How To Excel At The Game of OPEN Digital Banking

OPEN Banking is a platform-based business model where multiple industry participants typically known as producers and consumers participate to exchange value — this approach could revolutionize how banks generate value in the future.

Born out of the increasing pressures from European regulations and competitors, OPEN banking offers Financial Institutions the opportunity to expose data, banking services, and algorithms through application programming interfaces (APIs) and create new revenue business model that was previously never possible.

New innovative digital business models are created by marketplace participants such as Fintechs or banks who contribute/publish unique and differentiated services via APIS. On the other hand, bank subscribers to these marketplaces can simply quickly reassemble them like LEGO blocks to offer blended new service to their customers.

This form of OPEN Banking approach is a radical move away from the monolithic banks which has been used to build every service ground up and incurred humongous costs along the way. Marketplace source of services and platforms provides banks the ability to rapidly assemble new digital services, enhance loyalty, rapidly meet new regulation and increase the share of the customer wallet. Challenger banks like Monzo,  and Starling are already on the path to build digital banks integrated with marketplace offerings that provide superior consumer experience provided by a network of innovation fintech partners who have access to the customer’s permission data.  In terms of incumbent’s banks like BBVA have really mastered the game of open banking for compliance and are rapidly accelerating towards new forms of value creation using collaborative innovation

The first steps towards open banking is to meet basic compliance requirements to start exposing the customer permissioned data via APIS to the external collaborator (this of course only applies to European banks. Banks in other regions can leap frog this and focus on more advance capabilities like developing new business models). 

 From there on there needs to be a layer to be able to build value added applications that banking customers can use. These applications need to be available on a marketplace or app store that customers can easily download and enhance their banking experience.

True Innovation occurs when external services provided by marketplace connect with customer data that are available to create new business models that banks can create revenue streams from. Further innovation occurs when the banks themselves start exposing their own services out into these marketplaces as APIS for other banks and fintechs to consume thus creative mutualization of costs across banks.  When banking services can be ubiquitously made available anywhere on any channel, on any device, on to go the true renaissance of banking will unfold.

Planning for Success in OPEN Banking

So, while looking to the next generation for open banking platforms, banks must look for the following characteristics to build upon a strong and scalable foundation blueprint:

• Scalable API Layer: A secure and performant API layer that allows the banks to not only expose the customer data to external participant but also to secure them, manage them govern, meter and trace them and allows to create new innovative revenue streams from them.  Leveraging the layer to meet compliance requirements (like PSD2) is just the bare minimum that one must do
• API Catalog of Value Providers: A rich API catalog library of banking as well as fintech APIS and services that can enable true innovation and orchestration of collaborative value making across participants in a value chain
• A pluggable core: A core platform layer that is plug and play ready to these open banking platforms. Number of solutions exist to modernize these main frame systems without having to upgrade to a new core banking system. These techniques must be explored first to get to market fast.
• A Marketplace with participants:  A true marketplace platform that allows buyer and sellers to come to the platform and exchange value. In this case the platform must attract innovation developers such as fintechs to this platform so that they can truly create new services. The other side of the platform is the customer itself which brings the draw into a platform completing the 2 sides of a classic platform. Permissioned customer data can be exposed on this platform allow customers to participate in this network at will.
• Monetization Layer: A monetization layer to be able to meter and measure the services that are offered and then can charge and settle these services seamlessly across the ecosystem of value delivery partners
• Application Development & Integration Framework: A scalable toolkit framework and compute platform upon which these new innovators can built based on common standards and publish their services. At the end of the day these services need to interoperate cohesively so having some common platform and application build frameworks must be available. If these services do not interoperate we will end up creating the fragmented channel experience that is prevalent today in banking solutions.
• A compliance enforcement layer: For most banks, this is a core competency and they must now excel even further at enforcing compliance across new services delivered by 3rd parties under their brand.
• Blockchain Platform and API Layer: A built in blockchain layer is a must have in open banking stacks after open banking orchestrates value services across different untrusted parties on marketplace and network. To secure this transaction layer and reduce friction and reconciliation between these parties, Blockchain is a must have in Open Banking platforms
• Cloud Deployment Considerations: To make this global and scalable adequate considerations need to be given to public cloud and private cloud delivery models. While a public cloud works in some markets, the reality is in some markets the regulator may not be ready or the bank may simply not be ready for whatever cultural or inertia related reason. For these banks, it is imperative that they can also leverage platforms that can be delivered on public cloud as well as private cloud models without having to incur massive amounts of capital expenditure. It is important to understand that challenger banks are born in the public cloud and have not upfront capital costs and therefore used as the benchmark for excelling at this game.
• Sandboxabilty: An ability to create sandboxes that allow controlled local hackathons on this environment with ecosystems partners to constantly build new innovations and release onto the marketplace as new innovations get curated

Many open banking platforms simply have an API layer and that is only the base minimum layer for an open banking system. For banks to succeed an integrated stack that comprises of the following capabilities is needed to avoid the immense technology complexity required to stich these external services.

In my 20 years of being in banking sector, one thing I do know is that banks do have a hard time integrating and building internal systems. They are great at adding layer and layer upon added complexity thus successfully creating fragile, highly complex and costly to maintain banking systems. 

When embarking on the next generation of digital banking platform careful consideration need to be made so as not re-create the sins of the past.  The next war in banking is going to be fought with integrating not internal technologies but external technologies from 3rd parties and more importantly on the cloud. The banks that master the art of plugging in these external services at scale seamlessly without comprising security, performance, traceability, compliance and create new business models will be the winners of the banking digital war!