Oliver Pugh
Digital ecosystems are collaborations that leverage technology to create new propositions and innovative experiences for consumers. Open banking is one of the primary enablers of digital ecosystems. With explicit consent, it allows access and control of customer data and online payment capabilities through open API technology.
Developing open banking ecosystem offerings that provide services beyond banking can help traditional banks respond to the market competition and profitability challenges they face. Digital ecosystems and open banking have the potential to reshape the financial services landscape and the consumer experience of the banking industry.
Open banking adoption in the Irish market
The adoption of open banking varies widely around the world. The EY Open Banking Opportunity Index explores how the pace of change differs across markets. It assesses how four high-level pillars are playing a key role for open banking to thrive. The index shows that the UK and mainland China are market leaders. But they have taken completely different journeys to get there, driven by regulatory and market forces respectively.
The perception is that Ireland is behind the UK in terms of both open banking and digital ecosystem maturity. There is also a more active, government backed FinTech and innovation environment in the UK market. The EBA’s open banking license registry shows that there are 228 active licenses in the UK, compared with 40 in Ireland. However, considering the number of licenses relative to the total banking population, Ireland leads both the UK and most other European markets.
Instances of open banking in Ireland, the UK and most European markets are limited to within the financial services sector. For example:
• Account aggregators, where customers can see account information from multiple banking providers through a single app.
• Personal finance management apps, which help customers manage their finances and achieve better financial wellbeing.
In markets like Singapore, China, Australia and the US, however, cross-sector collaboration is occurring. Financial services products and services are participating in one-stop-shop ecosystems, fulfilling customer needs from end to end.
In some instances, banks are taking the lead and becoming the orchestrators of these cross-sector ecosystems. For example, Ping An has created a marketplace which caters to over 300 million online customers. It has collaborations and offerings across five ecosystems – finance, health, motor, real estate and smart city.
The five key drivers of open banking and digital ecosystems
1. Regulation
In Ireland and across Europe, the EBA’s Payment Services Directive 2 (open banking) legislation has levelled the playing field. Banks are now mandated to allow access to customer data and payment capabilities to approved third party providers once customer consent has been provided.
According to the UK’s Open Banking Implementation Entity (OBIE), more than 2.5 million UK consumers and businesses are using open banking-enabled products. Hundreds of thousands of new customers are being added to the ecosystem each month.
2. Increased competition
With a lower barrier of access to the financial services market, FinTechs, BigTechs and challenger banks are leveraging their technological agility and superior digital customer experience to capture customers and investors.
While digital banks like Revolut and N26 have signed up approximately 1.7 million Irish customers between them, few customers have fully migrated away from their pillar bank due to the limited services currently offered by these challengers. That is not likely to remain however, as digital banks are beginning to extend their offerings outside of payments products.
3. Increased digital and technology investment
Banks are investing in their technology systems and data. This drives down the cost to serve and creates platforms for new revenue streams. We estimate that large banks will need to achieve at least a 20-25% reduction in operating costs to maintain a sufficient level of profitability.
Globally and locally, banks are making major investor commitments to reduce costs. They are citing technology as the primary lever to achieve this. While regulatory change and legacy system renewal consume the majority of spending, digital transformation and innovation budgets are increasing. This is due to the competitive threat from challengers and new entrants resonating with shareholders.
4. Changing consumer behaviours and expectations
The way consumers are serviced is being redefined. Offerings are moving out of their current silos. One-stop-shop ecosystems that fulfil customers wants and needs are being created. In this new paradigm, banks will succeed where they can embed their products and services at the point of need.
Based on the experience delivered by the likes of Netflix and Spotify, consumers expect more personalisation, proactive services and connected omni-channel experiences from their banks. According to the EY Future Consumer Index, COVID-19 has accelerated digital adoption levels with 43% of global respondents saying the way they bank has changed during the crisis and 57% saying they have reduced their cash usage.
5. Partnership and acquisition appetite
According to the latest EY Global Capital Confidence Barometer, banks are increasingly focused on M&A and partnerships to accelerate inorganic growth. 66% say they plan to actively pursue this over the next 12 months.
In Ireland, we can see recent examples of this activity across some of the retail banks with players in the payments, wealth management and insurance space making M&A moves. How the banks will leverage these partnerships and acquisitions to build new digital products and services has yet to be seen, however.
EY’s FinTech Adoption Index also shows Irish consumers embracing FinTech services at an unprecedented scale, with an adoption rate of 71% indicating that partnership-based services are likely to be well received.
The opportunity for Irish banks
If Irish banks can find ways to embed their financial products in unique life moments along the customer journey – health, housing, education, employment – it will put them at the heart of this global transformation.
In this new future, Irish banks must seize the opportunity to create a strategic advantage. They can unlock a larger addressable wallet by leveraging open banking technology and orchestrating cross-sector ecosystems. Banks that don’t do this – because of lack of investment or the right talent – will be made obsolete by other sectors and players.
To succeed in an ecosystem environment, Irish banks should ask themselves:
• Is our overall business strategy and technology roadmap informed by a digital ecosystem and open banking strategy?
• What team in our organisation is accountable for understanding future customer needs and identifying cross-sector propositions?
• What traditional partnerships and relationships do we have today that could unlock value when viewed in an ecosystem context?
For inspiration, banks should look to their peers in other markets and adopt an innovation mindset. For Ping An, this meant setting up their own technology company to enable their transformation. What this will mean for the first Irish bank to seize this opportunity has yet to be seen.