I’m going to talk about the Big Rebundling in Financial Services. When I was researching for this talk, I was talking to a lot of different people about their experience with financial services and with banking. Some of these experiences and conversations really stuck out and I want to share them with you. So the first person I talked to was called Paul and he was really enthusiastic about his banking experience. You don’t hear very often that people are very emotional about their bank. But he was. And he said: My bank really understands me, they really know what I value, and they value the same thing. One thing you need to know about Paul is that he is actually very interested in protecting the climate in the environment and sustainability. And he says his bank is doing something. So for every payment that he makes, they’re planting some trees. And that’s very important to Paul. Other than that, it is a very normal kind of bank. It has a digital mobile banking app, it has credit cards and so forth. So I was researching, why is David so interested, and what is actually this bank that he’s so enthusiastic about. And when I dug deeper, I actually figured out this thing that David liked so much, is actually not a bank. It is a FinTech that offers a mobile banking application. And underneath, there’s a bank, a real bank that he doesn’t even know about. Then I was talking to another person called Judy who is a musician, and she was also very enthusiastic about her bank. She says she has a special bank, just for musicians like her, who like to sing and like to play music. So what does this banking app do? Well, it does a lot of things that normal banking apps do. But it also has features that are very special, and very interesting for musicians. They can look at all their streaming applications where they get their revenue from and it is all in one place. They don’t have to click around lots of different windows and apps to get that, it’s all consolidated in one view that’s relevant for them. Again, on this website of this bank, I saw they are actually not a bank. We are starting to see a pattern here, right? So there are very interesting and meaningful banking experiences for some customers but they’re not provided by banks, banks are only somehow involved underneath. So what is that? That is actually a bundle. It’s a bundle off a FinTech that offers a user interface, a mobile app, an experience for a particular segment in the market, very niche. Plus, there is a financial service offer underneath, there is banking as a service, which is combined together as a bundle. This bundling seems to be really important for this type of offer.
What is bundling?
If you look at bundling, it’s very simple, it’s just assembling, like a package deal out of small pieces. It is like assembling some of the pieces from a Lego box together to build a building. This assembling process is called the bundling and all these pieces kind of fit together. It’s like the FinTech app and the banking service underneath. The FinTech app consists of different pieces. Now, when you say bundling, you also need to look at the inverse, which is unbundling. You take that building or that figure that you have created before, and break it apart into its constituent pieces, right? And once you have all the separate boring pieces, you’re going to reassemble them into something new, you create new packages, therefore Rebundling. You get a new figure, with pieces that used to be at the bottom now being at the top, you can also add new building blocks to get something new out of it. So these concepts of bundling, unbundling and rebundling are actually a cyclical process. It is the same with businesses who are bundling and unbundling, like the FinTech and the underlying financial services provider, with the APIs as Lego blocks and the Lego figure corresponding to the digital product that you’re building. We can also go the other way around, starting with a monolith. You take that monolithic application and decompose it into its AP’s. That’s the unbundling part.
This concept of bundling and unbundling is actually very simple and applies to IT and to businesses. How does it apply to banking? Let’s consider a very simple timeline of past, present and future. Past banking: we have a brick and mortar bank, maybe a direct bank, an online bank or a digital bank, which are all very similar in the respect that they are addressing a mass market, lots of different people because that’s their way of gaining efficiency, and being profitable. They’re bundling those different types of banking products together into one big mass market banking offer. If you have a credit card, maybe you also have a checking account there, and if you have a checking account, maybe you also have a mortgage at the same bank. This is this mass market banking offer concept. Now, this is banking as we know it and that’s why it is so efficient. At present, we now have another movement or another trend going on: Open Banking and Open Finance. If we look at this through the lens of bundling and unbundling, we’re right now at the step where we have the mass market banking offer and we’re actually taking it apart. We’re unbundling this big mass market banking offer into APIs. We’re building APIs for credit cards, for current accounts, for savings accounts. This is what we typically call Open Banking when it’s around the payment area and cash accounts. We don’t stop there either, there are other banking products, such as retirement accounts, trading accounts, mortgages and loans. Thus, if you look at the complete set of APIs that comes out of it, we call this open finance.
