Open finance: a roadmap to success

JULIETTE FOSTER

You are watching the MoneyLIVE summit and we are about to dig into open finance and the steps being taken to ensure that it is a success. It is a big subject, obviously, and one that I don’t really think I can talk about by myself, which is why I am delighted to say I can call on the expertise of two people who know a great deal about this subject.
Now, first up is Hetal Popat. Hetal, it is good to see you. Tell us about yourself, please.

HETAL POPAT

Morning, Juliette.  It is a pleasure to be here with you today.

So I have spent most of my career in commercial banking, frontline, supporting customers with their cash management, lending, asset‑backed funding needs.  But I have spent the last six years now working in open banking, in particular leading the HSBC implementation of, first, UK CMA open banking and then PSD2.  We have now created a global team who look after this service for us in multiple markets and we are live with open banking of various sorts across 19 different countries and growing.  So we have got a very busy 24 months ahead of us now, and more and more markets are following Europe and implementing regulations of this sort and it is an exciting time.

JULIETTE FOSTER

It certainly is.  Well, thank you so much for introducing yourself and also telling us what you do.  Can we also give a big welcome to Rune Mai.  Now where are you joining us from, and tell us about yourself and what you do.

RUNE MAI

Hi everyone and thanks for being here.  So I am sitting in Copenhagen, in my office actually for a change, and I am the CEO and co‑founder of something called Nordic API Gateway.  It is a project I started back in 2010.

In 2012 we started experimenting with building and aggregating financial APIs from banks.  And that involved into Nordic API Gateway in 2018, where we wanted to build an open banking infrastructure that actually works.  It is something that seems a bit corny, but it is actually really hard to build quality into open banking.

So we focus a lot on privacy by design, compliance, security and quality coverage; three things that we feel are sometimes missed in some of the solutions out there, and it is getting more and more important to get these things right, in order to get the consumer adoption going.

So we spent a lot of time in the Nordics building and fleshing out that quality model and today we have above 95% coverage on all of the markets for payments and data and we have more than 40 banks as customers here, prominent names such as Santander, Danske Bank, OP Bank, DNB and also the new bank, Lunar.  And we are starting to roll out the model to the rest of Europe; so we are actually already live in the Baltics, Holland, Poland, UK, Spain, Portugal, and expect to be fully European at the end of this year.

JULIETTE FOSTER

It is interesting, because you can see the advantages to the banks.  But, Hetal, what about the benefits for customers?  Perhaps on their financial well‑being.  How do we experience the uplift?

HETAL POPAT

I don’t think banks benefit, if customers don’t benefit, would be a starting point.  So we are a business like any other and we need to serve our customers in order to have a sustainable business model.

But let’s bring that to life.  So at the moment, I can envisage a customer product that would enable me to link all my long term savings and investments into one place, so I can see an aggregated realtime view.  And then, with some fairly simple algorithms, you could start to provide me with advice on how I might better invest or better use my assets.

Now, that’s very easy to visualise and we even have robo advisers in the market today, but we don’t have access to all those account types.  So it relies on me as a customer in and linking my accounts manually, using screen scraping or updating, via some kind of other statement upload service, my current balances, which is clunky and therefore puts off most customers.

By extending from open banking to open finance, we create the opportunity to have these sorts of services in the market.

Similarly, if we think about the impact of the pandemic, right now I would expect there are many, many businesses across Europe and the world who are thinking about their funding model and how they make sure they have a sustainable balance sheet going forward, so they can ride this through and then progress back towards normality.

Again, you would want to have access to all the different types of asset‑backed loans and other SME lending products that are available, so you could pull that together and have a single view for a customer: here is your total position and here is how you could optimise.

And some of the monetisation rules are quite simple.  You could move to a digital relationship manager type set of services, but you need the data first, and open finance is the key enabler of that data piece and then people can build that service layer on top which actually adds value to customers and I am sure we would have many, many ideas as a commercial bank on what to do with that, for example.

JULIETTE FOSTER

Sure.  Because effectively, what you are referencing there is seamlessness.  It is one of these things that has always been talked about in relation to customers, that they can actually access the accounts if there are other things which they want.  It is a painless experience.  But I guess that it is one thing to actually build these capabilities that customers can use, but it is another to actually get them on board, so that they have the confidence to use them and that is a really big thing to tackle.  And how do you go about confronting that challenge?

HETAL POPAT

So we haven’t found this to be a challenge.  Just to give you examples.  At the moment, we offer automated income and expenditure analysis on lending journeys across loans, mortgages and credit cards, across three different brands in the UK.  And more than half the customers who have the option put in front of them voluntarily choose to use the open banking route to automate the uploading to the bank of their income and expenditure from another bank.  And they choose to do that because they trust HSBC, they know that we will use their data in a way that they have authorised and is safe, and we will look at it thereafter.  They don’t want to go through the manual process of uploading information or keying it in, because it is painful, let’s be fair.  And therefore, there is a win‑win.

