2021 European Open Banking Landscape
Following the implementation of the revised Payment Services Directive (PSD2), the EU has ‘forced’ the industry to move towards next-generation finance. New services and business models are emerging and customers in this market are beginning to expect more from their bank or financial services provider.
This article uses Porter’s Five Forces framework to analyze the financial sector in Europe, with banks at its core. The scope therefore spans banks (neo banks, challenger banks), fintech companies, blockchain companies, suppliers to banks (service providers) and buyers (the customers).
I will share my observations and interpretations of the European financial sector and paint a clear landscape for those who want to delve into the industry.
This article is part of my master's thesis, do let me know if you are interested in the full version.Previously on…
Last week we talked about FinTech trends for 2021 and some people asked me how did I sum up the trends in three areas: ‘personalized banking’, ‘modularity’ and ‘embedded finance’. Today, we therefore will discuss what all the actors have been doing lately, their priorities and strategies.
If you haven’t read my previous article, you can find it here:
Before we begin, what is Porter’s Five Forces framework?
Porter’s five forces framework is famously used in competitive analysis. It was published by Michael E. Porter of Harvard University in 1979. The framework is structured in two perspectives: horizontal actors and vertical actors.
As depicted in the figure below, you can set up your company, in this case, a bank, and identify its main competitors, i.e. industry rivalry. Next, the vertical analysis includes suppliers and buyers, and the horizontal analysis includes substitutes and new entrants. By analyzing all these five forces, the analyst can gain a better understanding of the target industry.
Industry Rivalry- Neobanks and Challenger banks
Revolut and Monzo in the UK, and N26 in Germany, are all challenger banks with over one million customers in Europe. They offer the same offerings as traditional banks but all online. Interestingly, all these three leading challenger banks are now seeking partnerships with other fintech companies. For example, Revolut has partnered with Flagstone to provide better interest-saving vaults. Monzo has partnered with Flux and offers a receipt-based customer loyalty program that connects merchants and Monzo. Lastly, N26 has teamed up with Younited Credit to allow customers to borrow money more easily.
Rather than building every feature in-house, those challenger banks tend to partner with other fintech companies or financial institutions to provide better services. By acquiring more partnerships, both banks and fintech companies benefit from each other.
Suppliers- APIs Providers and Open banking solutions providers
APIs providers such as Plaid, Trustly, Yapily and Tink provide financial institutions an easy way to build new features on their existing services without hiring more in-house engineers. For example, suppose a traditional bank wants to offer a better personal finance management system to their customers. With the help of these APIs providers, the bank no longer has to build the new system by themselves, which shows the demand for modularity.
Moreover, for the fintech companies, these API providers also offer solutions for payment-related scenarios such as online shopping, online gaming, and travel bookings. This type of solution connects every purchase in a user's life, which allows them to have a clear picture of their wealth, and has been described by some as "embedded finance", meaning financial services in life or financial services omnipresent.
Buyer- Gen Z
According to McKinsey & Company, Generation Z refers to the “first generation of true digital natives”. Therefore, you wouldn’t expect this group of people to be queuing up at the bank waiting for their financial problems to be solved — the battlefield for the next generation-finance will certainly be fought online and on mobile devices.
According to the 2020 Accenture Global Banking Consumer Study, due to corona outbreaks, lockdowns around the world push the customers to interact with their banks digitally. Fifty percent of respondents use mobile bank services at least once a week. Besides, fifty-five percent of consumers increased using contactless payments and almost ninety percent of them reported using contactless payments after the pandemic. The digitization of banking services is hence crucial.
Deloitte Insights (2019) further summarizes customers' needs with the following characteristics. Inspiring: assisting customers to find a restaurant or visit; Time saving: providing a convenient way to solve customer’s money-related tasks; Rewarding: tying all loyalty programs in one place; Money-saving: finding more money-saving opportunities for customers. Financial institutions should focus on personalization since it is an opportunity where technology meets the customer's needs.
Substitutes- Cryptocurrency
Cryptocurrency drew massive attention in 2021. More and more financial institutes are starting to look at the value of cryptocurrency and offer their customers new services to manage their digital assets.
Besides, some governmental organizations are beginning to explore the benefits and risks of Central Bank Digital Currency (CBDC); a significant example is the European Central Bank (ECB) which would release information regarding whether to launch a digital euro in 2021.
Another topic is ‘decentralized finance (DeFi).’ In a definition from one of the most prominent blockchain organizations, Ethereum, DeFi is defined as an alternative to traditional financial systems, providing an open-source ecosystem that enables users and developers to control their digital assets more easily, openly, and transparently. By its nature of an alternative to traditional finance, people can find financial services in a DeFi context. According to Ethereum’s classification, there are eight major financial services, including P2P lending and borrowing; trading; token swap and exchange; investments; payments; portfolio management; insurances; and crowdfunding. All these financial services are based on shared liquidity, meaning that no matter which service providers you choose, you can access the same amount of market resources.
In addition, a critical concept of DeFi is that all protocols on the blockchain can share the infrastructure built by other developers, meaning that service providers no longer have to build everything from scratch; they are able to gain advantages in the “speed race” of the financial world by stacking on the innovation of others.
New entrants- Fintech companies
Some significant new entrants are Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs) and Card-Based Payments Instruments Issuers (CBPIIs).
AISPs are companies like Anyfin and Qliro which retrieve account information from banks or financial institutions, and provide services like money management tools and loan applications. Rather than only viewing the data from banks, PISPs are able to make payments on behalf of a customer. Companies like Klarna, Zaver, and SaltPay are all PISPs. They offer payment tools to merchants or other services that allow their customers to pay in a more convenient way. Similar to PISPs, CBPIIs also provide payment solutions but allow users to pay with multiple accounts via a single card.
The goal of all these new service providers is simple: to make the financial world a more convenient place by managing the data that users have. Specifically, I further concluded the services into three characteristics: personalized services, refinance, and cross-platform.
Personalized services refer to the strategy that fintech companies focus on using their customers’ personal data in order to provide services that are best suited to them. Such services are budget control, spending alert, and financial management. Refinancing is the modification and replacement of an existing mortgage or loan, allowing the customer to change their previous contract, interest rate and payment schedule. Finally, to enable personalized services and refinancing, data needs to be retrieved from different platforms, and by doing so, fintech companies can connect data from different providers to generate new value propositions for their customers.
From the five forces, we can see that several trends are emerging. The opening up of customer data and APIs is enabling players in the financial industry to deliver new value to their customers. In order to realize these values, some players have started to work with what they previously called ‘competitors’ and have made their functions more flexible so that others can easily engage with them.
The trend towards open banking in Europe can be described as a “top-down” process. However, it is not only in the EU that we can see this trend, but all over the world. Particularly in the wake of the pandemic, customer behavior and expectations have changed with the rapid growth of digitalization.
From an end-user perspective, I would say the next battlefield will be the ‘touchpoints’, which means when and where a financial activity can take place, then there is an opportunity to innovate. Financial industry players should think outside the box about where they can become new touchpoints and what the job-to-be-done of a touchpoint is.
(Extracted from ‘Opportunity Exploration and Evaluation: in the Trend of Open Banking, 2021’ )
👏 Congratulations! You've finished this article! 👏 Please let me know that you are interested in more articles like this. Just clicking the applause button or leaving a comment will be an encouragement to me!If you have further questions you would like to discuss, or have something you would like to share with me, you can also send me an email 📬 hello@imsyc.info
