From Open Banking to Open Finance

00:00:32 [Maya]

Bruno, to begin, thank you for joining us. As the current Head of Research at Sopra Banking Software, your role involves early identification of investment areas and shaping SBS’s strategic and market positioning. Your enthusiasm for how digital transformation is revolutionizing the economy, especially the potential for broadening financial understanding through data openness, is well recognized. Your active participation in entities such as the Global Competitiveness Cluster Finance Innovation, the Berlin Group standardization body, and the European Commission is commendable. We appreciate your presence here, and it’s truly an honor to have you.

In our last episode, we traced the origins of open banking back to the early 2000s. Today, we’ll explore the future trajectory. This session will focus on open banking’s limitations, ecosystem discussions, and how data sharing facilitates real-time collaboration between banks and FinTechs. Additionally, you’ll enlighten us on the necessity of transitioning towards open finance.

Let’s dive into the first question. Bruno, could you share your insights on the opportunities and challenges that arise from real-time collaborative efforts in the financial sector?

00:02:13 [Bruno]

Real-time collaboration and data sharing in the financial sector are fostering significant advancements. One of the primary benefits is enhanced data accuracy. This accuracy stems not only from leveraging a broader spectrum of data sources through collaboration but also from the timeliness and freshness of data, which is crucial for accurate assessments. In the realm of credit, this has revolutionized the way financial health and creditworthiness are evaluated, allowing for real-time, detailed insights into the financial stability of individuals and businesses.

This technological leap has made it possible to assess financial behavior more holistically, beyond traditional metrics like long-term employment contracts, which were previously used as a proxy for financial stability. The inclusion of a wider demographic, including those in temporary or gig economy roles, has expanded access to financial services, highlighting the transformative impact of open banking and real-time data sharing. This shift towards inclusivity and detailed financial assessment is not just an evolution but a revolution in the financial sector, paving the way for a more accessible and equitable financial ecosystem.

00:05:07 [Maya]

Right.

00:05:08 [Bruno]

The challenges associated with collaboration in the financial sector revolve around data and service sharing, which inherently involve trust and security issues. Ensuring that all parties involved in a transaction are properly identified and authorized is a fundamental challenge, akin to concerns in anti-money laundering practices. Moreover, collaboration entails a level of ‘co-opetition,’ where entities must be prepared to cooperate in certain segments or situations for specific customers, even as they remain competitors in others.

This dynamic shift the competition landscape from merely exchanging data and adhering to data standards to focusing more on the business value and unique offerings each entity brings to the table. Overcoming these challenges involves not just regulatory compliance but fostering a culture of mutual trust and developing secure, standardized protocols for data sharing. These efforts aim to maintain a balance between innovation and security, ensuring a level playing field that promotes healthy competition and collaboration in the financial ecosystem.

00:06:34 [Maya]

Okay.

00:06:34 [Bruno]

FinTechs bring a unique blend of technical expertise and a deep understanding of business use cases, which allows them to tailor their solutions precisely to customer needs. This focus on adding value in specific scenarios enables FinTechs to identify unique opportunities and deliver services that enhance the customer experience. The agility of FinTechs to quickly test, pilot, learn, and adjust their offerings is a key factor in their ability to stay focused and relevant in a rapidly evolving market.

In terms of technology, FinTechs are at the forefront of leveraging artificial intelligence (AI) to improve banking efficiency and personalize financial offerings. AI’s application in assessing credit worthiness is a prime example, allowing for a more nuanced and individualized approach to credit evaluation. This technology enables FinTechs to focus on a specific domain, excelling in it by providing unparalleled value and expertise.