And from the bank’s point of view, this is also better quality data, because asking Hetal: “How much do you spend, how much do you earn”, is always subject to me making mistakes or just forgetting things.  Who amongst us really knows how much we spend on our utilities?  It is not the sort of thing you keep in front of your mind all of the time.

Whereas getting that data directly from a source which is reliable means that we know we have got full coverage, therefore you can make appropriate recommendations to a customer.  And over half the customers who have that put in front of them choose to do that.

Similarly with the open payments product, which Rune referred to, we are finding commercial customers are really interested in exploiting the opportunity that open banking offers to collect payments from customer accounts.  So I don’t think the challenge really is about adoption; I think it is really about innovative propositions that really add value to the customer.  If it’s a brand they trust, I think they will follow.

JULIETTE FOSTER

It sounds as if you have actually got it right.  You’ve got them hooked in and they are probably wanting more as well, so they are keeping you on your toes, in terms of what you can provide.

HETAL POPAT

I think it helps being HSBC.  Customers do trust us.

JULIETTE FOSTER

And Hetal, when we talk about these solutions, given the ambitiousness of their scope and what they can potentially deliver, not just to the customer but to the banks themselves, it always seems to stray into this question about partnerships; it is unavoidable.  But how should banks actually approach others within the financial ecosystem, if they are going to make these aspirations a reality; and is there a silver bullet?

HETAL POPAT

I would like Rune’s insight on this.

But I think you actually touched on a very important example there, where what seems like quite a small change in the user experience, not in the functional capability, drove adoption.  So we are still at the point, I think, in all of this where we need to experiment and learn from what our customers do and how they respond.  That drives you towards partnerships.  You need to have an approach which is based around experiment fast and fail fast; which doesn’t necessarily suit a classic large regulated bank’s tech stack, because they are driven more by resilience and stability because when you are operating at high volumes, they are absolutely critical features, particularly when you think about payments.

So certainly at HSBC, everything we have done in the open banking innovation space has been with partners, and very little of it has been built on premises; and that has been by choice, so that we can follow that exact philosophy of experiment, adapt, fail fast if needed and there have been a number of prototypes that we have put out into the market, our public domain, and we have then pulled back; not because we are never going to follow up on those things, but because we learned from customers that actually those may not necessarily be the most important things to prioritise right now.  And the spirit of agile is: put at the top of the list the things the customers value most, right now.  And we really are trying to follow that as a philosophy.

And hopefully some of those features will come back, because this may be where I feel we are really innovative and we create value, but the time may be in the future.

So I think there are a few things that you need as a firm to make that approach work.

Firstly, I think you need a slick onboarding process for fintech partners.  Regulated firms do have relatively cumbersome onboarding and due diligence processes for partnerships.  That is so that we can fulfil our own regulatory obligations.  At HSBC we have simplified those, so that we can work more flexibly with fintechs and we can onboard within a few weeks.  And I think that is good.  Could it be even better?  Possibly.  But I think we are good at that.

I think the second bit that you need to have is digital colleagues who are out there, talent scouting.  There are so many truly innovative FinTechs out there in the market.  You have to have people who almost have that as a full‑time job, looking at what is out there, so you can get those good ideas, bring them back to the product owners and then decide which ones you want to progress with.  I think those two things go together.

And the third piece that comes with that is having a clear idea of what your own strategic priorities are.  So we see other firms invest heavily in personal financial management solutions.  We think that is an area of interest, but it was not the first thing on the list.  For us, lending journeys was a real area that we wanted to improve.  We saw an opportunity, and it fitted with the wider bank strategy in the UK; and indeed in a number of other markets.

JULIETTE FOSTER

Hetal, let me just jump in for one moment, because I know that at the beginning of the question, I know that Rune wanted to respond.  So you have heard Hetal’s feelings about partnerships.  What about yours?  Is that something which, do your views tally with his?

RUNE MAI

Yes, they do, in many ways.  But I actually see this as a continuing thing.  So at one end of the scale you would be looking at how to partner with FinTechs, so partner with banks, depending on who you look at, to provide better services for the banks’ customers.  In the other end, it would be banks looking for distribution in the market.  And I think that is probably going to be the future label of partnering within the banks versus FinTechs.  It is actually all the FinTechs that produce and generate market really fast, they are also a platform for others to engage with.  So if you can be the lending mechanism on the need for certain of these FinTechs or if you can be the provider of the account from where you deal with your payments and so forth, all of a sudden you can stretch your own company goals and have them multiplied by being part of a greater ecosystem than what you can build yourself.

