The Connector Podcast - Open Banking Evolution: Navigating Future Payment Systems with Jan Willem...

Welcome to the Connector Podcast, an ongoing conversation connecting fintechs, banks, and regulators worldwide. Join CEO and founder Koen Vanderhoydonk as you learn more about the latest available trends and solutions in the markets.

Welcome to the Connector Podcast, and today I've got Jan Willem with me from Sopra Banking, and You bring some special news. You have been working on a white paper, is that right?

Yeah, that's right, Koen. And thank you for having me. I'm very pleased to be in your podcast.

Excellent. Can you tell us a little bit more about the white paper and maybe also about yourself?

Yeah, of course. Maybe to start with myself, Jaminus Stoffer. I'm Business Development Manager for the Benelux and the Nordics for Sopra Banking Software. I'm mainly focused on pre-sales activities for all the digital and open banking solutions that we have. And we try every now and then to also share some insights with the market. And this time, I think the idea started to— because what we saw is that some companies in some countries showed some interest in open banking payments because they wanted to reduce, for example, the dependency on the card payment rails from Mastercard, Visa. And I started to think about, okay, what's actually behind everything? So I was familiar with open banking payments, but not so much with all the things behind the card payments, the traditional card payments. So that's where the idea originated. So yeah, that's a bit more about myself and how it all started.

Okay, thank you. And I guess everyone is always a bit confused about open banking, open finance, open data, and now you even bring open payments. So what is the differences between all of those animals?

Yeah, so, so it's always— it's a good question, and I think it can indeed be confusing, all the terminology. So what we see is, if we look at, if we look at open banking— so we define open banking as the secure exchange of data and services between a financial institution, typically a bank, and a third-party provider, which is typically, or in many cases, a startup, with the main goal to provide value-added service to the marketplace. Mm-hmm. To consumers, to merchants, and everything is done via APIs. And it all is enabled by the PSD2 regulation from the European Commission back in 2018. They forced banks to basically expose 2 kinds of APIs. So on the one hand, it's account information services to basically exchange data with a regulated TPP. And on the other hand, it's payment initiation services to initiate payments. Via, for example, a third-party provider. And if you look at open banking payments, so if you look at the open banking payments, it's specifically about that PIS, so the Payment Initiation API. All the open banking payments are initiated via that payment initiation API that banks are forced to expose since 2018. And then you also had a question. Yeah. What is open finance and open data and how does it relate? So basically you can summarize that it all is building on the same principles of data sharing.

Mm-hmm.

However, today open banking is limited to payments. So PSD2 is regulating payments and the scope is not broader than payments yet. However, if we talk about open banking in full force, it's about all, let's say, the banking products. So it's not only payments, but it's also savings, it's investments, it is loans. And if you take it one step further, people now also start to talk about open finance, especially with the upcoming FIDA regulation.

Yeah, yeah, yeah.

That's being discussed. Or the FinCEN final one. Yeah, maybe, yeah. But then it's basically, again, based on the same principles of data sharing, but then all, um, all other non-banking financial institutions are included as well. So then think of insurance companies, tech companies, pension companies. And, and open data, it's, it's, it's, it's even broader. So then it's not only applicable anymore to the, to the financial institutions, but it's also applicable to, to, let's say, telecom providers, energy providers, basically all the, the companies out there in the economy. So that's what we expect at least from the European Commission to come if you look at their data strategy.

And you quote that 76% of banks are driven towards a collaborative business model. What does that mean?

Yeah, so what we indeed see is that 76% of the banks feel driven towards more collaborative business models. And I think one big reason is that As of 2018, banks were required to expose APIs via a developer portal. So they are kind of forced. So the first mindset or the first stage of the banks that they were in was a stage of compliancy. So they wanted to be only one thing that's compliant. And then they thought, okay, but okay, if we have these 2 APIs out there, that can be used by all kinds of TPPs? What can we do more with this kind of environment that we use to expose these APIs? And what you see today is that I think at least the bigger banks in the Netherlands, you have some good examples from, for example, Rabobank, ABN AMRO Bank, ING. They are starting to use that portal to expose more APIs beyond what is regulated. And that's basically the domain of embedded finance, where you can start off, you can start thinking of how could I as a bank collaborate with third parties that can be also marketplaces to embed my financial services into their online environments to sell our products and services. So, so that's, that's, that's, that's all happening today. So And that makes, I think, it makes it a very interesting topic to discuss and to deep dive in.

You mentioned one way, which is embedded finance, that's finance that's going out. What about beyond banking to bring things back in? Is that also sort of triggered by this whole open banking space?

