Open Banking is the disruptive concept within financial services triggered by regulatory initiatives such as PSD2 in the EU and the CMA Oder in the UK. Many other country jurisdictions are now following with similar initiatives. It is almost impossible to discuss Open Banking without mention of the numerous ‘platforms’ that are appearing and which are offering services in this space.
So, if Open Banking can be considered as a platform, how does it compare to other more obvious platforms such as Uber, Spotify and Amazon.
This article is a brief thought piece on the topic of ‘Open Banking as a platform’. The fundamental platform models for open banking are illustrated, accommodating both supply side (‘comply’) and demand side (‘compete’) solutions. On the demand side, the network effects of open banking platforms and their limitations are discussed. Using a feedback model of platform behaviour, it is tentatively suggested that the long term success of open banking may be directly coupled to the success of such platforms and their regulatory scope.
The introduction of new financial market regulation, notably the revised Payments Services Directive1 (or PSD2), has forced banks to open up payment related banking services to Third Party Providers (TPPs). The regulation is considered an important enabler for the creation of new and innovative customer propositions. Consequently, this sees the introduction of competing services into the banking and payment services market. PSD2 is perhaps recognised as a trigger for the wider concept of ‘open banking’ in which a rich variety of banking services are offered by banks and consumed by a mix of TPPs, business partners and industry bodies.
The PSD2 mandates banks (Account Servicing Payment Service Providers [ASPSPs] in PSD2 parlance) to provide access to payment accounts to licensed TPPs. Three core tranches of payment services are required to conform to the Directive:
Account Information. Providing a variety of information relating to a customer’s payment accounts, including balances, standing orders and direct debit information.
Account Transaction History. Providing the sequence of payment account transactions over an arbitrary specified period.
Payment Initiation. Providing the capability to submit payments orders to an ASPSP. This capability includes for the ASPSP to send, upon request, an immediate yes/no confirmation to the TPP on whether or not there are funds available.
In the new economic model enabled by the regulation, ASPSPs constitute the supply side participants. Fintechs, in the guise of Account Information Service Providers (AISPs) and Payment Initiation Services Providers (PISPs), use these services and these market actors form the demand side participants, providing new propositions to meet customer demand. The new market dynamics give rise to the requirement for IT solutions that are derived from a combination of both traditional banking services and new fintech services, creating a broader “banking marketplace”.
This article explores how traditional banking system architectures are likely to be impacted impacted in order to support new customer propositions, enabled by the regulation and provided by the fintechs. A “Platform” models for open banking services in the style of say, Uber, Amazon and Spotify are presented. This model is used to provide a simple economic analysis of open banking and the extent of the market growth that may be achieved.
Open Banking as a Platform
In brief, a platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative infrastructure for these interactions and operates within governance conditions set for them.
The platform’s overarching purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.
Platform approach applied to Open Banking
Applying this concept to open banking, two fundamental platform types are identified:
1. Platforms provided by fintech TPPs and used by Payment Service Users (PSUs)
2. Technical Service Provider (TSP) Platforms that are offered by unregulated entities and that provide an outsourced technical service to either of the ASPSPs or the fintech TPPs
Third Party Provider Platforms
Third Party Provider Platform Interactions.
In the context of PSD2, TPP Platforms match users in the form of PSUs to their payment accounts provided by ASPSPs and make use of the essential payment use cases. TPP platforms are modelled as business to consumer platforms. The services and associated value units are highlighted in the table below.
Third Party Provider Platform Services and Value Units.
In this scenario, it is the AISP and PISPs that provide the platform and the platform user is the PSU. In this respect, potential network effects are huge given the prospective user base comprises many millions of payment accounts holders.
Technical Service Provider Platforms
Technical Service Provider Platform Interactions
A Technical Service Provider is a non-regulated participant in the PSD2 eco-system. They provide services on behalf of a regulated entity and provide the necessary IT components to implement the required PSD2 services. Standards for PSD2 access to account services (e.g. Berlin Group3) universally employ application programming interfaces (APIs), these being the de facto standard for b2b interfaces over the Internet. In this article, these PSD2 interfaces are denoted ‘regulatory APIs’. Further, as the eco-system expands to accommodate broader open banking services, there is an expectation that these additional services will also be implemented using APIs. TSP platforms can also accommodate such open banking services.
Two forms of TSP platforms are identified:
Supply Side TSP Platform. Provides technical services for an ASPSP, hosting the regulatory APIs on their behalf.
Demand Side TSP Platform. Provides technical services on behalf of the AISP and PISP participants, consuming the regulatory APIs.
TSP Platforms are business to business platforms. As such, network effects are less relevant as the user base is much smaller, comprising regulated entities rather than individual account holders (PSUs). Value units for TSP platforms are shown below.
Technical Service Provider Platform Services and Value Units
The Open Banking Platform Virtuous Cycle
The key characteristic of a platform business model is that the more users of the platform there are, the more value is created for the participants. This is known as the virtuous cycle and was originally applied to the Uber platform model by investor David Sacks. In the Uber virtuous cycle, the key network effect was identified as being geographic coverage i.e. the more taxi drivers participate, the greater the geographic coverage and the greater value provided to the riders. An adaptation of this cycle, applicable to open banking, is now proposed by the author.