And I think that is what we have seen in most other tech industries happen: that you build APIs in order to become part of a bigger ecosystem that you can build yourself.  And then you start co‑creating the markets together with other players out there, in order to sell more of the stuff that you want to sell, in order to serve more of the customers you want to serve or even to serve non‑customers as well.

JULIETTE FOSTER

Let me jump in for one moment, because I am conscious that time is shrinking; there are still a lot of things I want to squeeze in.  But again, following up on this issue of partnerships, Hetal, have other industries, such as pensions, wealth management, etc, actually seen the value of open finance; and are they fully onboard or is there still more work to do in this area?

HETAL POPAT

I think they are not yet as progressed as the payment‑based firms like credit institutions, banks and other payment firms which were brought into the scope of PSD2.  I don’t think anyone would contest that.

I think there’s lots of activity, whether it is the teaser savings and investments initiative that is in place or the engines dashboard work that is going on in the UK; there’s similar initiatives going on in other markets across Europe.

So I think there is work in flight; but clearly payments started first, thanks to the legal change which prompted that.  But I think that gives us an anchoring point for all those other industries to look at.  It has established what good looks like in many ways and also it has established what not so good looks like, and areas and ways to avoid those pitfalls; and I think that is equally valuable.

JULIETTE FOSTER

Let’s stay with that point, Rune, because we can talk about this, but you do have to ask yourself whether other industries are technologically ready to embrace the initiative because the banks themselves, it took them a number of years to open up their APIs.

RUNE MAI

So I think on one end they are ready, because they are consuming these APIs from the banks to produce advantages in their own fields.  Pension companies are doing top‑up to account payments, so saving a lot of money on the credit card fees or saving a lot of inconvenient bank transferring by going to net banks and stuff.  They are also doing KYC and onboarding more swiftly by using data from accounts.

But on the other hand, whether they picked it up in order to lift the same strategies, we still have to see.  Many of them are still very protective of the data they sit upon, for many reasons, and they still think that they should build customer fences and tighter customer churn‑gates.  But in reality, the realisation is probably going to be the same, whether it is a loan account or an investment account, that it pays off to open up these things because that is the expectations of the customers and the consumers out there.

JULIETTE FOSTER

Right.  And from your perspective, have you seen any emerging partnerships or cross‑industry initiatives that really embrace the concept and which, from your perspective, really do stand as quite impressive?

RUNE MAI

Yes, I have seen it in two areas.

One is banks and accounting.  A lot of partnering happens there right now, also a lot of competition, because all of a sudden the accounting systems can do much of the banking parts and then become the primary interface of the banking customers.  But what we see there is the banks teaming up with accounting system providers, even buying accounting system providers in order to present better solutions for their clients and customers; and on the other hand, we see accounting system providers starting to build banking services.  There was a Danish group that recently lent a huge amount of investment capital to build a new bank for doing exactly this.

Another area that is really, really interesting is retail and banking where in the Nordics, we have seen a couple of partnerships appear where retailers team up with banks to provide SCA less payments done directly from your accounts, which is again something you can do on an agreement based, if you do this smart.  And we see them move really fast on these areas.  So in Norway there is a strong partnership between a lot of banks and retailers, already doing app‑based payments directly from your own account.  So I think we are seeing these areas appear and we probably see more of them in the future, especially centred around payments and the movement of data.

JULIETTE FOSTER

So that is something which presumably you are quite excited about, Hetal?

HETAL POPAT

Yes, I think so.  And I think it points to, looping back to the beginning of the conversation, why this needs to be an industry‑led process.  I think Rune hit it on the head when he said there has to be a value exchange.  PSD2 was really quite unusual in requiring firms to build something and then make it available for free.

And if you want something to be sustainable and to keep growing, at some point there has to be a commercial incentive for all parties to do that and I think PSD2 provides a nice baseline of what free looks like and then as you extend beyond that, in all sorts of different directions, you create opportunities to generate revenue or reduce cost or risk and therefore commercially incentivise the industry to do the right thing.  And that is the only way this is really going to, I think, move forward at the pace that it needs to.

And if I think about that, what that pace looks like at the moment, across Europe we are seeing customer adoption broadly doubling every six to nine months.  That really is a very fast growth rate and that could easily be sustained through ongoing industry innovation by both large institutions and small challenger entities, FinTechs or otherwise.  So we just need to have regulators and governments support us in unblocking areas where we might otherwise hit difficulties.  For example marrying PSD2 and GDPR, it is a complicated legal conversation.  There are things that the government needs to do to help us, but I think industry needs to really drive this, so that our customers get the benefits.