The banking industry is going through an era of seismic change as new technology, shifting consumer expectations and regulatory initiatives to spur competition completely transform the financial services landscape. Speaking on a recent FinTech Tour webinar, 10x Banking’s Chief Marketing Officer Lucy Heavens joined Banque Saudi Fransi’s digital team including Grant Niven, Head of Group Digital, Ben Lloyd, Head of Digital Product, Milon Veasey, Head of Open Banking and Mike Cunningham, Chief Strategy & Digital Officer, to talk about the digital banking models that could reshape how people bank in the future.
The future of banking is invisible, says Heavens. Consumers want a frictionless, seamless experience when making payments or buying goods. In the past, if you wanted to buy a new TV you may have had to go away and apply for a loan from your bank to finance it—now, everything is embedded within the same process, so the banking part of it is invisible, Heavens says. Lloyd calls this trend ‘bed-to-bed banking’. “From the moment you wake up, your watch knows your heart rate, it knows what time you eat, it knows what time you drive to work, knows what time you take lunch, what time you pick the children up, have dinner, go shopping, across the whole value chain of your life between the moments you wake up and go to sleep, there will be a silent banking partner providing you with all your transactional and banking services throughout the day,” he says. In other words, in the future banks are going to act as utilities that function behind the scenes. “That’s where consumers are coming in and we’re seeing this massive shift of people just wanting access to services when they want them and move away from some of the traditional boundaries that we’ve had,” says Niven.
Open banking and banking-as-a-service (BaaS) both rely on APIs but it is important to understand the distinction between the two, says Heavens. “Banking-as-a-service is a model that falls under the umbrella of open banking, so it’s the set of services that requires a banking license to underpin them and it’s how banks can provide their license as a service to non-regulated entities, like retailers for example, so brands can serve their customers better with the things they want and need,” she says. To provide banking-as-a-service, you need three things: a banking license that you are happy to effectively loan out, technology to facilitate the service and a suite of financial services that your banking-as-a-service clients can sell to their customers. Open banking, meanwhile, is the framework that makes all of that possible. “The main difference between open banking and banking-as-a-service centres around how those APIs are used—banking-as-a-service uses APIs to access banking functionality, whereas open banking uses APIs to access consumer data,” says Heavens.
One challenge incumbent banks face is that regulatory constraints often mean they can’t move as fast as they would like when innovating with new products. “The thing that differentiates lots of FinTech’s from us is their ability to execute at speed,” says Lloyd. Forward-thinking regulators can potentially help banks become more nimble. In Saudi Arabia, for example, the regulator is rolling out a new supervision programme that enables banks to innovate more rapidly by submitting new product approvals digitally, which will then be reviewed by AI. “This means we will be back at the table when it comes to speed of innovation because we’re going to close the length of the feedback loop with the regulator,” says Lloyd. Even so, the pace of innovation may still be sluggish compared to FinTech’s. “While the banks are able to move more quickly, from a FinTech perspective it’s still relatively slow, so having an expectation around what that real timeline could look like is super important,” says Veasey. Faster isn’t always better either, adds Cunningham. “If you’re going to reinvent finance and be disruptive, it takes time -you don’t need to rush this, it’s really important to get there with the best stuff rather than just be first to market with stuff.”
While the competitive environment for banks is as tough as it has ever been, the opportunity for partnerships has also never been greater. Heavens says banks could gain a competitive advantage by partnering with FinTech’s to combine those businesses’ non-banking data with open banking data to create more personalized services for customers. “From an ecosystem point of view we’re looking to see more partnerships this year to provide end-to-end solutions,” she says. Some high-profile banking-as-a-service partnerships are already in operation. Buy-now-pay-later FinTech Afterpay, for instance, has partnered with Australian bank Westpac to offer banking services without having to go through the regulatory headache of applying for their own banking license. “For the first time you have a 100-year-old legacy bank partnering with a FinTech to offer loans - part of the core business of Westpac is providing or having asset products on their balance sheet and now they’ve completely outsourced that to one of the biggest FinTech’s in the southern hemisphere,” says Lloyd.
The rise of decentralized finance (De-Fi) has the potential to radically disrupt how people access financial services in the future. “At the moment we generally have a centralized finance model where you have banks, insurance companies, brokers,” whereas decentralized finance “puts individuals at the centre and creates a peer-to-peer system on an open source blockchain like Ethereum which is permissionless and transparent,” says Lloyd. Some market participants are already creating decentralized apps that are replacing banking and insurance ecosystems, he says. All of this is being made possible by the boom in decentralized digital currencies, notably stable coins that are pegged to the US dollar such as the Dai or USDC coin. “What we’re left with is a more efficient, more accessible financial system—the banking concepts will all stay the same, but what’s changing is how those banking transactions are carried out and who has control over them,” says Lloyd.
To learn more about the future of digital banking, watch the full one-hour web discussion here.