The introduction of new regulations for payment services and payment service providers throughout the European Union has been designed to expand the possibility for competition in the payments industry, including for non-banks, and to create a level playing field by harmonising consumer rights and obligations for payment providers.
Wired for sound
In assessing how much change has really happened in the financial industry so far, it can be interesting to look at developments using the music industry perspective as an example. Twenty years ago, we consumed music in a very different way. Audio was recorded on CDs and tapes and we used devices such as Walkmans to enable us to listen to the songs.
I remember going into a music store to browse the latest albums, buying a CD and then listening to it on my chosen device, repeating the songs I liked the best. Ten years later streaming services arrived and the technology to be able to stream music had developed so much that I could listen to really good quality music anywhere. That changed the whole music industry for both consumers and producers, and new technology enabled a different sort of user experience.
No longer were we limited by the album format, we could now consume music instantly and flexibly in a personalised way with different song lists to meet our individual tastes. Nowadays, 80% of users listening to music use streaming services and the demand and consumption of music is at an all-time high. The variety and selection of available music is also higher than ever, creating a positive long tail of choice as a result of this new digital offering.
Streaming services changed the whole music industry for both consumers and producers, and new technology enabled a different sort of user experience.
User experience driving change
All of these radical changes happened in the music industry without the need for a “music services directive”. Whilst technology enabled a new user experience, it was the drive for better user experiences in themselves that really proved to be the catalyst for change.
The rules of the game in the financial industry and many other industries are also changing. Just like in the music industry, there has been a notable power shift from producers to consumers. The competitive landscape is changing as consumers are demanding transparency, user friendliness and instant solutions.
From an initial dynamic of bank versus bank and later bank versus fintech, we are now experiencing a far greater spirit of collaboration between fintechs and banks. We are also seeing larger banks transitioning towards becoming platform players and Bigtechs entering into financial services. In this dynamic and changing environment, it can of course be challenging to be a bank that has been around for many years and is traditionally used to longer development times and higher costs for new solutions when compared to fintechs.
From an initial dynamic of bank versus bank and later bank versus fintech, we are now experiencing a far greater spirit of collaboration between fintechs and banks.
Platforms creating advantages
One positive aspect of PSD2 is that banks have been forced to build open API (Application Programme Interface) platforms. That investment in itself will become one of the most important assets banks have to compete with moving forward. Platforms that have been built in order to comply with PSD2 regulations will be able to provide competitive leverage.
However, even in a digital financial ecosystem powered by APIs, it is not all about technology, but the services built on top of the technology. APIs allow the same technology and codes to be reused many times, enabling a much simpler and faster integration and co-creation process with selected partners. That really is the key and creates the setting where APIs and platforms become a good opportunity for developing solutions.
It’s of course important to understand the challenges when analysing what it takes to succeed as a platform player. Building a platform is a complex process as the platform has to cater for the needs of both producers and consumers. It is undoubtedly a challenging proposition for a fintech to build a platform from scratch. Banks also face many challenges, even though the platform itself might not be developed entirely from scratch, the organisation will need to move from relying on one business model towards a platform setup. One way of looking at platforms is to decouple them from the traditional bank business model and see them as a portfolio of potential revenue generators with each one offering a different way of doing business.
Building a platform is a complex process as the platform has to cater for the needs of both producers and consumers.
Partner capability will be a key competitive differentiator
The competitive landscape for the financial industry is shifting regardless of whether banks do something about it or not. A key differentiator between banks, fintechs, Bigtechs and large corporates is the ability to be able to develop partnerships, as no single player will be able to do everything in isolation. This partnership aspect is a key difference from the previous norm in the financial industry and is a very important success factor.
At Nordea, we are challenged by our corporate customers and the challenges they face in their own industries. A partnership approach creates the potential for us to develop more tailored services to meet their needs. In order to prioritise which partnerships to pursue, it’s important to be proactive and drive the collaborative agenda from the needs of the customer and your own organisation. Starting with the problem to be solved and doing your homework in terms of proactively evaluating and selecting partners suitable to your problem is much more effective than just waiting for potential partners to knock on your door. The goal is to uncover the customer needs that you are not able to serve on your own and understand how you can create the required offering together with a partner.
A successful partnership between a bank and a fintech is also about finding a common ground in terms of maturity. For the fintech, this means reaching the ‘scale up’ stage in their development. For the bank, it’s about reaching the stage of readiness to explore new opportunities for products and customer groups. For this reason, it can often be beneficial for banks to find fintechs that already have some experience of collaborating with banks.
At Nordea we are attempting to commercialise Open Banking by facilitating a rapid change process for decoupling front end and back end functions with the use of APIs.
At Nordea we are attempting to commercialise Open Banking by facilitating a rapid change process for decoupling front end and back end functions with the use of APIs. Establishing a first-class developer experience on our Open Banking platform and in our developer sandbox is a key success factor. It’s all about evolving a culture of innovation and a willingness to co-create with both fintechs and our corporate customers.
On the producer side of the platform, Nordea has managed to gather a large community of developers. Already one and a half years ago there were more than 2,000 developers registered on our developer site. At that time, they were mostly individuals, small tech companies and consultants and they were not very active on the platform. Now we see a much higher level of maturity on the platform with more than 5,000 registered users of which 60% are large corporates, ERP providers, mature fintechs and other banks.
Of course, in a network and on a platform, the real value lies in the number of users and the way they interact with each other. The expansion and maturation in our developer community in only one and a half years is a good indicator that our expectations for the development of Open Banking and in platform building are being met.
It’s already clear that the opportunity for and maturity of Open Banking is developing fast and mainly outside of regulations. These changes are enabled as a result of technology and driven by customer demands for improved user experiences.
Today’s business professionals want to consume financial services in their own choice of channel and in a much more seamless and smooth way, just like in the way there has been a shift in music consumption. By staying really close to our corporate customers and prioritising their most important challenges, we are identifying the areas where we want to explore commercial opportunities. Open APIs, I would call them services, can meet the great need of our customers for deeper integration, instant communication and supporting their digitalised processes.