Banking Trends 2022: Banking evolution with Open Finance
Over the past year the industry has accelerated in an ecosystem approach to banking, and more broadly with financial services. Accenture estimates $416b in banking revenues is at stake as we shift to an open data economy. Although banks embarked on this journey with Open Banking as a catalyst, many have embraced the augmentation of their business models and acquisition of new customers, often referred to as Open Finance.
An analysis by Oliver Wyman identified that the cost of acquiring a customer with a new, Greenfield Banking as a Service (BaaS) technology stack is between $5 and $35, as compared to $100–$200 typically. Additionally, a recent MasterCard report found that more than 80% of consumers in the U.S. and 90% of younger consumers are already connecting their bank accounts to technology apps. Therefore, it’s clear why both analyst and consulting firms see this as a major trend in 2022, and beyond.
Approaches being adopted
The ecosystem-based approach has taken multiple forms. However, in banking we see two common approaches: a Marketplace offering, and a BaaS capability.
Marketplace: In the same way that AWS creates a marketplace for our customers that lets them combine partner solutions with our services, banks are curating a set of partners that complement their banking services. This approach means that banks can leverage their ecosystem of partners to provide value-added services, rather than attempt to build their own solutions. These partners build either unique offerings to meet the needs of niche markets, or more integrated methods of consuming banking services.
In turn, many of these institutions are creating a “Financial Services Cloud” for their customers. This combines their banking offerings with an ecosystem of partners that offer integrated banking solutions to their customers, including advisory, technology, and banking services that can be customized to meet their customers’ specific needs.
Moreover, there are many examples: from integrated personal financial management solutions for retail customers, to small business industry solutions, such as providing restaurant merchants with software to support online orders and card acceptance.
Banking as a Service (BaaS): From a bank’s perspective, BaaS capabilities are similar to the concept of marketplaces. However, in this case, the bank doesn’t have the relationship with the end consumer, rather the banking services are delivered by a non-bank organization that consumes the bank services and offers those services to their customers. In the BaaS model, banks are providing their banking services via APIs for other institutions to white label.
Although each bank takes a varied approach to what services they expose via a BaaS capability, most white-labeled banking offerings are inclusive of the banking charter (or international equivalency), account opening and management, and compliance and regulatory capabilities (such as KYC). Furthermore, this has led to a new marketplace for BaaS offerings, with aggregators such as FinConecta creating a marketplace for non-bank organizations to consume services from multiple BaaS providers via a common marketplace.
For example, in the U.S., it’s common to see FinTechs leverage BaaS capabilities from banks. This occurs as they focus on the customer experience and niche product offering, rather than obtaining a banking charter, such as Chime, Aspiration, Brex, or Dave.
How the Cloud is enabling the trend
Regardless of the business strategy being adopted, banks are establishing solutions that provide their banking services, in a fine grain (microservice) and secure manner, through a common platform. Moreover, Open Banking standards have driven the banks to expand access to the platform to the various FinTechs by providing a normalized API Catalog along with a developer portal that’s fully integrated to the bank’s core system, rather than having to offer individual partner integrations. The API catalog and developer portal means that FinTechs can find the right APIs for their business needs, as well as try out the APIs in the test environment. Therefore, they can rapidly integrate the APIs into their own platforms.
This open approach to consuming banking services via APIs means that banks must build these platforms in a highly scalable and resilient manner, as they encourage FinTechs and partners to build engaging customer experiences.
Moreover, banks must modernize their internal services that support these APIs to make sure that they can scale up and down with the dynamic demand created through this new channel. Banks on this journey have also had to modernize their data platforms to support data ingestion and processing in real-time rather than in batches. Therefore, they have further established artificial intelligence/machine learning (AI/ML) capabilities to streamline operations as well as provide value added services and remove friction from the interaction.
Finally, our banking customers take two approaches to modernizing their core banking platforms to enable these APIs: migrating their legacy systems to the cloud and establishing a modern platform via the 7Rs approach, or selecting a cloud native core banking vendor with the prebuilt APIs.
How are customers doing this on AWS?
By utilizing Amazon API Gateway, financial institutions can implement Open Finance solutions to improve the customer experience and offer customers greater product choice and control over their finances and data.
BaaS and Marketplace offerings with the Open Finance platform on AWS
Bank – Core functionality: Banks are building abstraction layers with APIs on top of their core banking systems. This enables them to build more modern applications.
Bank – API integration: Open APIs mean that a bank can allow third parties and FinTechs to interact with the bank’s users, accounts, and/or transactions via a set of standardized APIs.
Bank – FinTech integration: The increasing integration across institutions in the Open Finance ecosystem poses risks for how banks secure customer privacy and data. To meet the privacy and security requirements of the Open banking regulation, banks are enabling centralized privacy and consent management options for customers. Furthermore, they are leveraging centralized identity and access management (IAM) to provide customers with control over their data and how it’s shared with other FinTechs.
FinTech – BaaS functionality: FinTechs are leveraging the open finance functionality offered by banks to offer new products and services for customer engagement. We’re increasingly looking at various digital banks that are building banking offerings on top of a bank service providers’ regulated infrastructure by using APIs built for Open Finance functionality.
Bank – Marketplace functionality: Banks are using data that is already available internally as well as leveraging alternative data and functionality offered by FinTechs to deliver new functionality to their customers. This makes it possible for a bank to have a more comprehensive and “360-degree” view of their customer, as well as helps better predict a customer’s actions and intent in the future.