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A challenging perspective on Open Banking: A platform play is not easy

A challenging perspective on Open Banking

Four considerations on how to enter the world of open banking platforms.

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“The cold war between banks and new entrants is over” (Kristo Käärmann, CEO and Co-founder of TransferWise). Last years, banks have tried to reinvent themselves and new players have been acquired. However, the cold war between the two is over. It's time for a warm embrace in which several parties join forces in order to, collaboratively, find the best solutions for their customers.

Triggered by drivers such as Technology-driven innovation (FinTechs, digitalization, AI, VR, modular IT, APIs), Changing customer behavior and European regulatory intervention (e.g. PSD1, PSD2, IFR, AML4) traditional banking business models as we know, are being affected by the introduction of new business models. Last years, well-known tech unicorns like Spotify and Airbnb, and FinTechs such as PayPal and Ripple, already introduced the platform business model. Now, established banks (e.g. ABN Amro, ING, Fidor, BBVA) are increasingly seeking for ways to transform (parts of) their business model towards the platform business model too. This (digital) transformation in banking will redefine success in the game of banks.

This new game of banks is called open banking. In open banking, banks provide access to customer data upon customer consent to third parties who can build additional services and products for these customers. Open banking might sounds like a winning situation - as it offers banks a way to boost innovation - however, banks should carefully consider the transformation towards open banking. The platform play is not easy and should therefore not be underestimated. Nevertheless, banks have no time to remain silent anymore, and should define their position in the open banking ecosystem. Therefore, we provide four considerations to take into account when taking the first steps in open banking.

1) Define your role in the ecosystem

To start with, banks should decide what role(s) to fulfil in the open banking ecosystem. Therefore, banks should ask themselves the question whether they want to become a player on someone else's platform, or whether they want to establish their own open banking platform (see figure below). 

Especially for the manager's and sponsor's role, open banking examples are already on the rise. In 2017, ABN Amro for instance launched its own developers portal to `play' beyond PSD2 compliance and enable external developers to build the future of banking on exclusive APIs. As the platform business, ABN Amro (the `platform sponsor') also establishes the rules for how much third parties can `play', and sets the standards for acceptable business practices. The platform manager is Tikkie, itself, which operates in line with the set policy by ABN Amro. Thereby, the developers whom are able to `plug and play' onto ABN Amro's infrastructure are the complementors, and you and I serve as both the consumer and the producer (depending on who initiates the transaction).

By adding third-party services on top of internal capabilities and offerings, banks such as ABN Amro can situate itself at the centre of an ecosystem where the bank's users can find services that are useful and engaging.

2) Define the control points to monetize

As a next consideration, banks should carefully consider monetization strategies. Defining the pricing strategy is a balancing act: who to charge and at what moment. Therefore, whatever role they take, banks will have to decide how they wish to monetize open banking partnerships or open banking APIs. What potential sources of value to monetize? What are potential parties to charge? And who to charge and who to subsidize on the platform? In the case of ABN Amro, ABN Amro offers the majority of its API Toolbox and certain content and functionality for free, only charging for a limited amount advanced APIs.

3) Set the right level of openness

Next to the roles and monetization, banks should decide upon the level of openness of their infrastructure and the technology to provide others the `mandatory PSD2' information. Many banks are reluctant to open up. Privacy regulations, fear for increased competition and fear to lose customer contact and control over the customer journey hold them back from opening up their APIs. Since the platform economy is characterized as a `the winner takes it all' economy, the reluctance is understandable. Banks could therefore decide on the level of openness: they could choose to only reveal PSD2 mandatory APIs (PIS & AIS) or they could choose to go beyond banking (such as ABN Amro and BBVA).

4) Take the right set of security measures

On top of this, banks should also consider the right set of security measures, such as customer authentication in order to ensure security of their platform ánd the trust related with it. A pitfall in security will drive customers away, both from the platform, but also from the service or product provided on the platform. Examples are access tokens for its authentication. The required level of authentication can vary per API depending on the requested information. Strong Customer Authentication (SCA) is a new mandatory method of authenticating online payments (or verifying a customer's identity before accepting an online payment) that will be introduced in Europe in 2019.

The open banking revolution has started and will take shape in the coming years. Defining your position in the ecosystem is key at this moment. The four considerations mentioned are just a few of the many when setting up an open banking strategy. What will be your role, how will you benefit from it, how open should you be, and how to ensure customer security and thereby trust are the first considerations for defining your position in the open banking ecosystem.

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Please contact Josephine Veerman, +31 20 656 8158 or by email.
Or Ingrid Sloots, +31 20 656 4479 or by email.

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