Recommended role profiles in the context of open banking for Swiss banking groups
This is the third and final part of my three-part series of blog articles in which I present the findings from my master’s thesis on the topic of “Implications of Open Banking on the business model of Swiss universal banks” at the University of St. Gallen (click here for the first part and here for the second part). In the first article, I elucidated the implications of open banking for the business model of Swiss banks. The second article focused on the strategic role profiles that banks can pursue in the context of open banking. In today’s article, I would like to analyze which role profiles are best suited to which banking group in Switzerland.
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.
As presented in the second article, according to existing literature, four strategic role profiles can be distinguished, which are available to traditional financial institutions in the context of open banking. The four role profiles are shown in Figure 1 and can be differentiated according to the dimensions of distribution and service creation. (Gozman, Hedman & Sylvest, 2018, p. 2-10)
But how can these role profiles be applied to the Swiss banking groups? In my master’s thesis, I differentiated between three different banking groups and, together with existing literature and interviews with experts, attempted to draw up a recommendation for the individual banking groups.
- big banks (e.g., UBS)
- cantonal and regional banks (e.g., St. Galler Kantonalbank)
- private banks (e.g., Julius Baer)
In Figure 2, the three banking groups are categorized in the grid initially presented in the context of the four strategic role profiles. The banking groups 2 and 3 were again divided into two categories, namely “smaller private banks” and “larger private banks” as well as “smaller cantonal and regional banks” and “larger cantonal banks”. This level of granularity allows to adequately consider for the different starting positions of the banks. The positioning of the individual banking groups is explained in detail in the following sections.
The big banks currently include UBS, Raiffeisen, PostFinance and Zürcher Kantonalbank. These banks are characterized in particular by their size and corresponding market power as well as their national roots. Open banking gives these banks the greatest possible freedom to expand their business model in the individual banking areas as the situation demands. The experts believe that this group of banks is particularly suited to the role of a producer, as these banks have the appropriate size to realize economies of scale. This enables them, for example, to produce and process products and services in the banking areas of payments, investments, and financing much more cost-effectively and efficiently than it is possible for smaller banks. The role of a producer enables big banks not only to integrate themselves into the value chains of other sectors (“embedded banking”), but also to perform certain specialized banking activities for smaller banks. This is already the case today in the context of investments. Zürcher Kantonalbank offers its know how to smaller cantonal banks as a service. In the context of open banking, further collaborations of this kind could emerge in the future and, thanks to standardized APIs, integration and processing efficiency will increase for all parties.
Big banks are also able to fulfil the role of a distributor or platform. They can cover complex customer needs by integrating third-party services and offer a unique customer experience thanks to comprehensive customer journeys. As an example, one could think of services relating to the topic of “living”. For example, offers that satisfy all the needs of homeowners. The development of a marketplace or a comparison platform for tradespeople that can be compared, booked, and evaluated directly via the platform. In addition, one could also imagine relocation services where all administrative matters relating to visits to the authorities, ICT services (e.g., TV, Internet) and address changes can be dealt with at the click of a mouse.
Figure 3 below shows the target operating model of a major bank in the future, which fulfils the role of a producer and a platform. This bank appears to achieve economies of scale in all customer processes (payment, investing, and financing) and is therefore able to sell its products and services in these areas to third-party companies and even other banks. In addition, this major bank has been able to develop and implement a national platform through which third-party companies and their customers can interact. Certain services of the big bank may also be offered on this platform (e.g., onboarding, payment).
Cantonal and regional banks
Switzerland currently has 24 cantonal banks and around 60 regional banks. These financial institutions differ enormously in terms of their size and market power. For this reason, a further distinction was made in Figure 2 between larger cantonal banks (e.g. St. Galler Kantonalbank, Basler Kantonalbank) and smaller cantonal and regional banks (e.g. Appenzeller Kantonalbank, Bank Thalwil).
Similar to the big banks, the larger cantonal banks are in a position to fulfil all role profiles in the context of open banking. Due to the size of their organization, they are in a better position to realize economies of scale and, in line with their core competencies, to sell certain banking-related areas via a banking-as-a-service offering. Nevertheless, it also makes sense for the larger cantonal banks to expand their offering specifically with third-party services (e.g., subscription management, selected insurance products) and innovative features (e.g., CO2 footprint analysis). The role of the platform tends to be recommended more cautiously by the experts. It would have to be a region- or canton-specific use case that addresses a need or specifics of the region, for example. At this point, one could imagine a marketplace for local SMEs, for example, or any other platform that connects local producers and consumers.