Open Banking around the world
The important thing here is that we are doing an unbundling and it is happening all around the world. The details do differ though, from countries to countries, so it’s very hard to keep an overview of where Open Banking is popping up and where it’s going to be implemented right now. You may have different drivers, regulator or market, different legal frameworks, different API specifications, either specified or left open and different industry standards. The scope of Open Banking products is very different as well, some say it is only Open Banking, others say it is Open Finance and that differs from region to region. The timelines are also different for implementation. Because it’s so difficult to have an overview of all these different Open Banking initiatives and because it is important for global banks to know what’s happening around the world, I’ve created this Open Banking map:
This will get you to a resource where you’ll see a global map, you can click on a country, or search for it. You’ll get the information that you need about this country, where they are at, what the timelines are, what the scope is, the API specifications and so forth for about 30 different regions. Open Banking is what’s keeping us busy, and we’re implementing right now.
What comes after Open Banking, or what is going to be the next steps for banks, when this Open Banking is fully implemented, when it unfolds? In order to figure out what’s going to be in the future, we’ll look at the development in the past and try to extrapolate. So in the past, we had banking as we know it and that meant we had a bundling of these different services to gain efficiency. At present, we’re doing an unbundling with Open Banking and open finance. Logically, if we know it is a cyclical process of bundling, and unbundling, and if we put the cyclical process on a timeline, we’ll get the sine wave. So the next step is obvious: we will do a rebundling and that most likely means Banking as a Service. Baas is also called embedded banking. We start with where we have stopped before with Open Banking: a set of APIs from the financial service industry, but we don’t stop there. We will add APIs from other industries to the mix. Australia has CDR where you’re actually, other industries will voluntarily also produce APIs. If you think about Twilio, they’re producing APIs. You can look at logistics, insurance, accounting, business, management, communications, transportation, you’ll have all these different APIs that you can now recombine and rebundle with your Financial Services APIs There are lots of different combinations so you can create a lot of different apps out of these APIs. That’s actually what we call specialised banking offers. So you might ask yourself how many different specialised banking offers can we actually build? Right? There’s so many APIs, so many banking API, so many APIs from other industries? Well, it’s actually a lot of them. Let’s look at some examples: Cathy is very much into yoga and she wants to run her own yoga studio. Problem is, she doesn’t know much about business and about managing her own business and finance. So she has an app which helps her do all of this business management and the connection to her financial services. It manages, for example, the payments, making sure the bills are going out in the right way. She’s actually someone who can profit from this new recombination of financial services offers with an integration of managing her own yoga studio. Or someone else,Mike for example, who is a frequent flyer, doesn’t have a lot of time, but he still wants to stay on top of his finances. He’s actually using an app from his airline. And his airline shows him all his bank accounts in one app so he doesn’t need to log in to all these different apps and get the information consolidated, he doesn’t have time for that. Rebundling is based on customer-centric thinking around many different customer personas and it leads to very niche products, but also very meaningful products for those niches.
How many rebundling opportunities are there and are they profitable?
On the one hand, you have the mass market banking offers, which are very popular and have a lot of users for very few mass market banking offers. On the other hand, you have loads of rebundled, meaningful, personalised financial service offers with so many combinations fitting the characteristic of few users, those we call niche markets. And the distribution that comes out of this is actually called the Long Tail distribution. So what we’re adding to the mass market is this really long tail of a lot of different recombinations and very special targeted banking offers. The mass market products that banks have built so far are good and very efficient as they only need one investment before being rolled out to a large install base. The question is, is it very efficient to also look at the niches? It is true that a single niche may not be very profitable for a bank, it’s just a few people who would be interested in this, out of all the people who are at the bank, only a handful are musicians for example. You therefore need a very efficient way to cover a broad range of these niches, so instead of targeting one, you target a lot of them at the same time. How do you do this? How do you efficiently use the long tail? How do you target the long tail efficiently? Well, you’re going to leverage partners, and you’re going to leverage developers out there. You won’t build all of these niche products yourself, you’ll build a set of APIs, a portal and a partnering process, which you’ll then distribute to the developers willing to invest and take the risk in building those targeted niche products. That way, it can be efficient for banks to also address those niche markets which, by adding up, will become something substantial.
How does the value chain look like?
