Latest great guest post by Paul Rohan, author: PSD2 in Plain English

In his recent letter to Amazon shareholders, Amazon CEO Jeff Bezos explains how getting a large and complex organisation to experiment with new Open Innovation methods is not easy. He says “when we decided to invite third party sellers to compete directly against us on our own product detail pages — that was a big one. Many smart, well-intentioned Amazonians were simply not at all aligned with the direction.”

This type of reaction could be anticipated by bank CEOs who are keen to push the adoption of Open Banking, but encounter misalignment with key business units that may actively or passively resist this development. Older businesses that were not born in the networked economy can be excessively focused on the downside risk of data travelling out to third-parties. Career aspirations, remuneration structures and personal prestige are tied up in the existing structures. Some staff will be happy about the prospect of an Open Banking Ecosystem and some may not be happy. This leads to tensions that should be anticipated and carefully managed. CEOs of large, wealthy and mature bank may look all-powerful from a distance, but getting these complex organisations to change ingrained practices and experiment with new methods is not easy.

Is the advent of Open Banking becoming a focus for bank CEOs? A recent study by Earnix, a provider of predictive analytics solutions for the financial services industry, found that 80% of the bankers surveyed expected a significant increase in competition over the next five years as a direct result of Open Banking. Of the bankers surveyed, 72% thought that Open Banking would significantly diminish their existing customer relationships, making it more difficult to cross-sell financial services. Given this, 75% think that their bank will need to overhaul their pricing and value models to maintain market share in a new Open Banking Ecosystem.

Bank CEOs should be considering value models because we seem to be entering an era of platform versus platform and ecosystem versus ecosystem competition, rather than product versus product. It is arguable now that a good financial product outside the right ecosystems will become irrelevant. The giant platforms are in a breakneck race to add App Developers and End Users to their ecosystems, to drive scale economies and positive network effects. A giant platform or a fast growth platform may see Open Banking as an enabler for adding routine financial activities of a large number of consumers and SMEs. This will drive additional network effects on their platform. Platforms in a race for End Users and App Developers try to “fill the bathtub” with as much innovation and choice as they can. This can lead them into aspects of financial services, if those aspects are means to filling the bathtub.

The main risk to incumbent banks may not be giant software platform businesses themselves initiating payments, taking deposits or offering loans. The main risk may be that a very large number of niche and narrowly specialised financial service providers build Apps on the platforms, aiming at valuable market segments. As a bank account user can take control of their account data under PSD2 and provide it to suitably regulated Platforms and Apps, this swarm of data-enriched niche competitors could rapidly accelerate industry competition and innovation. What will be the characteristics of a niche and narrowly specialised financial service providers?

Their business processes are assembled by APIs and is not dependent on any single type of technology. Their organisational processes and data are opened up to partners and customers via APIs. The architecture and infrastructure is highly scalable. Technology solutions emerge not only from top-down vision, but from bottom-up capability. These niche and narrowly specialised financial service providers are likely to offer narrow business lines such as student loans, equity release loans, peer to business loans, revenue based loans, invoice funding and purchase order/stock finance.

The CEOs of incumbent banks could have two major transitions to lead in order to react effectively to this platform-driven change in market structures. Firstly, they need to reengineer their software architecture into a more modular design, so that they position key services onto the giant platforms that their account users are increasingly using to run many aspects of their lives. Secondly, they probably need to start thinking as platform businesses rather than product businesses. This is easier said than done, as the mind-set, management style, distribution techniques and governance processes are very different between platform businesses and product businesses.

One way to achieve progress on Open Banking in the face of existing organisational structure is to develop new SMART goals and measurement processes within business units. SMART goal-setting has its origins in Management by objectives (MBO). MBO was first designed by Peter Drucker in his 1954 book The Practice of Management. Management by objectives is the process of defining specific objectives within an organisation that management can convey to organisation members. For a goal to be S.M.A.R.T., it needs to conform to the following criteria: Specific, Measurable, Attainable, Relevant and Timely.

Specific – target a specific area for improvement.
Measurable – quantify or at least suggest an indicator of progress.
Agreed upon – specify who will do it.
Realistic – state what results can realistically be achieved, given available resources.
Time-related – specify when the result(s) can be achieved.

