Is Open Banking just history repeating itself?
By Pål Krogdahl | 8 minute read | Tue, September 24th 2019
Open Banking is seen as a key disruption or opportunity to the banking industry driven in part by regulation and legislation. But this is just a small component in a wider transformation driven by digitalisation and consumer behavior. Are banks and FinTechs at risk of repeating mistakes from the past by focusing on the wrong things? Do we as consumers really want banking to be broken up and unbundled, or are we seeking consolidation and clarity – is the future of banking based on platforms which remove the confusion in our financial lives and rebuilds trust based on clarity, transparency and deeper insights? In this blog I draw parallels from the Dot.Com bubble to the current Open Banking explosion, and focus in on one bank that has navigated the new storm with success – Nordea.
Somewhere between 1998 and 2001, I spent majority of my time with IBM UK leading a small team of experts driving client projects in the fast growing dot.com and eCommerce space. We had a growing list of eager and focused innovative thinkers with great new business ideas that could be born on the internet and make them rich. They had the funding, ideas on napkins and a belief that they had the next big e-business that would take the world by storm. The primary focus often was to grow the number of registered users for the service as it was directly linked with the perceived success of the offering.
The IBM team developed an approach that would, within a three-day period, validate the business case, define the architecture and the minimal-viable-product (MVP) to get the idea up and running. With so many startups going through the process, I lost count of the number of ideas. And, now nearly 20 years later, I look back and struggle to spot many of those startups still in existence – even those that I was very proud to have got off the ground.
But that is the point, shortly after we kicked the small IBM team into action and engaged these keen Dot.com’ers I also started to notice them fading away just as fast. I did not realise it at that point, but that was the inception of what became a life-long passion for me into the world of Platformification and Platform business models. You see, it became obvious quite fast for me that the key metric used for success – the number of registered users – was actually only half the truth, and misleading. Whilst it did in the early stages help to get funding and visibility if you could demonstrate that you had thousands of registered users, your business case and the future of your idea was doomed to fail if these users were not converted into active users driving value for you and your business – or put in today’s perspective, would Amazon have become the giant they are today if all they had were registered customers but no books sold? Or what value would Facebook and Instagram have if they had millions of users but no one posting content?
What has this all got to do with Open Banking, I hear you ask? Quite a lot, I would suggest, and would go as far as to say that we are in part watching history repeating itself. Let me share my point of view with you here, but first some background. The Council of the European Union passed the regulations round the Payment Services Directive 2 (PSD2) on November 16th 2015 to primarily disrupt the banking industry by opening up the existing monopoly that the banks were holding. The Council specifying that EU member states will have two years to incorporate the directive into their national laws and regulations, basically re-architected the industry by enforcing transparency of costs and placing the end customer (you and me) in charge of their data held by the banks and more importantly, how they want to use banking services, removing the need for us to have a direct relationship with a given bank to use its services.
On January 13th 2018 these directives were put into force with a mixed level of completion by the EU member banks. Leading banks in the EU quickly eased on the wider opportunities associated with PSD2, and the concepts surrounding Open Banking was formulated. This forced the banks into a unique point in their history and heritage to reflect and evaluate their core purpose and operating model that will sustain them for the next hundred years, and embark them into the world of platforms dominated by the likes of Uber, AirBnB, Facebook and others.
Regulatory changes in the financial services industry are often associated with needing to produce additional reporting or augmenting mid-to-back office processes. However the proposed policy changes under PSD2 had a profound impact on (but not limited to) the financial services industry as the banks started to interpret how this was going to impact them and their dominant position, whilst a growing number of innovative thinkers drew business ideas on napkins to enter the exiting world of payments and banking services under the umbrella of FinTech startups and with a desire to disrupt the banking industry.
Innovation, new business ideas, internet business, startups, inflated expectations and insecure consumers – starting to see the connection back to the Dot.com boom? There is some key differences this time round – the internet is not a new exiting technology that we are trying to understand (although the FinTech community is flying the Blockchain flag quite high) and the wider population has a point of view on mass-consumer platforms. But just as the Dot.com bubble was driven in part by the wrong metrics, the incumbents (the banks) are blindly playing a numbers game with how many have signed up to their developer portal sandbox or how many APIs they have published – and the banks should know better, after all they have long known it does not matter how many account holders you have, it is the number of active customers that is driving business and value. PSD2 has forced the banks to reconsider their position and business models, and from where I am sitting, I can see a substantial number of banks attacking this challenge with the wrong mindset and focus. All to many are taking an inside-out approach and treating this in the same way as developing any new banking product, running workshops internally to identify new APIs that they can make available to drive new revenue streams for themselves, taking an “us and them” approach rather than a “we” approach. Building a successful platform business takes platform thinking and that is new to most banks. Like it or not, Open Banking is more of a business agenda than a technical one, and there are three new operating models emerging and the banks need to decide where they will stand moving forwards. Do they want to be (1) a bank as a factory, (2) a bank as a point of distribution, (3) bank as an open platform or a mix of all three? Whatever they select, it is the organisational change management to adopt a platform thinking and culture that will be the toughest one.
All this I think is fantastically exciting, there is no doubt in my mind that the future of banking is and will be dominated by platforms and that this will be across the full Financial Services spectrum. But this will not be an easy journey for many banks, who are facing in many ways their Kodak moment. One bank that has embraced this transformation in a positive and successful way to date is Nordea, who have not just been successful in their initial steps into a Banking as a Platform journey but received global recognition for their successes in Open Banking so far. All the way back in 2014 Nordea were actively engaging with the startup community and experimenting with Open APIs with initiatives such as the Nordea Innovation Challenge and the successful Nordea Accelerator Program. You could say that Nordea had a head start when PSD2 surfaced. But one of the key things that gave Nordea their success in the emerging Open Banking was their focus on the community and engagement of the external developer.
I recently had the pleasure to sit down with Harald Eidsmo who is the product owner of Nordea’s Open Banking Developer Portal. We discussed their approach to Open Banking, lessons learnt and success to date, the journey they have taken with IBM, and what does the future hold. In the discussions, Harald echoes the winning strategy that Nordea have taken in driving a wider business objective on Open Banking with a focus on the external and internal developer community as critical innovation partners. With a central focus on engagement and a positive network effect, Nordea drove an outside in agenda with full transparency. Rather than a “build it and they will come” mindset, Nordea took a “let them come and we will build it together” approach, and successfully executed on it!
Want to know more about how IBM can help you with your Open Banking journey or Business Platform? I would be delighted to share my point of view with you and investigate opportunities for us to make your Platform Strategy and vision a success.
Are you attending the MoneyLive conference in Copenhagen during October? I am delivering a keynote titled “Digitization of Knowledge – The secret sauce in Open Banking”, would be great to see you there and get a chance to discuss your experiences and future plans for Open Banking and Platformification.