The countdown to 2018 is ticking away - a timer that many belive could be a start to the era of Open Banking.
While much of the financial world was last year focused on Trump and Canary Wharf’s imminent departure from the EU, quiet power struggles and arms races played out backstage in European and Nordic financial services where incumbents and new entrants assessed the chessboard of the value chain in financial services. In 2017, firms will continue to evaluate their positioning, next moves and their competitors’ probable response. In this article, we consider the changes to financial services in 2016 and the likely developments of 2017.
2016 turned out to be an exciting year for our industry, quite likely unparalleled in terms of new business development and the level of innovative thought.
A maturing managerial mindset and world view enabled a willingness to realistically entertain trends, innovations and business model developments that in 2015 probably would have been dismissed as fads or, at most, intriguing peculiarities. The focus on PSD2 was off to a slow start during the year, but the content of the RTS draft from the European Banking Authority sparked a massive interest about its implications. Awareness about the strategic implications from the GDPR and content like citizens’ ‘right to data portability’ received attention. The discussion about Bitcoin matured into the topics of blockchain and distributed ledgers. Young talent, both technical and strategic, has seemingly become increasingly drawn to the industry as new technology and realistic cases for change surfaces. Both for established companies and aspiring Fintechs, we have witnessed a truly giant leap from simple app development to a more mature focus on exploiting fundamental regulatory opportunities and developing core technology that underpins strategic competitive advantages.
2017 looks to be a year of even more notable developments. A banking revolution appears to be coming, and there is reason to believe it could be more profound than many would like to believe. The reasoning behind this assertion is illustrated through a breakdown of the forces that are in motion.
Similarly to Napster sparking a revolution in the media industry in the last two decades, the financial services sector is today riddled with forces equalling, or superseding, peer-to-peer sharing in their potential disruptive strength. Plausible and relevant near term consequences of the combined forces of these drivers can be deduced – consequences that should ignite intense strategic discussions in the senior suites of your workplace.
Nordic mobile wallets becoming more than P2P payments
Banks have invested heavily in rolling out applications that probably have resulted in profit and loss statements that are not up to shareholder expectations. A difficult to prove indirect revenue due to lowered customer acquisition costs can only defend the level of sunk capital for so long, and at some point the investment must start to generate direct profit. As the expected price war between banks drained all possibilities of generating a profit from P2P transactions in 2015, the subsequent strategy for the wallets became ‘enrol users, pivot later’. The user bases they have achieved now have to, like any other Silicon Valley start-up, start making a profit. How can this be done? Most likely through new functionalities with viable business models.
PSD2 opens up a world of possibilities for these wallets. They are in the right place at the right time, and banks who are left out of the loop should be seriously worried. We have made a prototype that converts the directive into a user interface, and the results are staggering. Soon you will be able to shop banks’ products and interest rates through these wallets more easily than how you search for a good deal on Kelkoo, Pricerunner or Prisjakt.
Discussions about PSD2 turning into effort devoted to understand the concept of Open Banking
Open banking could very well become the hype phrase of 2017 as people get tired of hearing about PSD2 and start realising its implications. While PSD2 is a directive, Open Banking describes the ecosystem, communication technology and interfaces that will arise because of it. To be fair, we have all probably heard the phrase and understood the concept of open application programme interfaces (APIs), but it seems unlikely that we have fully grasped its implications in a tangible manner. But this does not mean it does not hold a profound substance, and UK seems to be in the forefront of defining its content through the Open Banking Working Group set up at the request of HM Treasury.
The strategic imperatives for opening up to third party services providers through such APIs is not just something that is happening within banking. PSD2: The revised Payment Services Directive regulates how third parties can initiate payments and directly access information from customer accounts. RTS: The Regulatory Technical Standard defines many of the uncertain articles in PSD2, such as the account information that third parties can access, how it can be accessed and the authentication requirements. GDPR: The General Data Protection Regulation is a reform of the EU data protection rules that provides EU citizens greater control of their data and strengthens data protection requirements.
All industries are subject to disintermediation by technology, and all industries are experiencing a shift from value being generated by digital enabled services surrounding the products rather than the core products themselves. An increasing amount of business models revolve around APIs, eg Expedia.com generates 90% of their revenue from APIs.
In essence, Open Banking revolves around how banks share their data and distribute their products and services to customers through third parties in a resilient and secure way, and in effect giving their customers a greater degree of freedom to choose, mix and match their financial services from different distributors. In the transformation towards becoming an Open Bank, incumbents should focus on building a strong answer and strategic rationale to several pivotal questions regarding the design of their business model.