APIs with different purposes can yield different payoffs. Some APIs are internally focused (e.g. they are not open but they facilitate internal software modularity and reuse). Bank CEOs could have access to internal hard data on wastage and rework that could enable SMART goals on the adoption of APIs for this internal purpose of internal software modularity and reuse. However, these SMART goals for API adoption are likely to be assigned to the COO or CIO, rather than a market facing business unit.

Some APIs are supplier oriented, for business to business purposes (e.g. they are open to make the data exchange with the bank’s supply chain more efficient). Again, bank CEOs could have access to internal hard data on order cycles and expensive time lags in the supply chain. However, these SMART goals are likely to be assigned to the Chief Procurement Officer or some other internal efficiency-led function, rather than a market facing business unit.

Some APIs can be clearly customer oriented and part of an Open Banking business strategy (e.g. they are open to third parties and help grow sales). These Open APIs are the responsibility of market facing business units. Top management can make progress if they embed Open Banking objectives into existing business units without setting up a formal Open Banking Unit. As Open Banking partners are likely to differ between the consumer markets and the enterprise markets, Open Banking adoption targets need to be embedded at segment level in a bank. The business unit is part of the ‘command and control’ structure of a bank. The structure provides operational control and administrative support for management, capturing business activity and financial activity management reporting. Business unit management and administrators track and record business unit activity and financial performance.

In the early days of Open Banking, revenue streams need not be the most important performance indicator. Nevertheless, identifying and pursuing new revenues at Business Unit level will be very important. Program fees are the entry ticket fees for partners into partner programs. Product revenue can be generated from the new Open Banking Ecosystem from license fees for using Partner APIs or from revenue shares. In theory, business units can be set SMART goals on programme fees that generate new revenues. Business units can also be given SMART goals on underlying volume/margin revenue drivers e.g. developer numbers, API call volumes etc. However, in the early days of an Open Banking Ecosystem, it could be hard to be sure that these targets are realistic, so the R in SMART would be missing.

Banks can pursue cost saving targets at Business Unit level. Cost savings in Sales and Service can result from educating the ecosystem and from leveraging the ecosystem as a multiplier for product knowledge. Opportunities exist across pre-sales activities and sales activities. The ecosystem can also displace post-sales activities like customer support and answering product-related questions. Business Units can be set SMART goals on reducing volumes across internal processes by letting the Developer Community take on some of these loads. Again, in the early days of Open Banking, it will be difficult to be sure that these goals are realistic, so the R in SMART would missing.

Bank business units can look at the costs of innovation as they adopt Open Banking. A sound Business Unit innovation process should contain a mix of internal and external innovation that supports Sales and Service. External innovation happens outside of the walls of the bank, mainly by partners, but also by customers and system integrators. The advent of Open Banking can help optimise the costs and benefits of innovation. Business units can be set SMART goals on cutting direct spending on product and process innovation by letting the Developer Community take on some of activity. However, in the early days, there may not be the confidence or knowledge of the Open Banking environment to aggressively set targets to push processes into the ecosystem. It could be impossible to set deadlines for these outcomes, so the T in SMART would be missing.

Banks can measure payback from Open Banking investments through the attraction of new customers at Business Unit level. Customer communities that share their experiences can start a viral effect to attract new customers. This happens when end users spread the news about their use of bank API-enabled solutions. This word-of-mouth can carry the good news about lower integration costs (thanks to APIs) between bank solutions and complementary solutions at that life-stage. Aside from an enhanced customer experiences, banks could also benefit by indirectly reaching parts of the market that they could not reach on their own. This will strengthen the market presence of banks. Open Banking can strengthen market presence by closing gaps e.g. a bank business unit will always have white spaces at various life stages and have customers seeking adjacent, complementing solutions, which are not offered by the bank itself. Complementing offerings from partners can be positioned in these white spaces or adjacent areas. It is important that banks with new API strategies seek to measure these type of outcomes. However, in the early days of Open Banking, it could be difficult to get individual market facing business units to agree to be accountable for these indirect outcomes, so the A in SMART would be missing.

