By: Mario Ernst
Who are these innovative new entrants?
The new entrants are diverse, ranging from a handful of tech-savvy young people who want to develop platforms to serve the financial needs of individuals and businesses, to giant technology conglomerates that have been disrupting across industries for many years.
It is difficult to categorise them exactly, because there is a grey area that prevents precision in this regard, so I will make a standard categorisation that is normally used in the industry, which despite not being exact and having points that can be discussed, serves to order the ideas and understand the magnitude of the new entrants:
- B2C Fintechs and Insurtechs: These are technology-based companies that develop a digital value proposition to address some vertical of financial services for individuals or companies. Here we have from some focused on factoring, payments, credit, insurance (as is the case of iúnigo in Argentina), etc., to crowdfunding platforms or person-to-person loans, as is the case of Lending Club in the USA or Redcapital in Chile.
- Neobanks: These are unregulated digital banks, which are normally based on a core product and whose offer is growing as time goes by, with certain limitations in some countries where regulation prevents them from intermediating funds (i.e. capturing money from savers to lend it as credit to other debtors). Here we have cases such as Revolut in the UK or BNext in Spain.
- Challenger Banks: These are regulated digital banks, i.e. they have a banking licence, which means they can offer all the usual products offered by traditional financial institutions. Here we have cases such as the now defunct Wilobank in Argentina (which was the first digital bank in Argentina, later acquired by Ualá) or the successful Nubank in Brazil.
- Bigtechs: These are consolidated technology giants, which are among the largest companies in the world, have large capital flows to invest and strong data exploitation capabilities. They develop financial services linked to their ecosystems. Here we have the case of Apple and Tencent, which, although their origin is in the USA and China, are global companies that are present all over the world.
The important thing is to know how to take advantage of Open Finance to create new digital business models that allow the financial institution not only to comply with regulation and defend itself against new entrants, but also to grow in terms of customers and make its portfolio profitable.
What capabilities does the traditional financial industry need to develop to create value in the Open Finance context?
To take on the «Open Finance» challenge, traditional financial organisations will have to develop 2 core capabilities that will involve changes in processes, structure, technology, culture and, above all, «strategy»:
- Open Innovation with Startups, Insurtechs, Fintechs, technology providers and non-financial companies: Establish formal and systematic mechanisms for engaging with the environment, identifying internal challenges that can be solved with external solutions, scouting or a process of searching for digital partners that have the capacity to develop things together and prototyping solutions or new joint models that provide value to the customers and companies involved.The key will be the speed and security in which experiments are carried out, which is why having a sandbox to experiment safely without using real data or integrating productive systems will be fundamental. The main challenge here is to align the entire organisation in this experimental logic, as the traditional BackOffice or business support areas will often not understand this new form of experimentation and will unnecessarily delay time to market by using traditional processes and paradigms in this exploration of the future.
- Open Architecture: Having a technological platform that allows external solutions to be integrated into the Core systems, satellites and Legacys of financial institutions and to go into production in order to quickly scale the solutions that have been validated is fundamental.As well as making digital assets available to the market via APIs as a white label, it will be key to realise digital models in Open Finance logic. Speed of implementation and simplicity will be relevant, so having an Integration Hub will be mandatory given the diversity of systems involved. The challenge here is to have a technological infrastructure that allows the integrations to be carried out with the least possible effort from the technology areas, as each experiment, pilot, proof of concept or MVP that is to be carried out depends on the BAU (business as Usual) technology areas, In most companies, it will enter a quicksand that will slow down the efforts to innovate and will slow down market launches, because these areas normally have an established roadmap, with committed resources and a very large and delayed backlog, making it difficult for them to collaborate with innovation.
What is the outlook for the future?
Open Finance is becoming the new industry standard and brings many opportunities for organisations that take advantage of it quickly. In a short time it will no longer be a differentiator, so now is the time to step up the pace and create value for customers, develop capabilities to compete with new entrants and incorporate advantages over current competitors that will lose relevance over time.
At Evolution Labs (www.evolution-labs.co.uk), we work with leading Latin American financial institutions to design and implement new digital businesses to create value in the financial industry. Take advantage of being a leader in the new «Open» paradigm.