnering in the past – no incentive to share access to customers – and increase the emphasis on innovation through three main routes: buy, build or partner.”
“As a leading fintech speaking with a number of global banks, we’ve seen first hand that the move towards PSD2 and Open Banking has made incumbents think differently about their approach to innovation and collaboration,” it said.
Standardisation is promised through open APIs, and their development will help expand traditional banking and payments markets, Priviti said.
“We think that there will be excellent collaboration in a very large number of newly discovered ‘microsegments’ of the financial services market, which weren’t discoverable and serviceable when banks and fintechs developed separately. However, when banks and fintechs collaborate using platform economics and API-driven service innovations, we expect the market to expand.”
“New customer needs will be discovered; more specialist or younger businesses will get loans; money that could have fallen through the cracks will get placed on deposit; people with more specialist jobs or more volatile earnings will get mortgages etc. All of this will happen because the combined ecosystem of financial services platforms and apps will generate better data and more efficient distribution of services,” it said.
The future direction of collaboration in Open Banking
Further innovation is likely to arise should banks look beyond the scope of PSD2 and the CMA’s Open Banking order to liberating data held in other accounts, such as savings and mortgage accounts, YoYo Wallet, a mobile payment and rewards business, said:
“If banks build on the initial Open Banking APIs to provide more access to data across more products, there is an opportunity to build strong collaborations between old and new financial services companies,” YoYo Wallet said.
“Banks should welcome this – fintechs will generate more innovation in the financial ecosystem than banks could ever do on their own, and the best ideas can then be taken ‘in-house’ to be developed at scale.”
“The customer base of banks and the speed of innovation of fintechs will result in the development of some brilliant new services,” it said.
The market dynamics will change as businesses from other sectors, predominantly technology companies, look to take advantage of the opening up of the banking and payments markets under PSD2 and the UK’s Open Banking reforms, according to MANGOPAY.
“We know that banks and retailers will get a head-start and that services like personal finance management will make the AISP offering very attractive,” MANGOPAY said. “For sure, and the trend has started already, trusted social media companies, such as Facebook, Twitter and LinkedIn, and tech companies like Google and Apple, will capture a significant slice of the market.”
“However, again, collaboration with large merchants and the partnerships they forge will be key in the adoption of PISP services. There are great challenges ahead for both AISPs and PISPs to know the types of service that will be the most successful: innovation will be key to meet evolving consumer expectations. Third-party market players considering a PISP-based proposition will need to launch cutting-edge products to meet consumer expectations,” it said.
Luke Scanlon and Yvonne Dunn are experts in financial services and technology law at Pinsent Masons, the law firm behind Out-Law.com.