What is your background briefly?
My entire career has been in the digital payments and online financial services arena. I helped build the first generation of electronic banking solutions in the 1980s, internet banking in the 1990s, mobile banking in the 2000s etc. I also spent many years working on the upgrade and harmonisation of EU digital payments standards, starting with eurozone entry in 1999, followed by PSD1, SEPA and now PSD2. This type of work involved industry-wide standard setting at both Member State and EU level. I seem to have spent decades with one eye looking at Silicon Valley and the other eye looking at Brussels. That may seem silly, but this Silicon Valley/Brussels combination is what drives much of the development of the digital ecosystem in Europe.
What are you working on currently?
I have an advisory client base that straddles both big companies and small niche providers, both in financial services and technology. PSD2 is prompting a lot of strategic thinking about Open APIs in financial services across the EU, so I see a lot of airport lounges at the moment. It’s interesting work, because I have clients with 50,000 employees and clients with 10 employees examining PSD2 and Open Banking very closely. This is exactly what the Regulators are hoping for – more diversity of innovation and competition in financial services.
What inspired you to write the book?
Open Banking is multi-faceted, in that it is a regulatory intervention, a standard setting process, a wave of innovation in financial services distribution, an executive education challenge, a framework for inter-firm collaboration and a transformation challenge for incumbent banks. As a topic, it warrants a serious and in-depth examination that a book can allow. I also think that perhaps there is some superficial and transient commentary about Fintech innovation at the moment. When you know that your current analysis of future trends could still be on somebody’s bookshelf in five years’ time, it concentrates the mind wonderfully.
What audience are you aiming at?
I had three types of reader in my mind while I was writing. Firstly, there are tech sector specialists who are coming to Open Banking who are looking through a “Fintech” lens. They might be interested in providing solutions for Open Banking, but they need to scope and time their investments. I hope the book will help them gauge the level of opportunity and speed of opportunity for their business to be part of an Open Banking Ecosystem or to supply the Open Banking Ecosystem. Secondly, there are many commercial people working in business development in financial services, who need to know more about Open APIs. Historically, financial services companies have commissioned monolithic own-brand electronic channels that deliver data and services to bank customers. Open Banking implies that customers will expect to consume their banking data and services through a number of third-party Apps, in whatever context they happen to need it. Business development people in financial services may have to learn a lot of new techniques and new technologies. Thirdly, Open Banking brings in new types of risk for risk managers in the industry to understand and manage. When radical change comes, new risks arise and old risks can look different in a new context. The book walks through the entire service landscape of a bank, from Data Management, to Channel Management, Operations, Compliance etc., trying to surface emerging risk management challenges.
How soon do you think / hope the barrier to adoption you describe will be overcome? / how soon might we see these changes?
Although the introduction of third-parties using Open Banking APIs seems to be a serious change in the banking business model, many existing and potential market participants have formal plans that are tentative or defensive. A serious change in strategy tends to be associated with discontinuity, the very thing that formal planning is least able to handle. It is a fiction that serious changes in business strategy appear annually at predetermined times, full-blown, all ready for implementation. Strategy formation tends to occur irregularly and unexpectedly, upsetting stable patterns because of unanticipated discontinuities, often from threats in the external environment. This reality may be what Mike Tyson was explaining when he said that “everyone has a plan until they get punched in the mouth”. Maintaining the boxing analogy, I think there will be lots of tentative jabs until a big bank or big tech company throws a flurry of big punches in an effort to gain a dominant position. I think this will be relatively soon, because the banking data generated by 500 million Europeans is a resource that will attract investment and innovation. In terms of guessing how soon Open Banking could become mainstream, I see a similar timescale as the introduction of websites into retail commerce in the mid-1990s. The Dot.Com boom turned to bust because many people thought that eCommerce would completely revolutionise the retail sector in 3 years. However, everything that was predicted – and more – happened in 6 or 7 years. I see the same dynamic with Open Banking. Less will happen than many people predict in 3 years; a lot more than we can imagine now will happen in 6 or 7 years.
You describe the actions that banks and traditional banking institutions needs to follow to achieve relevance and success going forwards – question will it be banks or tech companies that are able to do this fastest?
I don’t see the race as being a race between banks and tech companies. I see it as race between various possible industry structures that could meet the financial services needs of customers. The race is to become the dominant design, one of which will prevail. A dominant design is the one that wins the allegiance of the marketplace, the one that competitors and innovators must adhere to if they hope to command significant market following. With the emergence of Open Banking, strategic planning in both banks and tech companies has to look at a range of possible outcomes in industry structure. A very thoughtful approach is required and scenario planning techniques are needed to track the relative probabilities of each evolutionary path. Market participants need to invest in stages, aiming to add value at each stage and react to the emerging dominant design. In becoming the dominant design, speed as important as technical elegance. The dominant design does not mean that every competitor will use the same technology but that it defines the expected norms for meeting users’ needs. The dominant design is often not the technologically superior solution. It involves compromises because it is designed to appeal to a broad range of users. I expect some banks and some tech companies to make the right changes and investments at the right time to help establish a dominant design, so they could make very significant competitive gains.
What are you excited about for the future if your suggestions are followed?
I am very excited about the potential for a major industry-wide improvement in lending to small and local businesses in an Open Banking Ecosystem. Small and local businesses are the bedrock of economic and social activity, particularly in non-urban areas. If small and local businesses are thriving, employment levels tend to be very healthy and forced labour migration to cities and other countries is minimised. Some of the socially divisive political populism we have seen recently probably has a strong anti-globalisation sentiment behind it. Small and local businesses don’t attract investment from venture capitalists, they depend on working capital finance and term loans as their only source of external capital to grow. However, getting sufficiently rich data on all aspects of their business performance to inform a good lending decision has historically been very difficult. Some of these small businesses can be in very small market segments, which require extra time and knowledge from a lender. This is why a new combination of Platforms and Apps in an Open Banking Ecosystem could be transformational. Platforms enable innovation on a scale that they cannot do by themselves. Innovation is massively distributed to a diverse pool of outsiders (in the shape of Developers) with deeper expertise in narrow market segments. This combination captures underexploited long-tails of the platform’s core market. Platforms enable Developers to use the platform’s baseline capabilities as a foundation for their own work and the upfront investment for Developers is limited to functionality that their Apps do not share with others. It becomes economically viable to target very small market segments that would otherwise have been difficult to justify targeting. Platforms also provide access to an existing pool of customers, who can more easily find the Developer’s work. In crude terms, various niche small business lenders could emerge (through sourcing banking data on Open Banking Platforms) who could be profitable by just lending to Pharmacies in Munster, or Importers in West Dublin or Farmers in Connacht. If the trends we have seen in non-financial markets apply, we can foresee the Pharmacies, Importers and Farmers uniquely customising their experience of a platform to their idiosyncratic financial needs by mixing-and-matching Apps that augment the utility of a platform. End Users should also benefit from the network effects in competitive platform markets. As more Pharmacies, Importers and Farmers come to the Platforms looking for Apps with credit solutions tailored to their unique regional and industrial characteristics, more lenders will come to the Platforms to design highly customised credit solutions for them. PSD2 gives the Pharmacies, Importers and Farmers control of their cash flow data so that it can become fuel for this new innovation and competition dynamic. This development is very important both economically and socially, so I think it is very exciting.
Where can people buy the book?
Open Banking Strategy Formation is available as both Paperback and Kindle eBook on all Amazon sites and most of the mainstream online bookstores globally