Christoph Berentzen, head of API banking at Commerzbank, examines the various forms that open banking can take and the challenges that bank-fintech collaborators must overcome to ease their entry to the corporate mainstream
While open banking has long been touted as a framework for technological advancement of sleek and connected corporate banking solutions, it has yet to fulfil its promise. But this could soon change. Indeed, many banks are going well beyond the EU’s Payment Services Directive 2 (PSD2) ’s initial requirements for technological investment and are seeking ways to connect various services to, in effect, create a full operational picture for corporate clients – all from a single application or platform.
Yet, according to our recent interviews with large corporates, the concept is typically falling short of this promise. Indeed, we have found that the key to unlocking open banking’s full potential involves greater alignment between the project’s key participants, a deeper understanding of a project’s objectives, and, finally, greater input from the corporate clients themselves – ensuring they are in the driving seat, rather than mere passengers in the innovation cycle.
Options for open banking development
The delivery of open banking solutions is already tried and tested, yet knowing where to begin is more problematic.
Ideally, the firm offering open banking services should begin by conceptualising the client’s end-goal. And, of course, corporates have long sought a seamless banking experience, (irrespective of sole- or multi-bank status) serviced by state-of-the-art technologies that are tailored to their industry and individual needs. For these reasons, open banking, and its underlying API technologies, are a well-tuned fit, enabling clients to benefit from the strengths and skillsets of both banks and fintechs. Banks typically bring dedicated client experience and governance expertise to
the table, while fintechs bring their uncompromising commitment to creating client-centric services and sleek interfaces.
From our recent round of corporate interviews, we identified three strands to open banking that create value for clients: product supply, aggregation, and orchestration.
Product supply involves applying open banking so that corporates are offered relevant services at the right time and place, such as in product comparisons, online lending solutions, and cross-border payment solutions – typically at the point of sale. Such services are lower in the value chain than other open banking applications since they do not directly augment or address the client’s primary needs (for instance as a loan or other financing product would) but are instead enablers of their primary needs.
The second is aggregation. Open banking, in this scenario, is a conduit to offering access to various services or providers (rather than offering the product itself). Multi-bank or aggregated functionalities increase transparency and client choice. With higher quality client data available, the end service can also be better quality – helping banks fulfil their role as service providers.
The last, and most complex, is orchestration. Open banking, in this context, goes a step further and connects the client to a multitude of third-party services. A highly lucrative and attractive concept for a client, such models have already been adopted by the archetypal big techs (the likes of Facebook, Amazon and Alibaba). These players have made such innovations look easy – at least in part thanks to the willingness of third parties to contribute to their ecosystems.
Yet, in reality, orchestration requires substantial investment and a delicate buildout, as well as the technological nous to build infrastructure capable of easing data-flows between multiple and varied parties and systems. Understanding the technological requirements is but one piece of the puzzle; coordinating and managing the various stakeholders,
establishing governance standards and consistently modifying the service to fit clients’ needs requires tremendous vision, investment and planning.
Understanding the barriers
In practice, bank-fintech collaborations will find open banking’s true value for clients via a combination of these various applications. Success will hinge on partners’ capacity to apply these concepts in fast-changing conditions on the client side – all in a secure and transparent fashion.
In our experience, however, commonplace barriers can scupper this endeavour – namely, identifying the right opportunities, technological readiness and expertise to execute.
In the sandpit phase, even identifying the right opportunities for an open banking project is fraught with complexities. Corporate clients can typically apply a narrow lens to open banking’s possibilities and look to transaction platforms by default, when client relationship management (CRM) or enterprise resource planning (ERP) system modifications could yield greater value in the future. Another prerequisite to success is robust technical infrastructure, to ensure data flows efficiently within an organisation and between third parties. In turn, varying degrees of adoption among different corporates create a challenge for bank-fintech collaborators implementing beneficial use-cases.
Lastly, even once opportunities are identified and technology readiness has been proven, yet another challenge is leveraging the right expertise and resources on all sides. While corporate clients, as well as financial institutions, have been significantly investing in digital capabilities and building up know-how, such resource can often be tied-up in other initiatives. Open banking capabilities may bring significant value in the long-term, but the necessary effort and capital to invest in such solutions may not be available for all parties at the same time.
The possibilities ahead
These challenges highlight the interdependencies, but also the opportunities, that open banking presents. Indeed, the concept only comes to life if all involved parties can surmount obstacles, not only
within their own organisations, but also in those of their partners. While this requires institutions to undergo a mindset shift and to forgo their competitive instincts, we are optimistic that this trend will only accelerate over the coming years.
There are still plenty of miles to cover on our own open banking journey.
We rolled out our API program in 2017 and sought to find value in the concept beyond PSD2’s regulatory requirements. Today, third parties and fintechs can co-create solutions, based on our banking data, which corporate clients can subsequently integrate into their systems.
Our advice to all institutions is: set up agile-minded teams. Our API program team, for example, adopted a ‘cluster’ approach and was comprised of business and IT experts in one department – following the ‘Spotify model’ of innovation.
Approaching innovation in this way is not without its hurdles. But we are convinced of its value to end-clients and are eager to continue contributing to an open banking future.