Due to their size, the smaller cantonal and regional banks tend not to be in a position to produce products and services in the banking areas of payments, investments and financing with the efficiency and to the extent that they can be offered competitively on the B2B market. The aim of these institutions should therefore be to position themselves towards their customers in the best possible way and with a broad service offering. They can achieve this by acting as a distributor, integrating third-party services into their value chain and, if necessary, also procuring services from other banks (e.g., asset management from a private bank). Thanks to open banking, these banks can thus put together a customized modular offering.
The following diagram shows the target operating model of a smaller regional bank that mainly acts as a distributor. It appears to have its core competences in the specialist banking area of financing, which is why it continues to act as an individualist here. It obtains the banking-related areas of payments and investments “white-labelled” from a larger bank, which can provide these services much more cost-effectively and efficiently. Ultimately, this bank opportunistically integrates additional products and services from third-party companies in order to provide its customers with the best possible service offering.
Similar to the cantonal and regional banking group, the private banking group can also be divided into smaller (e.g., Vontobel) and larger institutions (e.g., Julius Baer). It should be mentioned at the outset that the business model of the private banks will probably continue to exist in its current form for somewhat longer and that these institutions will therefore continue to act as individualists a little longer than other banks. The reason for this is the nature of their business, private banking. The experts increasingly pointed out that in private banking, the personal and trusting relationship between client and advisor is still very important and that this will continue to be the case for some time to come. The recommendation therefore differs significantly compared to banks that specialize in retail and commercial banking.
Larger private banks are in the best position to take on the role of a producer and thus provide banking-related investment services for third-party companies and other banks. This area is considered a core competence of these financial institutions and enables them to provide and process products and services more competitively than other institutions. In addition to their primary role as individualists and producers, larger private banks can also opportunistically fulfil the roles of distributors and platforms. In the latter role, one could imagine a special marketplace for trading venture capital and private equity shares. These are usually investments that require a longer holding period (e.g., 10 years) and a larger initial amount (min. CHF 1 million). If a liquidity requirement arises after a few years, it is currently difficult to sell this investment piecemeal. However, the experts emphasized that implementations in the context of platforms should have a concrete connection to the core business of private banks in order to maintain credibility.
Smaller private banks can act as distributors in a similar way to smaller cantonal and regional banks and specifically expand their range of services with third-party products and services. For this subgroup, too, it will probably take a little longer for the change to take place than it is the case in retail banking and commercial banking.
In the following illustration, we see a private bank that acts as a producer and distributor. This private bank was efficient and cost-effective enough in the banking area of investing to make its services available to other banks and third-party companies. It has currently “outsourced” the areas of payments and financing, for example to a larger cantonal bank or major bank, which can cover these areas more cost-effectively.
In this blog post, we have seen that a wide range of opportunities will open up for banks in Switzerland in the future. Swiss banks should now take a detailed look at their future positioning and, in particular, ask themselves which products and services will be in demand from the upcoming generations and in what way. The role of banks could change significantly in the coming years if bank managers increasingly recognize the potential of horizontal value creation in collaboration with third party companies (e.g., within ecosystems). However, this requires a rethink of today’s purely vertical value creation logic of an individualist. The roles of producer, distributor and platform enable a unique design and parameterization of one’s own business model and, thanks to standardized APIs, integration and processing efficiencies are created. In future, data can be offered as an additional product and banks must learn to take this into account in their value creation architecture. Open banking is just the beginning of a much larger trend reversal, namely the seamless and cross-company handling of data in interconnected business models. We are now looking forward to the Swiss banks and newly emerging collaborations such as that between Coop and Hypothekarbank Lenzburg in the context of “Coop Finance+”.
Alt, R. & Zerndt, T. (2020). Bank model. In: Gramlich, P., Gluchowski, A., Horsch, K., Schäfer, K. & Waschbuch, G. (Eds.), Gabler Banklexikon (15th edition). Wiesbaden: Springer Fachmedien, 232-234. https://doi.org/10.1007/978-3-658-20041-1
Gozman, D., Hedman, J. & Sylvest, K. (2018). Open Banking: emergent roles, risks & opportunities. Twenty-Sixth European Conference on Information Systems (ECIS2018), Portsmouth, UK, 2018
Hypothekarbank Lenzburg. (2023). Coop enters into partnership with Hypothekarbank Lenzburg AG. Retrieved from https://www.hbl.ch/de/ueber-uns/medien-news/medienmitteilungen-und-news/2023/coop-geht-mit-der-hypothekarbank-lenzburg-ag-partnerschaft-ein/