The winning trio for FinTech success, as highlighted, includes artificial intelligence, privacy enhancement technologies, and data standardization. This combination ensures that open financial data can be effectively used to create personalized and tailored offerings for specific customer situations. By focusing on these key areas, FinTechs can continue to innovate and lead in providing solutions that meet the nuanced needs of their target markets

00:09:17 [Maya]

Okay.  I think that brings us perfectly into the next question that I have, which is about the collaboration between FinTechs and banks and creating new and open offerings for the future.  What are the ones that you think will be the next major initiatives for banks and FinTechs in creating these new offers that are really geared towards kind of, I think what you’re saying too, is the customer, good customer experiences?

00:09:41 [Bruno]

The three tiers of financial services, which can be viewed from the perspectives of immediacy, complexity, and overall financial health, are essential. The foundational tier involves everyday financial transactions, such as making payments, choosing optimal payment methods, and automating these processes based on the user’s context, like traveling or shopping locally. This level includes straightforward services like QR code payments for instant transactions.

The next tier encompasses more complex services like credit offerings, which require deeper innovation and refinement, as previously discussed. The most advanced tier focuses on financial well-being, expanding beyond the confines of open banking’s initial focus on payments to encompass wealth management, savings, and possibly insurance. This tier represents the broadest scope of open finance, aiming to address a comprehensive range of financial needs.

FinTechs, with their ability to concentrate on specific niches and rapidly iterate through testing and learning, are well-positioned to add value to banks that traditionally offer a wider array of services but may lack focus on particular customer scenarios. This specialization allows FinTechs to tailor their services closely to customer needs, enhancing the banks’ offerings and driving the industry towards more personalized financial solutions.

00:11:39 [Maya]

We talked about the FinTechs and we talked about the banks. I want to talk a little bit about other players, too, so I have a specific question for you about how you think that banks and FinTechs and something like utility providers or other companies that are kind of like even more different can prepare themselves for the future of open banking or open finance?  Where do these other kinds of companies come in and how does open banking or open finance touch them and how can it be helpful for them?

00:12:11 [Bruno]

Banks are increasingly recognizing the necessity of collaboration for value creation, as highlighted in our annual DBX survey, soon to be released for 2023. This trend is evident from the findings of the last two digital banking maturity assessments, showing a growing consensus among banks and financial institutions that collaboration, not competition, is key to generating value. This shift towards cooperation is noteworthy, especially in the traditionally competitive finance market, which has not typically engaged in such collaborative efforts.

Your mention of utilities sheds light on how these service providers, involved in essential services like telecommunications, water, electricity, and gas, stand to benefit from open banking and finance. These sectors are looking for reliable payment methods that minimize risk, such as those posed by direct debits in Europe, where there’s a chance of payment contestation. Open finance can facilitate smoother onboarding processes for utility companies, allowing them to quickly assess a customer’s financial capability to sign a contract, thereby speeding up service provision.

Furthermore, the collaboration between banks and FinTechs through open finance can offer real-time, machine-readable services for utilities, enhancing their operational efficiency. The emergence of new payment schemes, like the SPA, offers a robust alternative to traditional methods like SEPA, enabling direct bank-to-bank or account-to-account transfers. This not only simplifies the payment process for utility providers but also reduces their dependency on intermediary payment systems, fostering a more direct and efficient financial exchange ecosystem.

00:16:10 [Maya]

To encapsulate what we’ve discussed, it appears that the concept of open banking may seem somewhat nebulous, whereas the future seems to be gearing towards open finance. This broader spectrum includes all critical personal finance data aspects, catering to three key areas: facilitating everyday banking transactions and services, aiding in project financing for significant needs such as loans or mortgages, and enhancing overall financial management. Would you say this is an accurate reflection?

00:16:47 [Bruno]

I like the term inclusion.  And inclusion as well.  The high financial management takes about inclusion.

00:16:51 [Maya]

Exactly.

00:16:52 [Bruno]

And education and financial literacy.  This is very exciting.

00:16:56 [Maya]

Definitely.  So we have another installment that we are going to be doing next week, and I look forward, Bruno, to speaking with you a little bit more about open banking innovations in our third session.

00:17:08 [Bruno]

Thank you, Maya.