It is possible to measure how the Open Banking Ecosystem can be used to fight competitors. This is a simple count. More customers and more partners can make it harder for a competitor to compete at a particular life-stage. For bank customers, a large ecosystem of customers and partners provides a variety of solutions with low integration costs and low inter-operability costs. If an ecosystem has a very large and visible number of participants, the more it can attract new members for the ecosystem. The top management of a bank can use these simple counts as performance outcomes. However, it could be premature to divide up this number and assign this simple count as performance objectives for specific business units, so the S in SMART would be missing.

SMART goals can help drive hard data on outcomes, but these command and control processes don’t necessarily capture imaginations, hearts and minds. There is a normal expectation that business strategies should be underpinned with lots of hard data. Strategic planning tends to have a fundamental assumption that it can be informed in a formal way. The world of noise, inference, impression, and fact about Open APIs and Open Banking must thus be reduced to firm data, hardened and aggregated so it can be supplied to the business development process in a digestible form. The normal assumption is that firm and hard data is superior to the softer, more qualitative data. A bias toward quantitative data can allow the economic to displace the social and the financial to displace the creative. The emphasis on objectivity is reflected in the data used. However, an excessive focus on hard data can distort a business development process that relies on it excessively. As Open Banking is immature and yet may be a serious disruption to the banking industry, any excessive focus on hard data is a risk.

Command and control has a militaristic dimension. If a metaphor for traditional hierarchical business is an army, a common metaphor for platform ecosystems is a symphony. The Open Banking platform owner is like the conductor and the App developers are like the musicians. The conductor helps diverse musicians synchronise their own contributions to help ensure overall coherence in their collective performance. Like in a symphony, orchestration rather than control is the focus of governance in platform ecosystems. Command-and-control structures work well in traditional organisations because legitimate hierarchical authority of managers over employees is accepted by both sides as a condition for employment. However, no such direct authority exists in a platform ecosystem. App developers are not employees of a platform owner; rather they often are free agents who typically specialise in niche domains outside those of the platform owner’s.

It is important to note that the advent of Open APIs in financial services does not mean that the only strategic option for the business unit of an incumbent bank is to become a platform owner in its target market segments. For example, the Consumer Banking business unit may wish to become a platform owner in an ecosystem that allows a Consumer to coordinate all aspects of the financial lifecycle. In contrast, the Business Banking business unit may wish to become a complementary downstream App in an ecosystem where the Accounting Software provider to the business is the platform owner. In this context, a broadly based retail and commercial bank is the conductor in one orchestra and a musician in another orchestra. Platform governance is important because it determines whether innovation divisibility made possible by modular platform architectures is successfully leveraged. Banks will need to understand platform governance from both perspectives, learning how to orchestrate and learning how (and where) to be orchestrated.

In crude conclusion, bank CEOs should be considering value models because we seem to be entering an era of platform versus platform and ecosystem versus ecosystem competition, rather than product versus product. It is arguable now that a good financial product outside the right ecosystems will become irrelevant. Some APIs are internally focused and some are supplier-focused, so bank CEOs could have hard data that would allow some SMART goals to accelerate their adoption. However, the Open APIs that are customer oriented and part of an Open Banking business strategy won’t easily and quickly lend themselves to SMART goals while the Open Banking Ecosystem is very immature. It is likely to be premature and possibly counter-productive to try to devise hard data driven SMART goals for market facing business units. As the Ecosystem evolves, key staff in market facing business units will come to instinctively understand platform governance from both perspectives, learning how to orchestrate and learning how (and where) to be orchestrated. SMART goals can be introduced when that new learning starts to become a distinct pattern of measured behaviour within the organisation. Education on platform economics and platform governance, both from a Platform and App perspective, seems to be an important first priority.

Paul’s latest book Open Banking Strategy Formation examines the forces that are likely to influence the evolution of Open Banking at an industry level. It also examines the bottlenecks and accelerators for Open Banking adoption within banks. The transition of the industry to Open Banking will come from a patchwork of deliberate and reactive changes by existing and emerging market participants. Open Banking Strategy Formation will help existing and new market participants to judge how and when their businesses can become part of the Open Banking Ecosystem. The book is available in paperback or as an ebook here.

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