Open banking is enabling financial institutions to scale quickly and at low-cost; however, they have to the right ‘DNA’ for it to work, according InnoCells CEO Julio Martínez.
In January this year, the Revised Payment Services Directive (PSD2) opened up a number of opportunities for the sector. As a result of the regulation, financial institutions are now required to share consumer information with third parties, when they are directed to do so.
Whilst the primary purpose of PSD2 was to increase efficiency in the payments industry, by promoting greater transparency for international payments and eradicating hidden fees, PSD2 is also encouraging competition in the financial services sector.
It does this by allowing greater participation in certain areas by non-banks, such as FinTech companies, for the first time. As well as creating further opportunities for existing third-party providers, PSD2 paves the way for the creation of many more.
In an interview with RegTech Analyst, Martínez said: “I think that Open Banking will definitely help financial institutions to open up and partner with the ecosystem. Open Banking accelerates the realisation of FIs that they cannot come up with all the new technology, good ideas and products that their clients want.
“It makes a lot of sense to partner with WealthTechs and offer improved solutions to their client-base without concentrating too much build-up risk”, explained Martínez.
As the open banking initiative is encouraging financial institutions to partner with FinTechs and WealthTechs, it is helping provide them with new solutions and technology.
For example, startups such as Motif (which Goldman Sachs is licensing as a white-label platform) can offer low-cost investment services for millennials who are interested in creating an ethical portfolio which supports companies that, for example, have a positive impact on the environment, whilst still offering traditional solutions.
“When it comes to WealthTech, open banking facilitates the way new entrants or existing can access all of that information to provide the best financial advice. It not only appeals to WealthTech, for instance to analyse better and quicker debt or saving capacity.
“When you can have a 360 view of your client , you know their positions in all the FIs or startups they are with, you see their cashflow, FX you see what they can say, and you can also have a better understanding of their risk profile and then provide them with better financial advice, get closer and provide more accurate financial planning which is critical.”
While Martínez believes that partnering with WealthTech companies is the best way to go, he understands that this approach is not right for all financial institutions.
“Deciding on whether to partner, acquire or build in-house depends entirely on the DNA of the institution and situation-specific circumstances,” he added.
Some may strategically choose to develop a service internally from scratch to onboard FinTech specialist talent to help them succeed in their broader transformation efforts and further grow long-term by gaining experience in building digital products.
On the other hand, those that want to acquire the solutions may do this as they are certain about the solution’s value and want to deploy it to customers immediately, or they may wish to want to avoid supplier risk or downing out to competition.
With this in mind, Martínez does believe that all financial institutions need to seriously consider potential partnerships in their strategic conversations and decide when they should take that avenue.
Partnering allows to accelerate the go-to-market of the products, and it also offers the ability to deliver a wider variety and more personalised solutions to a Financial Institution’s different international markets without incurring in the upfront build-up cost.
However, more importantly the regulation is also creating a better customer experience, which is vital to any organisation who are trying adapt to the increasing digital demand of the millennial generation.
“What’s important is that FIs are coming to realise the customer should be at the centre no matter what. Some players are born this way and others need to evolve – that’s fine. We are all here to deliver value to the customer and the realisation is that this is the only way to thrive these days.”
In the current WealthTech market there is a sustained demand for digital platforms that incorporate sophisticated products, with this appealing especially to the millennial generation according to Maritnez.
This customer segment is becoming the most relevant as globally millennials are predicted to possess $20tn in assets by 2030, and in North America alone the baby boomer wealth transfer is expected to result in further $30tn being passed down by 2050 (analysis by Ribbit Capital).
The way this generation interacts with financial services has driven important changes in the product offering, as players strive to ensure their relevance in the evolving market.
Regarding the accessibility of sophisticated products, he said, “As increasing competition drives fees down, I think that players will move up in the market to offer specialized products that millennials are comfortable purchasing digitally. We will see a trend of players becoming more sophisticated in the types of assets they offer, so that they command a higher pricing power.”
“Simply distributing ETFs at zero fees is not a sustainable business model, so these players need to find niches, like alternative assets, beliefs-based stock-picking portfolios, hedge funds, or more sophisticated portfolios with hedging strategies.”
Although it is not in practice a simple task, product sophistication, which is being enabled through open banking, will need to cohabit with the clean and easy customer experience that millennials demand.
Martinez added, “I think the user-focused journey is here to stay. The answer is not just cluttering products with sophisticated and niche features that allow for higher fees. Financial institutions and WealthTechs alike are looking to properly address customer segments in a user-centric way.”
Historically, a brand and its reputation played a major part in how many customers it attracted and retained. However, as millennials are substantially more willing to change provider for a better deal, it has resulted in the success of newer customer-facing businesses.
Copyright © 2018 RegTech Analyst
Copyright © 2018 RegTech Analyst
