Interoperability and the future of global banking
The rise of FinTechs has been well documented. These smaller, more nimble FS players can respond to changing consumer needs with greater agility than the more cumbersome traditional financial institutions. But as the banks adapt to a changing landscape, what will the future look like for the sector, and how will interoperability be achieved?
FinTechs, the rhetoric goes, have the agility to innovate technological solutions in a way that many traditional banks rarely can, often due to the banks’ size and the essential role they play in economic stability. However, both FinTechs and banks are increasingly appreciating the need to work together to ensure interoperability – the capacity for divergent computer systems to exchange information effectively – doesn’t get lost in a burgeoning tech landscape.
“The opportunity for the traditional financial institutions has become clearer in the past few years,” says Nicola Anderson, CEO, FinTech Scotland, a cluster management organisation bringing together large and small financial companies to drive innovation.
“The pandemic has accelerated the need for us to progress digital financial services, and to better serve customers and businesses. We’re seeing FinTechs partner with banks and large financial institutions to develop the services that consumers will come to demand.”
Open Banking points the way
Anderson believes the benefits of collaboration are clear for both FinTechs and larger financial institutions. “We have so many lessons that we can lift from the Open Banking experience across the UK. That created an opportunity to drive better interoperability. The principles of standardisation, consistency and collaboration have enabled Open Banking to become a potential gamechanger for us all,” she adds.
“The FCA [Financial Conduct Authority] has recently started to do more to progress Open Banking, and that’s an exciting opportunity to explore other vital products and services that could be opened up for better innovation. The UK government is carrying out lots of work with the pensions dashboard, that would allow customers to become more financially resilient. There are also discussions around digital ID. That kind of capability could help uncover opportunities for true interoperability.”
The government is currently developing plans to make all state and private pension information accessible all in one place via digital dashboards. This will oblige pension companies to link up to a centralised database, which would represent a significant step towards greater interoperability.
In many cases, the driver for that interoperability is demand from businesses looking to exploit the benefits, adds a spokesperson from LendingCrowd, the Edinburgh-based FinTech lending platform for SMEs.
“Access to real-time financial data can deliver tangible benefits to businesses. Most users see the ability to connect a bank account as an important feature of cloud accounting, which helps them gain more immediate and accurate insights into their financial position,” explains the LendingCrowd spokesperson. “API platform Salt Edge says SME lending offerings have also been improved by embracing Open Banking. Lenders can gain instant insight into a borrower’s financial wellbeing and rapidly make a well-informed credit decision.”
Overcoming the barriers
As the frontiers of digital banking open up, the need for interoperability has never been greater. Much work has already been done to ensure Open Banking and Open Finance standards are put in place. The European Commission established the European Interoperability Framework (EIF) in 2017 to create shared standards, establishing 12 principles of interoperability, including openness, security and user-centricity. The FCA established its Open Finance Advisory Group in 2019 to facilitate innovation and overcome developmental barriers. LendingCrowd sees standardisation as an important puzzle piece.
Its spokesperson continues: “The European Commission believes standardisation can lower barriers, underpin consumer trust, and boost innovation and compliance in a cost-effective way, while also recognising that finding shared standards is a challenge. “But the financial services sector has a strong track record of co-operating to deliver the best outcomes for all stakeholders. By working together to provide access to standardised data, the industry is well placed to take the lead and help shape the regulatory environment.”
There are certainly positive signs larger banks are embracing this innovative agenda. HSBC has developed a FinTech 101 education programme to prepare its personnel to better understand – and leverage – emerging technologies; Barclays is supporting the next generation of FinTechs through an accelerator programme.
A culture shift
Despite a general eagerness for close collaboration, FinTechs can still struggle to interface effectively with the legacy systems of traditional banks, notes FinTech Scotland’s Anderson.
“The procurement process within some large organisations is a barrier. While a bank may see real value in a FinTech’s proposition, the due diligence process can be time-consuming. Sometimes the questions aren’t relevant to that business. It can be a templated approach as opposed to a bespoke approach. That’s a market hurdle.
“But we are seeing a shift in the culture. In FinTech, innovation is agile, it is iterative. And our larger financial institutions have established ways of working. Finding ways to build common ground is important; where smaller enterprises also acknowledge that some of those processes are necessary.”
Despite the challenges, there have been promising examples of traditional financial institutions partnering with FinTechs to create better experiences, as exemplified by innovations like near-real-time payments and seamless banking. Many of the barriers to interoperability are technical in nature but, for Anderson, fostering an attitude of shared problem solving is key to making progress.
“Creating the environment that enables the big and the small to come together, to share problems, to be innovative together is crucial. And large organisations are open to building partnerships and opportunities with those smaller enterprises, which are also keen to see that happen.
“Interoperability is top of mind for large organisations with legacy systems. They want to build that capability and derive the right outcomes for consumers. When you have that cultural intent to find a way forward, we’re seeing progress.”
WHAT IS THE FUTURE FOR GLOBAL PAYMENTS AND DIGITAL FINANCE?
The FS industry is in the middle of a digital revolution, transforming how consumers as well as B2B clients pay for goods and services. FinTechs are transforming the way we save, borrow and spend, and the global exchange of financial data between companies and institutions is becoming more complex.
“I think that we will find a future that sees the large organisations of today have different operating models, different business models. We will see many more partnership opportunities between the big and the small. As the large organisations move forward with technology, they will become FinTechs,” says Nicola Anderson, CEO, FinTech Scotland.
As banks begin to look much more like FinTechs in terms of their offerings, the gap will narrow between old and new institutions. While tech giants such as Apple and Google will continue to develop their FS offerings, they will likely deepen their partnerships with traditional financial institutions, which will scale up their digital offerings as legislation evolves.
Embedded finance solutions such as Klarna will continue to evolve, in both B2C and B2B contexts, fostering the frictionless user experiences of tomorrow. The companies leading the charge will still need to rely on the role traditional banks can play in terms of stewarding customer data, leveraging their unbeatable scale, and safeguarding financial security.