Implications of Open Banking for the Business Model of Banks
As part of my master’s thesis at the University of St.Gallen, I have had the opportunity over the past few months to take an in-depth look at the topic of open banking and its impact on the business model of banks. According to my chosen definition, Open Banking describes a collaborative concept under which banking data is exchanged between two or more parties via Application Programming Interfaces (API) in order to provide added value for the end customer. Open Banking originated in the UK and subsequently became relevant for all EU member states and their financial institutions via the Payment Service Directive 2 (PSD2 for short) in 2018. In this context, I was interested in the following three questions:
- What impact does Open Banking have on the business model of Swiss universal banks?
- Are there strategic role profiles that a bank can exercise in the context of Open Banking?
- If so, which role profile is suitable for which bank and why?
Based on a systematic literature review, I initially obtained initial findings on the above questions, which I subsequently validated and expanded in the course of eleven expert interviews with specialists from banks, consulting firms, public authorities and service providers.
This is the first part of a three-part blog post series in which I present my findings. In this post, I focus on my impressions and experiences on the first research question: What impact does Open Banking have on the business model of Swiss universal banks?
Switzerland is currently one of the few countries (including the USA, Argentina, South Africa and China) to pursue a market-driven approach in the context of Open Banking. In comparison, the European Union has been pursuing a regulatory-driven approach to the implementation of Open Banking with PSD2 since 2018.
However, the Swiss Federal Council addressed Swiss financial institutions last December with a clear message and wants to accelerate developments around Open Banking.
This can be seen as a clear signal for the local financial institutions to take a closer look at open banking in the coming months. However, the Federal Council is currently leaving open the form that corresponding measures could take.
Against this background, many bankers are currently asking themselves the question: what influence does open banking have on my current business model? To answer this question in a structured way, I used the banking model of Alt and Zerndt (2020) in my master’s thesis. The bank model provides a concise overview of all essential processes of a universal bank. If we now look at the influence of Open Banking within the framework of this model, we can distinguish three different levels: strategic, operational and technical/cultural. These levels are explained in detail below.
Open banking confronts banks with various issues at a strategic level. With regard to the banking model, management processes are particularly involved (e.g., partner management, channel management and sales management). First and foremost, banks must be clear about how they want to expand or change their service offering with Open Banking. This can involve integrating data and services from third-party companies as well as making their own data and services available to other companies. The “Framework for an Open Banking Strategy” by Standaert, Muylle and Cumps (2020, p. 369) provides good guidance in this context.
The framework contains five dimensions that must be taken into account when defining an open banking strategy. These include “Product”, “Customer”, “Ecosytem”, “Datascape” and “Geographical Scope” (see Figure 4). In the context of the “Product” dimension, in addition to existing products and services, data is now also a product, which can be embedded in integrated value chains via suitable monetization mechanisms. In addition, thanks to Open Banking, data, products or services from companies outside the financial sector can be integrated into a company’s own value creation architecture. In the “Customer” dimension, the focus is on the customer centricity of the service offering. In the past, a bank’s services could only be demanded physically at a branch (“bank-centric”). Today, banks are increasingly positioning themselves with their products and services in constellations that enable convenience and simplicity for the end customer (“customer-centric”, e.g. mobile banking instead of manual payment orders). In the “Ecosystem” dimension, banks define the corresponding channels or those parts of integrated value chains in which they want to place their services. There are also various forms, ranging from conventional banking applications (“Bank Channels”) to integrations in platforms (“Platform”). In the context of the “Datascape” dimension, banks must find a way to use the comprehensive database in a targeted manner for the development of the service offering while complying with the applicable data protection regulations. Finally, thanks to interoperable API standards, Open Banking also enables easier collaboration and positioning in international markets (“Geographical Scope”).
Customer centricity plays a central role in the development of a suitable positioning. Banks must anticipate which products and services their customers will want tomorrow and at what time and via which channel they will demand them. This will inevitably involve a shift in thinking from purely vertical value chains to horizontal collaborative value architectures in business ecosystems.
On an operational level, the sales, execution and settlement, transaction-related and cross-transaction processes are affected. In the case of distribution of own products and services via APIs to customers of third-party companies (banking as a service), the entire sales part as well as the initialization and recording of transactions takes place at the third-party companies. The bank takes over the verification, approval and processing of the transaction and ensures second-level support. On the other hand, for integrated products and services (e.g., carbon footprint analysis, insurance products), the distribution takes place in the bank’s applications and channels. The transactions are then processed by the third-party company. In this context, new products and services can also be designed jointly.
The technical and cultural level primarily comprises the support processes, which include human resources, accounting and IT. Here, the bank must first build up the technical capabilities to be able to operate Open Banking at all. This includes API management (including API gateway, access policies) and a developer portal in which interested third parties can test the functionality of the APIs. Furthermore, it is essential to involve all relevant departments within the bank from the very beginning. This promotes the viability and acceptance of the project, and the know-how of long-standing employees can be adequately taken into account. Finally, a jointly coordinated marketing campaign should be set up to clearly communicate the reach and message to the market.
In the next part of this series of papers, I will address my second research question and explain which strategic role profiles can be distinguished in the context of open banking.
Alt, R. & Zerndt, T. (2020). Bankmodell. In Gramlich, P., Gluchowski, A., Horsch, K., Schäfer, K. & Waschbuch, G. (Eds.), Gabler Banklexikon (15th ed.). Wiesbaden: Springer Fachmedien, 232-234. https://doi.org/10.1007/978-3-658-20041-1
Fed. (2022). Federal Council wishes to promote open finance. Retrieved August 28, 2023, from https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-92275.html
Open Banking Map. (2023). Open Banking Map. Retrieved August 29, 2023, from http://www.openbankingmap.com/
Standaert, W., Muylle, S. & Cumps, B. (2020). Opening the gates: A framework for an open banking strategy. Journal of Digital Banking, 4(4), 364-376.