Open Banking - Behind the Scenes: Part 1 of 3
Digital Transformation in the Financial Industry: The Impact of Open Banking
With Jorge Ruiz, Founder & CEO of FinConecta.
For this three-part series, we sat down with CEO Jorge Ruiz for a behind-the-scenes view of his perspective on digital transformation in the financial industry, as well as the latest developments in open banking (OB).
About Digital Transformation
BankersLab: What is your viewpoint on the state of digital transformation in the financial industry?
Jorge: In financial services, digital disruption is here to stay. There is a promise of personalized solutions and improved experiences delivered via digital channels, and there is potential for major changes in the banking ecosystem. Despite this, based on the research done this year by the Digital Banking Report, few organizations are prepared for these changes.
Not only are financial institutions (FIs) faced with legacy technology, but they are also impacted by outdated regulations, disparate data sources, internal silos, increasing external cyber-threats and a culture that has not changed in decades.
To embrace the digital transformation necessary to maintain relevance, organizations must rethink how they leverage people, processes, and technology in an innovative fashion, while dramatically changing their business models, as well as design and deliver a memorable client experience. This transformation must be led by the top members of the organization, leveraging cross-departmental collaboration and tapping into the wisdom of the many -rather than just the ideas of a few.
Done well, this transformation will have the opportunity to increase revenues and decrease costs, positively impacting customer experience and providing differentiation in the marketplace. Delaying this transformation will result in an organization that falls behind from what consumers expect, while increasing the costs of playing catch up.
About OB
BankersLab: According to a recent survey of 2,000 people in the UK, only one in four people have heard of OB and only one in five knew what it meant or entailed. Beyond this, respondents were reported to be cynical about OB being more geared towards the financial services industry than for them. So, in your own words: What is OB? And moreover: How can OB improve customers’ experience?
Jorge: OB is the practice of sharing financial information electronically, securely, and only under conditions that customers approve of. Application programming interfaces (APIs) allow third-parties to access financial information efficiently, which promotes the development of new apps and services. Ideally, OB should result in a better experience for consumers.
The most important element of OB is that it acknowledges and respects that customers own the decision rights on their data. Anyone can use new services and link their history to those services. If you paid your loan on time and you want to transfer it to another institution, you can move your information and your business easily. So for the customer, the benefits are surpassed security and flexibility — due to access to many more options.
BankersLab: But don’t Credit Bureaus already compile customer data and transaction history?
Jorge: Credit Bureaus don’t have all the transaction details. Bureaus create a risk rating based on summary-level information. There are new alternative methods to determine who is a good payer, and the raw data will fuel these new methods. OB also has online, real-time capabilities. Information can be transferred in real-time, which results in better and cheaper services for clients.
BankersLab: How could I simplify and explain OB to a child?
Jorge: A good analogy is the transformation in the mobile phone industry. Years back, providers used to own your phone number. If you moved from one company to another, you changed numbers and started over. The company ‘owned’ your phone number. Now, in most countries, customers are granted portability of their phone number. Similarly, with OB, now you can take your financial info anywhere because ownership and control are back in the hands of the customer.
BankersLab: Why is OB relevant for financial institutions? Why entertain the idea in those markets where regulation on the topic is still far away or uncertain?
Jorge: OB is the technology enabler of a business model based on the participation in an ecosystem of 3rd party solutions, rather than the traditional concept of isolated institutions relying solely on proprietary solutions — a model that has existed for various decades, and has proven to be expensive and slow, not to mention detrimental to customer experience.
Through integration with a marketplace of financial solutions offered by Fintechs from different parts of the world, an FI today can tap into a plethora of state-of-the-art products and services that can be bundled and complemented, to offer a unique and remarkable experience to clients, based on lifestyle and life stage -rather than being based on a “one-size-fits-all” approach.
An early start in the digital transformation that would leverage OB, ahead of regulations, may constitute the most relevant strategic decision an FI can take, in order to gain share of mind in all relevant stakeholders. Big Tech is already in the game, so being vigilant about trends in other industries -as well as the strides of Big Tech in the financial industry, which are becoming more frequent and bold- are an important aspect to add to a bank’s planning process.
BankersLab: Why, in your view, are banks not massively integrating Fintech solutions to their technology stack?
Jorge: The main reason is that one-to-one integrations are extremely cumbersome, and time and people-intensive: creating APIs, and producing the required “dialogue” between a Fintech’s API layer and the FI’s API layer demands several months -sometimes more than a year — to yield meaningful results. On the other hand, there is a different approach, FinConecta’s approach: we create the necessary API layer for an FI, and we integrate our middleware solution to their core banking system. This integration provides access to our vetted and curated FinTech store. A similar experience to browsing iTunes, an FI can browse, pick and choose to try one or many FinTech solutions in our regulatory-proofed sandbox. Once the trial is successful, the 3rd party solution is moved into production, and available for customers to interact with.
The main driver to move from only proprietary solutions to becoming a part of an ecosystem of integrated FinTechs, is a shift from considering technology as a capital expenditure towards a pay-per-use and more flexible financial approach.
BankersLab: Why is OB relevant for customers, beyond the recovered right of the ownership of their data (which is not minor at all)?
Jorge: A customer can build her own budget, then pull up her financial information -from one or more sources: banks or digital-only solutions, and then move money from one to another -or even to a new one that is more convenient and suits her better. The customer is aggregating her data, in order to have a complete view in one place. Mint, for example, will notice that the customer is paying international fees, and suggest: “Why don’t you try this other product that offers international functionality without fees?”. And with just a click, the customer can easily move her business to a new option, more attuned with their lifestyle and life stage.
BankersLab: With more parties accessing data, there is the concern of increased vulnerability. What is your view on this aspect?
Jorge: What’s transformative about OB is that you can link different solutions, and also improve security. There is no either/or paradox. Customers can add a layer of security in which nobody can take action on their account unless provided with a specific token. The traditional understanding of how to ensure security of financial transactions isn’t applicable to new products.
New solutions are coming out — many linked to how a customer types in her phone, her biometrics, etc. OB allows these new solutions to be implemented, because clients can add an additional security layer, provided that banks integrate these new and powerful capabilities.
BankersLab: Are there challenges with APIs due to the lack of a single standard?
Jorge: Lack of a single standard is definitely a challenge. OB rules, in many markets, are broad and not prescriptive about implementation methods or standardization. FinConecta’s value proposition to FIs is to provide standardization of the integration with 3rd parties, and we do this one time for all the FinTechs an FI decides to integrate with.
To Be Continued…
