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At BCS Consulting, we like to share our informed thoughts and opinions on the latest developments in the financial services marketplace.

    Open Banking – How to Partner for Success

    Karl Heimann
    Karl Heimann

    • The last year has witnessed an ever-increasing number of services being facilitated by Open Banking, as more and more FinTechs have moved into the market and registered as Third Party Providers (or ‘TPPs’), which can use APIs to access consumers’ banking information. However, this increase in competition is not without its risks for established banks.

    While Open Banking enables customers to manage their finances through a third-party app, it can eliminate the need for direct contact with their bank(s). This puts banks at risk of being the “pipes” sitting in the background, relying on falling, traditional revenue streams. This is particularly problematic when combined with the broader digital FinTech revolution, with increased customer access to banking products not previously feasible due to cost and technology constraints.

    Banks therefore risk losing the direct connection to the customer / owning the interface, leading to a decrease in ‘stickiness’ and brand awareness in younger customer segments. It is with this scenario in mind that banks should assess how they themselves should strategically react to Open Banking and the innovative, emerging ecosystem.

    One potential response is to partner up with FinTechs and other third parties to stand up their own select use cases. However, it is important not to embark on this partnering journey blindly, but with a robust selection framework in place which is tailored to the specific benefits to be achieved, considering the complete Open Banking ecosystem which we can currently see evolving. The potential benefits of doing so will only increase with the emergence of new opportunities connected to Open Finance, with additional products and industries being subjected to open data principles.

    The inertia in financial services presents an opportunity. Banks still hold most customers across retail, SME and corporate. Despite the impressive gains of challenger banks and FinTechs, this hasn’t fundamentally changed yet in the UK, so there is still time for the traditional banks to respond; but given the size of the TPP market (over 200 in UK alone) and the number of customers attained by Monzo (4 million) and Starling (2 million), or OakNorth (200,000) and Tide (150,000), there is enough evidence to suggest the window for responding effectively is shrinking.

    Banks are struggling to respond because of the time it takes to build and deliver new products, due to bureaucracy, risk tolerance and legacy technologies. While banks have an advantage in customer base and traditional trust, FinTechs have time and again proven that they can do things with a better customer focus, release new products and services more quickly, and take advantage of new tech developments. At the same time, Covid-19 increased the utilisation of neo-banks who can do everything online.

    Ultimately, what customers want is a better service, either because it offers more, or because it is easier. This is where the banks still have the advantage. With the customer base, and the scale, the successful option is to become a platform that integrates all the different new service providers to provide better customer service. This can be done faster than building these new services in house. The way to make a success of Open Banking and the digital revolution will often be to partner and integrate – however, there are several factors to be taken into consideration when deciding on whether to partner up to bring a specific Open Banking proposition to market, or whether it is easier to build in-house.

    Factors to consider when deciding on a partnership vs in-house Open Banking solution

    Whether it is more prudent to combine forces with a third party or to stand up an in-house solution is never a straight-forward decision, but should be determined after careful consideration and weighting of several factors, including the scale and size of your organisation, which will determine whether there are synergies to be leveraged by building in-house (i.e. for larger banks with multiple brands), as well as the type of Open Banking service that you are looking to establish. Are you looking to launch a more standard Open Banking service, e.g. account aggregation – or do you need to supplement this with more specialised tools around e.g. spend categorisation (in which case drawing on existing categorisation engine expertise via third parties may offer a faster route to market)? Lastly, any entity making a decision on partnering up vs building in-house should also carefully consider its target market and customer segments, for example including whether you are operating across territories. If so, it will be crucial to either find a partner who can plug into different ecosystems, or to build in-house while keeping interoperability in mind.

    Why is partnering up so difficult?

    The process of partnering up is not without its pitfalls. There is an overabundance of TPPs on the market, and it can be difficult to assess true differentiators. Likewise, it is difficult to assess true credentials vs ‘sales pitches’ in a new ecosystem with limited live use cases / successful collaborations. Even when moving past the selection stage, it is difficult to bring new partners into traditional banks, as risk management around cloud and new technologies slows the speed of onboarding new partners and new use case exploration. Furthermore, traditional banks are still facing difficulties of working with legacy tech, and immature data management capabilities are further limiting insights / complicating ability to share data. There can also be cultural differences, and an overall resistance to acting as a platform, coupled with the typical problems of changing one’s operating model.

    How to make a success of partnering up

    Connected to the above, there are certain rules to follow and strategies to be avoided when partnering up. Firstly, any partnership that is established should be stood up with an interoperable mindset – it is not prudent to stand up a partnership which can never be disentangled should the need arise in the future. Instead, it should be very clear from the outset what the role of the partner is, and – perhaps even more crucially – what they are not there to do. An example could be an account aggregation service which enables plugging into different Open Banking standards, but is stood up in a way which allows for clear separation of aggregation as a service vs further data enrichment capabilities, such as spend categorisation, which a bank might want to retain in-house. Secondly, established institutions should be very clear on where true value sits within a value chain and/or customer relationship when deciding to ‘out-source’ certain steps of the process to a third party, and ensure that they retain power over any assets which are deemed valuable within a partnership – which can be immaterial. Thinking up-front about the value of data, about the intrinsic value of facing off to the customer and brand recognition when standing up a new service can avoid becoming entangled in a relationship which isn’t mutually beneficial. Lastly, any partners should be selected with a strategic mindset in terms of which further use cases they might enable, and evaluated based on whether they fit within the established institution’s wider strategy – as such, speed to market can be a differentiating factor, even if the general intention is to partner up temporarily (with the partner providing a service which is stood up in an interoperable way, allowing for switching out or replacing partners in the future).

    How can BCS help

    BCS has significant Open Banking expertise, having led Open Banking implementations across CMA9 and non-CMA9 institutions, and are able to draw on international regulatory Open Banking knowledge. We also have relationships with many of the United Kingdom’s leading TPPs, and are able to draw upon a comprehensive and extensive evaluation framework for assessing Open Banking maturity. In addition, we can:

    • help navigate the complex landscape of TPPs with our industry expertise and experience. We can provide advisory services on the right TPPs to consider for the use cases you are most interested in
    • help navigate and improve procurement processes
    • run selection and onboarding processes, and support the integration of partners into your open banking and digital operating model

    Partnering up for success in Open Banking can be daunting due to the high number of competing third parties operating in an increasingly crowded, competitive space, and it gets ever more difficult to establish true differentiators. At the same time, the opportunities within Open Banking are vast, and establishing successful partnerships in a strategic way will often be crucial to take full advantage of the many use cases that can be enabled. BCS is here to support you every step of the way, from navigating the landscape, selecting most appropriate partners, to successfully rolling out and embedding partnerships within your organisation.

    If you want to find out more about how BCS Consulting can help, please contact me at [email protected] or get in touch via our website at www.bcsconsulting.com

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