How can Open Banking scale revenue streams for retail banks?

Last September, the revised Payment Services Directive 2 (PSD2) went into full effect, shifting open banking from futurism to a regulatory requirement for retail banks.

But the EU is not alone in wanting to open up consumers’ financial data via APIs (application programming interfaces) to trusted Third Party Providers (TPPs).

Neobanks and fintechs have been marrying technology and customer data as a market-grabbing strategy, thus increasing their competitive edge. And retail banks have taken notice. The U.S. Bank welcomed this competition by signing data-sharing agreements with seven fintechs and data aggregators.

So, what’s the rush with opening up customer data?

For one, there’s a lot of money up for grabs. PwC estimates that the revenue opportunity generated by open banking will exceed $9bn by 2022.

What’s more, customers are embracing it. In January 2020, the UK hit the 1 million customer mark for open banking users, doubling the number in the last 6 months alone.

Let’s be clear - there will be obvious winners and losers at the end of this digital transformation. Who they are will depend on how fast banks can react to market changes and customer-driven trends.

How can retail banks monetize open banking?

The go-to-market strategy depends largely on the retail bank itself. Some will want to fulfill the minimal regulatory requirements, while others will want to take advantage of the early market maturity for the land grab.

Depending on the products that they’ll be offering under the umbrella of open banking, banks can decide to monetize the new data flows in various ways:

• By creating their own products. Using data to create mobile banking apps or digital investment bots are just a couple of examples of leveraging data for product development.
• By opening up data to others. Selling raw data (via licencing, API calls fees or transaction fees), as well as insights from that data (e.g. credit ratings), banks can monetize on the potential of data for external service providers and product designers.
• By becoming a platform or integrator for other TPPs. Offering banking services as a platform to which other TPPs can connect, such as payment execution.

The monetization strategy will ultimately depend on the product (or service) that each bank will offer. With that said, banks will need to be quick, savvy, and creative in how they approach the new market economy of open banking.

9 new product areas that are changing the world of banking

Regardless of whether retail banks will offer these products as a service, part of their platform or as a joint venture with TPPs, there are 9 new products hitting the financial markets worldwide:

1. Identification and compliance. Digital activities are often stopped in their tracks because the need to financially identify a customer or company still partly relies on the sluggish offline world. By using APIs that can identify a legal entity, sensitive digital transactions can be sped up. Strong Customer Authentication or Know Your Customer mechanisms will greatly streamline interactions in the world of (crypto) investment, online payments, and other digital operations.
2. Credit risk scoring. At the moment, requesting a bank loan or a new credit card involves a myriad of back-and-forth discussions to assess the customer’s credit rating. Having customer data centralized and available with an API call speeds up creditworthiness assessments. This is not just limited to accelerated in-bank operations (and therefore an enhanced customer experience); a customer can finance their retail purchase by requesting a BBVA loan with a single button click, without ever leaving the e-commerce website.
3. Predictive analytics. With past credit card transaction data, banks will be able to offer tailored products to their customers. Buying airplane tickets and booking hotels? How about a holiday microloan? Do a customer’s spending habits look very similar to those of a high investor? Offer them a trading package.
4. Payment initiation. Online payments are often executed via intermediaries, such as VISA, MasterCard, Amex, DinnersClub and other credit card companies. This slows down digital transaction processes, adds middleman fees and deprives banks of potentially valuable customer spending information. When banks open payment initiation directly through their infrastructure, they’ll not only be able to achieve faster and safer payments, but also retain spending information which can be used as a valuable product.
5. 360 customer views. Centralized customer data is a necessity for open banking, but it’s also its main advantage. The holistic view is a product in and of itself, which allows bank workers to immediately access all customer data without first being required to join disparate sources. The aggregation can be used across other products as well. HSBC leveraged data aggregation to create Connected Money, an app that shows consumers all of their financial data (credit cards, loans, accounts, etc.) within a single interface. The experiment was so successful that they integrated this functionality into their regular mobile app too.
6. Automatic account creation. Creating new accounts involves a lot of red tape. By utilizing the compliance technology behind identification, customers can create bank accounts for various purposes. Among other things, CapitalOne leverages the technology for automatically creating wedding registries to securely collect monetary contributions for newlyweds.
7. Fraud detection. Centralizing customer data allows for better and more rigorous analysis. Having data on transactions, spending habits, credit profiles, and more allows banks to move away from outdated fraud detection processes towards cutting-edge machine learning techniques. The safety of your clients is not the only value of having a state-of-the-art fraud detection algorithm - these capabilities can also be opened up to SMEs who wish to reveal any fraudulent patterns in transactions on their platform.
8. Improved customer support. Data aggregation gives banks the power to move faster from problem to resolution. A Single Client View (SCV) can quickly determine why a credit card has been revoked, a payment bounced, or whether a potentially fraudulent attempt has been made. All of these abilities increase customers’ trust in their banks, as well as equipping banks with the tools to lower operational costs by resolving support tickets faster.
9. Improved financial management. Analyzing credit card spending, historical transactions and current financial reserves can advise clients on how to invest their money, savings, or simply shop with healthier financial outcomes. Chip is one example of an app that draws on customer data to offer financial management advice. Retail banks can create their own “pocket consultants” or open up data to TPPs for a fee.

The advantages of these products? They can all be scaled at a fraction of the cost of traditional products:

• Centralizing customer data opens up the technical requirements for multiple products (identification, risk scoring, predictive analytics, mobile banking…).
• Real-Time update of customer transaction data and compliance analytics.
• Multi-channel (bank website, in-branch activities, ATM activities, 3rd party merchant platforms, etc.) API- tracking of customer behaviors.
• Increased demand is easier to meet online than it is offline. Having 1 million additional API calls does require your technical infrastructure to be able to scale, but it does not mean that your bank will have to open 1000 additional branches.

What technical hurdles will retail banks need to overcome?

Retail banks are making huge strides in their journey to digitalization. But there are two common technical hurdles in particular that prevent banks from reaping the benefits of Open Banking:

1. Legacy technology. Banks often rely on technological solutions that were architected for a purpose other than that of a fully opened API. The cost of re-coding everything from scratch, or coding enough patches between separate systems, is usually hefty.
2. Siloed data. The credit rating department is in a different location to the savings department, which again is in a different location to the loans department. These physical differences translate to data discrepancies. Data is locked within multiple silos and it’s not easy to join the different sources together into a single customer view.

Keboola can help your bank build the technical foundations for Open Banking

Knowing how to deliver modern data products is just half of the battle. Technically executing these products is the task that remains.

Keboola has worked with several banks to help them organize, collect and use their data to deliver more value to both their businesses and their customers.

Banks turn to Keboola because they can easily build data pipelines on top of their legacy infrastructure and combine data that has been siloed in different warehouses and locations.

Curious about what Keboola can do for you and your bank? Let’s hop on a call.

‍