Started as a hyped initiative to push digital innovation in the UK and spread through regulation triggers in the EU region (PSD2), Open Banking is still in its pre-history, far away from the tipping point of mainstream adoption.
When the Open Banking buzz started to be subject of discussion in the board meetings of financial institutions, some years ago, as a tsunami to come, everybody expected tons of fintech startups coming from the dunes to fight for banks’ lunch. But it didn’t happen yet. It’s been a crazy and complicated ride for some guys that founded companies in this area, later to find out how hard it is. Some of them remained as stand alone players (still striving to prove there is a business to build), some of them were swallowed by the incumbent behemoths, greedy to pose innovation early adoption and kill any egg of a bigger animal.
As a startup founder in fintech, when speaking with investors and different stakeholders, most of them are warning me that the space is already crowded. Indeed, there are some startups around in Europe struggling to survive and dreaming to move innovation forward. But still, thinking that there are around 6000 banks and credit institutions, couple of players in Open Banking is still a tiny number. Then the discussion continues with the unfair differentiation questions and the “winner takes it all” assumption as challenges to any fintech project. I just ask in reply what is the competitive clear differentiation between ING and BNP Paribas? Nothing embedded, only the decisions they make. Their core banking approach is perfectly identical. And they remain multibillion businesses without any unfair advantage. Coming back to fintechs, the huge number of undifferentiated banks is a clear proof of the irrelevance of these discussions.
The real factors that challenge any fintech project is not market adoption nor the lack of embedded unfair advantages. A fintech team with the right focus on learning and discovering the problems to be solved in the financial ecosystem can do it. And it will attract soon the capital and business support to play the game.
The biggest stoppers that slow down Open Banking are 2 technological complexities hard to be put down:
- Internal tech complexity of the present players. Technological legacy of the incumbents are not only a barrier for them to play the new game of Open Banking, but also for the other new comers. Because Open Banking means plugging a service to an existing service, the banks should be able to provide a plug. If there is not an appropriate plug, the innovation does not create effect.
- The aggregation of data complexity. There are no standards fully deployed in the markets. The digital transformation of banks was a very democratic process (for the banks that proceed in adopting it) and no norms, rules or standard imposed by anybody.
Even in the new PSD2 regulation, in EU region, there is no clear rule on how a bank should expose their data. Only that it is mandatory and they need to invest money to obey the law. If you look at CEE markets, for example, there are almost 350 relevant banks. This year, in order to be compliant, every bank will choose to adopt one of the types of APIs from a big list of “standards” (Open Banking API, Berlin Group, Polish API, Slovak API, STET, etc.). Or they will create a mix of them with a couple of flavours.
On top of the lack of common standard, it comes the multiplicity in itself. If you want to build a wallet to cover the region and you want to add on services from local banks, aggregation on hundred of endpoints becomes a huge effort. It is a bigger task than creating the UX of the frontend and getting traction to users. And it simply doesn’t make sense to make it for a single app.
The role of banking data aggregation platforms (like Token, Figo or TrueLayer) in making Open Banking work is increased also because some players need to focus on innovation needed to leverage the financial data at such big scale.
At FINQware we are assuming exactly this role of being the innovation platform and enabler for financial industry in the CEE region.
The fact that the gap between banks and external consumers of their data needs to be covered by specialised players is being widely recognised. It is considered the building block needed to make the progress work in banking. Once they will be in place, business models and strategic approach of the API aggregators will include creating and supporting a layer of frontend players. And this will actually drive innovation at scale. Understanding this idea, banks are already signing in for this middleware space. Just take a minute on the Crunchbase profiles of some of the ready-to-play fintechs in the area. For example, last month there were announcements of huge investments, most of them being from banking incumbents to get a skin in the game in the aggregation new market: tink — 56M, Bud -20M, Raisin -114M.
The two technological complexities are in the hands of the existing market players, they have the power. They need to resolve their internal legacies and make data available. And they are the ones to provide the biggest chunk of capital to build the middleware layer. Even their support is needed, the struggle of new players to disrupt and build banking innovation is still worth it. Otherwise it won’t be possible.It is hard indeed to allign the stars, but if it were easy, everybody would do it.