Key network effects of a TPP open banking platform
The figure above illustrates the suggested key network effects of a TPP open banking platform. The central hypothesis of the model is that the value to each of the participants grows in relation to the growth in account data. The types of value growth for each of the participants is summarised in the table below.
Value Growth of TPP Platform for participants
In this open banking model, account data is analogous to geographic coverage in the Uber virtuous cycle. The feedback loop works as follows:
Demand is created as fintechs propose new open banking propositions based on customer insights
Account data accumulates as PSUs consent to use open banking propositions
PSU demand can eventually act as a catalyst to drive changes in the regulation or for ASPSPs to voluntarily provide access to more account types leading to greater and more diverse data
Increased consent and widening of account scope leads to richer and broader account data and further potential for better customer insights
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Platform Network Effect Limitations
Platforms such as Uber, Amazon and Spotify achieve, or have to the potential to achieve, truly global reach. In the case of TPP open banking platforms there are factors to consider that limit the network effects of such platforms.
Firstly, a TPP must consider the regulatory jurisdiction. Since there is no global regulator there are network limitations defined by regulatory scope2 which is typically a jurisdiction based on country. A TPP must be authorised by the regulator of a specific Member State of the EEA, however, it is allowed to passport its license to other Member States within the EEA. Thus, an AISP and PISP is, after passporting, entitled to access accounts across all the Member States in the EEA and the potential network effects will therefore still be considerable. However, a further factor to consider is that the underlying ASPSP financial products (the payment accounts) are relevant only in the domicile of the PSU. Thus, certain propositions from TTPs will have relevance within a given Member State only.
Consider first AISP services. Whilst a TPP open banking platform may, subject to the relevant authorisations, technically operate across multiple jurisdictions, logically its accumulated data, customer insights and underlying accounts and customer services are most relevant to a local market and jurisdiction. For example, a platform making recommendations for a product switch, it would only be sensible to make a recommendation for a product based in the same jurisdiction. Similarly, PSU behaviours may vary per local market and so obtaining customer insights globally may have limited value.
Consider now PISP services. The scope of the PSD2 payment initiation service only caters for the initial payment order submission. The payment order fulfilment may be completed by any number of credit transfer payment schemes, as determined by the payers ASPSP. Global, cross border and cross jurisdiction payments are therefore possible for a TPP that is authorised in the payers account domicile. In terms of reach of the service, accessibility of the beneficiary account to the TPP is therefore not the key issue, rather it is the accessibility of the payers account to the TPP that determines the reach. Reach of the PISP payment initiation service is therefore limited by the TPPs authorisation; they must be authorised within the jurisdiction of the payers account.
In Europe, PSD2 does enable pan-European reach for PISP services since TPPs are allowed access to accounts for all countries in the EEA, subject to passporting rights. However, a practical barrier to the effective implementation of this is the standards employed for payment initiation. In the absence of a single, mandated standard for payment initiation, a PISP is presented with the technical challenge of implementing multiple standards for access to accounts to initiate a payment for a given ASPSP. An inability, or practical limit, to keeping pace with a multitude of PSD2 standards would therefore limit the network effects of PISP services.
Platform Approach Summary
To summarise, network effects for TPP PSD2 services are limited by the jurisdiction in which the TPP chooses to operate. A pan-European reach is made possible, in principle, by PSD2. A global reach is also theoretically possible should a TPP succeed in achieving authorisations in multiple jurisdictions outside the EEA. However, in practice, AISP services are logically determined by specific, local market factors, resulting only in a country specific reach being relevant, irrespective of regulatory scope or through multiple authorisations across jurisdictions.
For PISP services, PSD2 has, in theory, enabled pan-European reach, but this may in practice be limited by a TPPs willingness to implement solutions for the multiple PSD2 standards that are emerging within the EU.
Two categories of open banking platform have been identified (i) supply side (ii) demand side. Platform theory in the form of the virtuous cycle model has been applied to the AISP supply side platform.
The model suggests that that key network effect dimension is that of the account data; the more this accumulates and the greater its scope the more this will generate innovation, entice more customers which will in turn generate more account data.
In terms of qualifying the future success of open banking, this cycle is considered quite key as any platform will ultimately be judged by the value it creates for its users.
Network effects of demand side open banking platforms have been shown, in principle, to have a limitation on reach, bounded by the regulatory jurisdiction and the domicile of the PSU.
As closing thoughts, the following questions are posed for readers of the article to contemplate.
Are network effects of demand side open banking platforms sufficient to reach a tipping point for their adoption beyond country jursidictions?
Would a widening of the scope of the regulation in terms of account types in scope may help increase the adoption of such platforms?
Given the limitations on reach identified, how likely are the emergence of truly global open banking platforms.
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References and Notes
Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (Text with EEA relevance), available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32015L2366, last accessed on 7 Feb 2020.
NextGenPSD2 XS2A Framework – Implementation Guidelines, available at: https://www.berlin-group.org/nextgenpsd2-downloads, last accessed on 28 March 2020.
How to Miss by a Mile: An Alternative Look at Uber’s Potential Market Size, Above the Crowd, July 11, 2014, http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/, last accessed on 13 Mar 2020.