For the mass market, the value chain starts with the bank who has a lot of end user data. The bank exposes it through a single banks app, their mass market banking offer. Value now flows from the bank directly to the end user and the bank typically monetizes this value via fees. This contrasts with the value chain that you have with the long tail. In the long tail, you start with the bank as an API provider, which still has the end user data at the bank, but now, it is going to expose APIs, instead of the app directly. And those APIs are exposed, not to the end users, but to the FinTech, to the API consumers, all these developers and partners that we’ve seen before. They’re going to build a very specialised targeted app for a few end users. Therefore the value flows from the bank, to the FinTech, to the end user. Monetization opportunities are now from the end user to the FinTech and from the FinTech to the bank. In fact, when you look at the value chain, it actually looks the same whether you have banking as a service, or whether you have Open Banking, we have kind of the same value chain. However, there’s a certain type of nuance that’s different.
API Provider Roles
Let’s look at this nuance now, which is in the API provider roles. There are two API provider roles, one for the Open Banking play, and one for the banking as source play. If we look at the API provider in the Open Banking play, where the API provider is an ecosystem partner to the API consumer, then the end user actually interacts with both the API consumer and the API provider. The end user knows his bank and he also knows the API consumer, the FinTech that provides the front end. In this case, the bank and the FinTech are going to market together to the joint end user.
In BaaS, things are a little bit different. The API provider is only a supplier in Banking as a Service and the end user primarily only interacts with the API consumer. People don’t even know there’s another bank underneath, they are only thinking about the FinTech in front. This means the end user interaction is only with the FinTech that uses the APIs of the bank.
Rebundling changes competition
When we addressed the mass market, we saw that banks know each other, all the competitors know each other and they all have the same business model, they address the same mass market and they are in the same industry. The way things are working is predictable. However, if we open up this game, there can be competition from other industries, which may have an unfair advantage. We call this new competition “the longtail play lane changers”. Banks are in this one lane and the other industries are coming in from the other lanes and moving into what is traditionally offered by banks. They will create those personalised experiences through rebundling and they’ll bring in new business models that haven’t been seen there before. So the Long Tail market is making the financial industry more colourful and interesting.
Q: There will be a major question of trust with this bundling and re bundling in terms of the data and where that data flows, and who owns that data and how you’re giving it to other people. Can you comment on that and what you’ve seen in terms of trends in the industry around that?
A: Trust is very important and it kind of works like a currency, you need to earn trust. If we take the example of the airline having all your data and sharing it with the bank, people are already trusting the airline with their lives. They trust the plane works and won’t fall out of the sky, they trust the pilots are doing their best and so forth. I also think established brands, like airlines for example, are not seen as a FinTech. They can become a FinTech by repurposing that trust that customers already have in that brand and kind of move it over from one industry to the other. They are a trusted partner within the transportation industry and they’re moving that trust that takes the customer base with it into the financial services space. That’s probably one of the easier ways because you leverage trust you already have. It is much harder to build that trust when you’re FinTech starting out with zero.
Q: Do you find that it depends on the generations as well in terms of the younger generation being less concerned about trust?
A: It is probably a trade-off. You have trust, but you also have convenience and sometimes, they go against each other. The younger generation may be ready to take a little bit more risk on the trust side because they like the convenience. Maybe, this generation does another trade-off calculation than the previous generation. Trust is important to all of them but they balance it in different ways.
Q: Speed is so important. So, from what you’ve seen in the people that are successful in this bundling, and unbundling, How do they achieve the speed that’s required to be able to get out to market?
A: When you do a rebundling, you take pieces that are already there, they’re tested, they have worked, and you assemble something from it. This is a lot faster than building everything from scratch. If you need to build a core banking system from scratch and have to connect to all the other telecom providers, it takes a very long time and it is very hard. But if you can take building blocks that are already there, kind of pre-assembled and tested, throw them together and orchestrate them just in the right way, then your time to market will be a lot faster than anyone who will do that from scratch.
Q: Do you think that the vertically integrated banks will start to unbundle themselves in order to compete?
A: That’s going to be the very interesting dynamic that could play out. I think there are already some signs that something like that might happen. And again, if you think about the Open Banking world map, you can say: “okay, a bank has maybe a market in this region, and maybe they’re doing this unbundling, or they’re opening up in terms of Banking as a Service in another region where they don’t compete with their own digital solutions”. Let’s say a bank has a whole market in Country X, then they’re going to do an offer of Banking as a Service in country Y so they don’t compete against their own offer in the new market.