New research identifies the transformation underway in the open corporate banking industry writes Dan Choi
The banking industry is evolving to meet corporate treasury demands for digital connectivity. A key enabler of this new paradigm is “open banking” or API banking, which can be defined as the use of Application Programming Interfaces (APIs) to connect third parties to financial service providers. Over the past year, Starfish Digital has interviewed over 50 leaders at the world’s top tier and leading ASEAN regional banks. The resulting research identifies five key trends that will define the open corporate banking industry in the coming years.
Recent research by PWC shows that 42% of financial institutions have some form of partnership relationship with a fintech. Similarly, Allied Market Research reports that the open banking economy is projected to grow at a 24.4% Compound Annual Growth Rate (CAGR) between now and 2026. The report further states that the challenges facing banks to remain competitive and keep pace in an increasingly digital marketplace cannot be understated, and that collaborations between banks and fintechs are set to increase.
Open Banking has created unique market opportunities for forward-thinking financial institutions and fintechs to establish new markets, develop innovative financial opportunities, and transform the corporate banking industry. Here are the top five trends open corporate banking trends:
One - Banks will prioritise digital capabilities and data
Banks are positioned as the gatekeepers of the most important asset in open banking, data. As open banking matures, banks are identifying ways to monetise digital interactions, and expand their capabilities. To maintain their central position as the world’s financial processing centres, they must continue investing in their digital core, automation, data management and analytics capabilities. Banks need to:
Adopt technologies such as Artificial Intelligence (AI) to facilitate the automation of processes and analyse data for customer insights
Expand and improve API products and services to ensure robust, secure, and wide range of available digital products and services.
Two - Bank partnerships with fintechs will increase
Today, many banks view fintechs as ecosystem competitors rather than partners. As open banking grows in adoption, increased customer demand for unique customised offerings will require banks to contract with fintechs in order to extend their services.
Fintechs will operate as ecosystem partners focused on better customer experiences and delivering distinctive service offerings
Fintechs and banks will work together to make banking infrastructure more accessible while managing the security threats and data-privacy concerns.
Fintechs will enable banks to extend their infrastructure, accelerate adoption of digital financial products, create entirely new services, and further enhance open banking capabilities to serve more customer segments.
Instead of competing directly against fintechs and third-party institutions, corporate banks can leverage APIs to partner with them, remaining competitive in the rapidly evolving industry.
Three - Global interoperability will improve
Open corporate banking standards are evolving and there is increasing commonality across jurisdictions, but differences remain. In the European Union, United Kingdom, Australia, New Zealand, Hong Kong, South Korea, and India, governments have relied on regulations to mandate open banking capabilities. In the United States and China, they have relied on market forces with open banking participation becoming a necessity. Meanwhile, other jurisdictions such as Singapore uses a blend of the two models. As open banking matures, expect to see:
Increased regulations and a market driven need for coherent financial services despite the individual components being technically different and managed by diverse organisations
Natural convergence of open banking API standards as data exchange and interoperability become the norm.
Regulators looking at the future of open banking are already considering cross-border interchanges between marketplaces in a drive to promote international trade and improve customer experiences.
Four - Business adoption of open banking will increase
Adoption of open banking by medium to large corporations has lagged consumer adoption. With Covid-19, many businesses are struggling. This has created a need for banks and fintechs to address the business pain points by offering company specific digital services.
Firms struggle with accessing open corporate banking services because:
Inconsistent open banking capabilities persist
Challenges of digital integration remain
Only a limited number of corporate banking APIs are offered
Existing technical debt and prioritisation of budgets is an ongoing challenge
Technology expertise may be sub-optimal.
A key challenge for many businesses is that most financial institutions provide open banking access but make it their responsibility to invest in the digital capabilities to consume those services. Currently, less than 30% of open banking APIs are applicable for corporate customers.
Five - Expansion of Banking-as-a-Service platforms
Banking as a Service (BaaS) describes a model in which licensed banks integrate their digital banking services directly into the products of other non-bank businesses. This way, a non-bank business, such as your airline, can offer its customers digital banking services such as mobile bank accounts, debit cards, loans, and payment services, without needing to acquire a banking licence of their own. Importantly, new products and services can be rapidly created and deployed continually extending BaaS capabilities.
The BaaS industry has grown rapidly and is predicted to become a US$7.2 trillion industry by 2030. Leading banks including BBVA, and JPMorgan Chase have invested significantly, and Goldman Sachs has announced its own new BaaS portal for developers. Big players like Solaris bank and Mambu have completed significant funding rounds, with several new competitors on the horizon. By using APIs, complete banking services can now be offered “out of the box.”
Incumbent banks will continue to operate as the processing centres exposing APIs to enable neo-banks and fintechs to offer full services without having to build the full banking back-end capabilities.
Open banking is maturing rapidly but faces key hurdles and crossroads. Customer demand, regulatory requirements and the desire of banks and other providers to exploit market growth opportunities are behind the trends. Challenges in making open banking a true digital open data exchange with a robust ecosystem. But the demand from modern CFOs for corporate banking products to be provided digitally is increasing as they look to receive the same services from their corporate banking partner as they do from retail banks.
About the author
Dan Choi is the Chief Technology Officer, Starfish Digital and member of the executive leadership team. Prior to Starfish Digital, Dan was Managing Director and Senior Management Consultant at Luxoft with over 30 years of financial service experience. He has served at the Managing Director level at UBS, Credit Suisse, and Bank of America with senior positions at Merrill Lynch. His leadership responsibilities in financial service technology include mergers and acquisitions, technology production, large-scale global program change and delivery. Dan graduated from Vassar College with a BA (Hons.) in Asian Studies.