Back in 1980, Deutsch Bundespost (German Federal Post Office) conducted an “online banking experiment” pilot experiment with 5 external computers and 2,000 connected users who could transfer money amongst themselves using a specific transaction code. With a touch of prescience, they called the initiative “My bank in the living room.” But it would take several decades for the concept to take root, only after regulations, such as PSD2 in Europe and Open Banking in the United Kingdom, enabled the conceptual foundations laid down by the German experiment to evolve into what we call the modern day, open, ecosystem-driven models of banking.
Open Banking – what, and so what
For banks, which have traditionally exercised full control over their customer data and relationships, open banking is nothing short of revolutionary. This model in effect breaks the industry’s monopoly over clients and their information by allowing third parties – financial and otherwise – to use banking data to build their own services to offer additional value to customers. Think travel booking, online shopping and so on.
But why should incumbent corporate banks adopt this trend?
Well, simply because they can see that it is the future of the business. Imagine all banks operating in a much broader ecosystem, breaking down the silos between themselves. They are empowered with an almost seamless flow for a wide variety of transactions. As an example – a purchase manager for a clothing store can buy a consignment online through a wholesaler’s site and seamlessly get connected to their local bank for a Letter of Credit application, with all relevant data transferred automatically. Or an AP office can get the latest balance and available credit limits for them to use. Next-gen digital players are taking advantage of open ecosystems model to offer innovative propositions in several traditional transaction banking areas from cash management to liquidity management, lending, customer onboarding to supply chain.
In a recent corporate banking digital innovation survey, conducted jointly by Infosys Finacle, Strategic Treasurer and RedHat, 45 percent of respondents said that fintech firms would lead innovation in connectivity and related solutions. APIs (application programming interfaces), the main drivers behind the open ecosystem model, are supporting real-time information flows in corporate transaction banking, thereby not only creating new revenue opportunities for banks but also deeper, stickier relationships. More than a third of the respondents said that re-imagined transaction lines of business such as cash management, payments, and trade and supply chain finance from the open banking lens, would power the business by posting robust double-digit growth (11-25 percent) in the next three years.
How it is changing corporate banking
Non-standard data formats, disparate processes, inconsistent information, across multiple intermediaries have been age-old challenges around transaction banking. The new model streamlines that to some extent, clients benefit from a clear, unified view of transactions, total cash resources, or other operational information across their business and intermediaries. This helps them make faster and well-informed business decisions based on real-time information. Operationally, this also helps drive down costs and improve the overall customer experience.
The biggest impact of open banking is seen in innovation around payments and account related services; they have undergone tremendous changes, firstly due to due to the onset of the digitization wave about 5-6 years ago and then by disruptive innovations around Open APIs model. However, this is truly just the tip of the iceberg, and we expect to see this trend catch on in other areas around lending, microfinancing, and supply chain in the next 1-3 years.
What banks are saying
In the above survey, a massive 84 percent of participants acknowledged the importance of APIs; the dampener however was that only 10 percent had achieved significant success with them. When it came to open banking business models, the study indicated that adoption was underway with universal banking players testing the waters of platform play and ecosystem orchestration. But again, the ground reality was more muted – while 40 percent of respondents had deployed their open finance strategies at scale, their success was largely restricted to meeting compliance requirements, in regions where it was made mandatory. When it came to the “real” objectives of open banking – product innovation, customer engagement and data monetization etc. – just about a fourth of respondents had managed to deploy it fully and produce results.
So, while the model is still in a nascent stage at an industry level, we expect a full embrace in the near future at a growing pace.
Where to?
For the most part, though some of the early use-cases around payments laid down the base foundation for the model and concept, the new mutations of the model are starting to emerge already. As banking-as-a-service model gains traction, some banks are fragmenting it into sub-variants such as transaction banking-as-a-service, risk-as-a-service, and payments-as-a-service. We are witnessing new-age entities in the market that offer banking services, but they look very different from the traditional brick and mortar banks and perform the same functions through open API rails. This is innovation at its best with the leading disruptive innovators transforming the industry. It is only a matter of time before the rest catch up.
