Fintech Chain Mail: open banking with Sven Siat, Head of Connectivity at SIX Banking Services
Open banking is often associated with third-party providers (‘TPPs’) benefiting from access to data that was traditionally been held by banks, do you see banks benefitting from TPP data as well?
Yes, definitely. Accounting tools, for example, capture forward-looking information such as open invoices and pending costs. Banks only have a rear-view mirror – they see transactions that happened yesterday. Giving banks access, with the consent of the customer, to forward-looking information will allow them to better understand and anticipate clients’ needs. This in turn could enable them to quickly react with offering tailor-made products (e.g. a loan to close a short-term liquidity gap).
Successful Open Banking cases create a WIN-WIN-WIN situation for TPPs, banks and of course the customers.
Open Banking is an enabler for Embedded Finance, where financial services are integrated into non-banking channels such as marketplaces or Software as a Service. What roles do you think that banks continue to play in the embedded finance ecosystem? Who owns the client relationship (banks and/or service providers) and is being a trusted brand still very important in this model?
Embedded Finance is an ecosystem approach in which financial products are only a means to satisfy a customer’s need – in the travel industry ecosystem for example, the need is not, “I need a credit card”, it is “I want to pay for something on my vacation”.
The financial institution must go where the need arises. At the point of booking my trip, I want a provider to offer me the credit card with favourable exchange rate within the same user experience – I don’t expect to need to go to a branch to apply for the card.
The question is, where should banks invest in building up their own ecosystems (where they have credibility and power to do so) and where should they connect into other ecosystems instead? Banks tend to want to be the sun and for everyone else to come into their solar system and integrate with it. However, there will be areas where banks can keep their client interface and areas where they won’t. It will be an iterative process. In any case, I believe adoption by a “wait and see approach” would not be the wisest strategy because it takes time to build up the necessary capabilities.
If you look at UBS, they’re investing in building up an ecosystem around living and housing with key4. This is a promising start. But living is broader than having a house and a mortgage, it’s about renovation, maintenance and lifestyle. UBS will now work on integrating relevant players that service needs around living into their key4 ecosystem.
In my opinion, what won’t work in the future is trying to satisfy an unspecified segment of customers with a non-differentiated offering. Through Banking as a Service, there will be players that will be able to put together a niche offering to profitable segments over the course of months (not years). For example, specialised providers will target environmentally conscious retail customers with a tailored value proposition, gaming hardware companies will issue cards to their loyal customers, e-commerce platforms will start offering loans to their merchants – and this is only the beginning.
Application Programming Interface (‘APIs’) enable TPPs to utilize bank clients’ account data and perform banking functions in connection with those accounts. Do you think there’s still a role for card acquirers and issuers in Open Banking, given that payments can be initiated and authenticated directly from a bank account?
It’s easy to jump to the conclusion that open APIs connecting to client accounts make the current card schemes obsolete. However, the schemes including acquirers and issuers provide services like reservations, refunds and dispute management. Also, it’s not easy to get tens of thousands of merchants to adopt a new payment method. It is possible but will take some time to get to same service level and reach with Open Banking APIs. At the end it would also require behaviour change from end customers which usually takes significant investment.
Open Banking is part of this greater movement towards data sovereignty by data subjects (the people and companies which create the data). What do you think the implications are for Open Finance and beyond?
What you see is the trend towards customers getting sovereignty and governance over their data. It’s a development which differs from region to region. Australia is one of the most progressive countries, (driven by the consumer protection agency). They have started to open up bank data and are working on opening up all relevant data like social data and automotive data. In the EU, the European data strategy is boosting the concept of a data-driven economy beyond the scope of PSD2.
In the case of Open Finance, control over their financial data in additional areas such as mortgages, credit or insurance will allow people and businesses to manage their finance more holistically. They will be able to profit from better and cheaper finance offerings and perhaps get access to financial services they’ve previously been excluded from.
The UK and Europe followed a regulatory approach to Open Banking with the UK going beyond PSD2 in prescribing a standard format for implementation and setting up an open banking implementation entity. How does this compare to the market-led approach in Switzerland?
Regulation is a not necessarily the best path to success, although standardization has likely supported the UK in reaching 500m+ API calls per month. In the EU regulation has led to a fragmented situation with different API standards in the market. The regulatory approach has had an immense cost on the side of the banks which not always improved the situation. In Germany for example, FinTech’s and TPPs have better interfaces with more access to data before PSD2.
In Switzerland, market participants acted without the regulator having to become active. SIX went live as with the b.link platform in May 2020 only a few months after the mandatory PSD2 date in September 2019. The market driven approach has benefited from being a fast follower, meaning that we can learn and take on best practices from international Open Banking developments. The Swiss market is now moving ahead with a Wealth / Securities market API where we are currently ahead of other markets.
Within banks, are there benefits of Open Banking being driven from a top-down strategic perspective versus from a bottom-up business and IT perspective?
Technology gets a lot of attention. However, technical aspects are relatively easy to solve and doing so is necessary but not sufficient. Open Banking is first and foremost a question of strategy and new business model innovation.
In a discussion on Open Finance, when APIs come up the business manager often says, “API, that is something technical” and forwards it to the CTO. This is can significantly de-rail Open Banking discussions in a bank.
You need to have a strategic C- level discussion first. The strategic narrative is that we’re moving towards Embedded Finance. Banks will have to connect to third parties whether they are building up their own ecosystem or connecting to other third-party ecosystems.
This requires investment in infrastructure, capabilities, building up know-how in supporting functions and often a change of mindset. In order to address those challenges, it is vital that a bank defines the broad range of use cases across retail banking, corporate banking and wealth that they want to implement.
What are the benefits of having a centralized, standard interface connecting banks and TPPs of financial services (e.g. SIX’s b.link platform)?
SIX is creating an API-enabled marketplace and providing the infrastructure. We act as a moderator bridging the gaps to ensure that the Fintechs and banks connect with each other in a language they can both understand. As the system scales to 10,20,30,40 partners you really start to see the benefits.
Banks have the obligation to verify that counterparties are competent and can handle sensitive client data efficiently. b.link reduces the complexity for banks by solving the issues of how to onboard, resolve service queries or manage the multiple bilateral relationships. We also provide a sandbox, where TPPs can try out products before they integrate fully into production.
Similarly, third parties face challenges in meeting separate requirements of multiple banks and managing multiple connections. SIX has reduced the requirements to a set of criteria which we check, e.g. company registration or the existence of IT-security best practice.
It is ultimately about providing the customer with security and transparency. They need to know where their data is going, for what purpose and whether it’s secure. They also need to be able to revoke their consent at any time.
SIX is best positioned to provide this central, high-quality infrastructure because we operate much of the infrastructure for the Swiss financial market already.
Interview conducted by Stephanie Hurry, Olabisi Ayodeji, Matteo Conti, Emon Goswami