OEM wallets launching in the Nordics
In October 2014, we wrote an article in Dagens Næringsliv stating that Apple Pay was probably not going to enter the Nordic market for some time. The reasoning was based partly on the difficulties their business models would face due to the interchange differences between the Nordics and other target markets.
The prediction has so far proven to be true, and today is the time to refine the statement. Apple Pay and other ‘OEM Pays’ have had plenty of time to adapt their business model so it better suits non-US ecosystems and revenue streams. At the same time, the Nordics is a highly attractive market due to a high number of card transactions per capita, high smartphone penetration and population propensity to adopt new solutions, meaning their ROI could justify a product launch in 2017.
Facebook piloting or beta testing next generation money management interfaces
Facebook’s recent e-money license in Ireland and recruitment suggests something is going on, but instead of speculating over rumours let us rather ask ourselves the question: why would they not do it? We all understand the unfathomable opportunity that lies dormant in using their 1.8 billion monthly active users to create a financial eco system that spans the world. A triad of argumentation usually surfaces when discussing this matter with conservatives. Facebook will either not succeed or stop their endeavours due to:
- The insufficient profits to be made from a money management interface
- End-users not trusting Facebook to manage their finances
- Facebook being good at nickel and dimes (or, in this case, bits and bytes) – not private or business banking
Although they are valid arguments, it is not difficult to disarm every single one. But let us yet again pose another simple question: If Facebook presented you with the opportunity to manage your finances in the same user friendly and interoperable manner that you are used to within the Facebook ecosystem, would you switch?
Our answer is that many would – in a heartbeat.
Increasing M&A activity and forming of strategic partnerships
Due to PSD2, Open Banking, and the ever-increasing data and infrastructural complexity within banking products, it seems unavoidable that we will see new strategic partnerships and/or M&A activity in the financial services sector. Economy of scale and collaboration is vital to withstand threats from Google, Android, Facebook and Amazon. Swish, MobilePay and RetailPayment have already kicked this off through the collaborations they represent. The Nordics have historically been a very collaborative environment within financial services, and there seems to be no obvious reason why this will not continue in 2017. However, it could be more partitioned than previously.
A resurrecting focus on digital identity
In the Nordics, we have been blessed with the digital identities called BankID and NemID. While they have ensured trust in digital financial services, they are lagging behind as Identity Platforms catches on. The truth is that a user’s identity is one of the most valuable possessions a company has, and the General Data Protection Regulation (GDPR) wants to regulate this. Additionally, BankID and NemID are domestic solutions and have poor functionality internationally, although the directive eIDAS could lead to digital identity usage across Europe. We live in a world where the traditional one-factor username/password log-on dominates internationally, but as we are rapidly approaching an internet of value it becomes necessary to develop new ways of identifying and managing end-user identities inside an ecosystem, ERP/CRM-system or on the internet.
Increasing understanding of alternative blockchain use cases
In 2016 we heard about the continued success of several bitcoin applications, e.g. Goldman Sachs backed Circle that clocked in a nifty $400 million valuation in its series D funding round. While Circle focuses on refining the P2P bitcoin payment experience by improving the customer interface and reducing currency volatility risk, we also witnessed the rise of the Distributed Autonomous Organization (DAO) based on the Ethereum blockchain that raised nearly $200 million through crowdfunding. The DAO introduced a use case for smart contracts to the world, which is a digital contract that can execute commands based on metadata none of the contracting parties can influence. In this way, completely safe and trustworthy contracts are constructed, rendering much of the conflict judicial system obsolete. Other maturing applications based on distributed ledgers present similar promising use cases, and 2017 will probably enlighten us with more details.
To sum up, we are plagued by what might seem like overhyped terminologies these days, and while some could fade away, several are likely to contain unavoidable truth. An agile organisation that manages to rapidly respond to these changes – changes that are rumoured to be accelerating at an exponential rate – seem to gain a competitive advantage that is increasing in its strength year-on-year. The banks, credit institutions, schemes, payment service providers, acquirers and many other players who do not really have a clearly defined name in the financial value chain, are today playing a game of chess for position that is fuelled by severe ecosystem changes. Players who are able to deploy lateral thinking to break out of their traditional reaction pattern and product lifecycle state-of-mind are highly likely to be the successful players of 2017 and beyond.