Yeah, that's a very good question. So what you see is that I think you can call it the marketplace model. So it's a model where you as a bank decide to consume the APIs of third parties to offer their products and their services on your platform. If you look at the banks, I think Revolut is a good example. They combine multiple different financial products also from third parties on their platform, but it also sometimes indeed goes beyond. So you see, I think in Belgium, you have KBC Bank. And they also offer the opportunity to, to buy your cinema parking tickets via the platform, um, to book a shared bike or a shared car. So it can indeed go, go beyond depending on, on the needs of, of your banking customers. You, you can indeed also start to think about that direction. So that's, that's indeed true.

So you, you quoted now 2 strategies, uh, embedded finance beyond banking. But at the same time, within the report, you mentioned a staggering 130 million open banking users globally. Are these the only strategies that banks can use, or are there any other strategies to be still told?

I think if you look at the— if we summarize on the business models for open banking, then we, we may— we often mention 3 models. So there's one model, that's, that's what the one we discussed. So that's basically the distribution model or the embedded finance model, where you expose your APIs to sell your products, your services, or the banking products and banking services, uh, via a third-party platform.

Yeah.

So you will ensure, you will ensure that you are in the place that your customer wants you to be at that specific moment. So that's, that's, that's quite interesting. The other one is the marketplace model. We also touched upon that one. Um, and I think there is one more left that you can discuss. That's the banking as a service model, where you basically, um, white label your, your technology stack. You also provide, um, uh, support, uh, let's say, uh, customer support, uh, back office support. To allow or enable a non-bank to be like a bank. And I think if you look at Apple, uh, Apple is, is, is— I think it's today it's heavily debated, but they, they are still in contract with, uh, uh, with, with Goldman. Um, but, but they offer many, many financial services today, uh, in, uh, in, uh, yeah, following the banking as a service model.

If we look at the BaS, banking as a service, we see a lot of new players in the market that come and expose, also partially triggered by very often the e-money license. But what do you see as the traditional role for a bank within this whole movement of BaS?

Yeah, the traditional role of a bank is that they leverage their their license, which is quite complex to, to, uh, yeah, basically to, to apply for and also to maintain. Um, they bring in their products and they're bringing also their technology stack. Um, and, and so, so all the, the things they, they heavily invested in over the last couple of years and that are quite hard to apply for and maintain. That's something they bring in. So basically they take all the trouble away from the non-bank that wants to act like a bank.

Maybe that's leading me to my already next last question of this podcast. You're almost saying that banks need to scale, need to globalize. But when looking at open banking in general, it's not always the same. Open banking does not mean the same in Europe than it does in Asia or it does in the US. What would be your take on that?

Yeah, there are, uh, I think that the, the conceptually, um, it's, it's the topic is the same. However, how, how, how different regions, um, uh, basically apply it is, is different. And I think there's even a difference between how the UK is, is handling open banking or stimulating open banking, and also mainland Europe is stimulating open banking. Uh, and there is indeed a huge difference between also how the US is, is trying to, uh, to start open banking initiatives. So if you look on, on a global level, um, you, you can basically ask yourself 2 questions. Uh, what, what would be better for, for customer adoption? Is it the— is it a regulatory-driven approach, or is the market-driven approach? And what we have seen today, if you look at the numbers, is that in Europe, open banking took off because we had a regulatory-driven approach. Banks were forced to expose these APIs so other companies could innovate on top of that. And if you look, for example, at— although it's not perfect yet, In Europe, for sure, and hopefully PS3 will eventually indeed improve. If you look at the US, it's way more market-driven. There is no regulator forcing banks to expose the APIs, so the open banking movement is much more driven by the big tech companies like Google, Facebook, Amazon, and it's not taking off as fast as here, although they are carefully watching each other in that market. And I think if you look, for example, at one of the features of open banking, if you look at payments, payment initiation via open banking APIs, that might be a driver for adoption in the US. Why? I mean, if you look at credit card fees, the fees that merchants are paying for credit card transactions, um, yeah, it ranges between I think 1.5% and 3.5%. Wow. So it's quite expensive. So if you have an alternative option, so alternative payment rails, uh, combining, um, or using open banking, leverage open banking, there can be a big cost advantage for merchants to To explore that direction, so I yeah, I think the U.S. market is very interesting to watch, but they are not as far with open banking as we are here in Europe today.

Well, we are at the end of our podcast, and it I like those podcasts where I'm actually sitting on millions of questions, but I'm glad there is a white paper. So Jan Willem, tell us where can they find the white paper?

They can go to Sherpa Banking Software. They go to insights, and then you will find all the white papers that we that we publish.

Well, thank you very much. Thank you very much for having you. Thank you also to the audience, and please stay tuned. More fintech and finance news coming from this podcast. Thank you very much.

Thank you, Koen, for having me.

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