Is the future of banking not open but closed?
In Europe open banking has led to a slew of new challenger banks with the majority offering “better banking” to retail customers or small businesses.
As open banking initiatives roll-out globally, we are experiencing the start of similar growth of new banks in these countries. So, is Europe leading the world towards a new direction in banking, is open banking the future?
I’ve been a proponent of open banking since its inception and believe the true benefits and future design of banks is yet to come and that “better banking” will be overtaken (not replaced) by experience driven banking. However, another model has emerged from the East that is in a way the total opposite.
This is the ecosystem play – a model very different from “marketplace” banking and their focus is much broader than banking alone, they want you to facilitate as much of your life as possible. Whether its chatting to your friends, getting a meal, watching a movie, paying your bills or just simply saving for a car, their remit is to facilitate your life as much as possible. Here, banking is merely transacting the monetary aspects of those experiences because spending, saving or investing has a lifestyle/stage purpose.
The big Chinese tech players have huge ecosystems that encroach into an ever-expanding range of their customers online worlds. Their huge customers bases attract third party developers wanting a slice of the action in a similar way to the iOS app store – seemingly open but yet still a closed walled garden with a single gatekeeper.
Their business strategies have been executed well with growth fuelled by a mixture of in-house development, acquisition and investing as the chart below highlights.
Image credit: Abacusnews China Internet Report
Whether it was destiny or simply fortuitous luck, these ecosystems have benefited from China’s unique differences and its changes in politics. For example, the change from state-run businesses to relaxation to initially allow farmers to run side businesses and then others to drive commerce occurred around the time of the internet.
However, the Chinese government created a walled garden thus making it hard for foreign competition. Another unique characteristic is their single-child families, which has created a different population of Chinese millennials versus those in any other country. Chinese millennials grew up needing the internet to chat with friends as typically they would not have siblings to play with. Another difference is the Chinese millennials’ wealth distribution, as far more of them own their own property than millennials in any other country in the world. Of course, having a huge population also helps. So, for a multitude of unique circumstances Chinese tech companies have grown very big very fast.
So, are ecosystems exclusive to large tech companies? Well no, and they also do not have to be Chinese as Yandex and Tinkoff in Russia have proven. Whilst Yandex is Russia’s Google with multiple internet-related products including ecommerce, like many fintechs, Tinkoff describe themselves as a tech company with a banking licence.
Tinkoff is closer to the likes of Baidu, Alibaba and TenCent where banking is embedded into a broad ecosystem. However, Tinkoff started out as a bank and has expanded its vision towards an ecosystem/super app plan showing that banks with real vision and ambition can compete with tech companies. Compared to Chinese companies, Tinkoff’s customer base is a mere ten million users (according to a Gemalto report in November last year) but they have time and room to grow with their proposition. Their initial super app displays open APIs, facilitates a broad range of health and beauty services, and has a voice assisted bot, Oleg, that provides financial advice.
Image credit: Tinkoff.Ru
An ecosystem leverages platform effects for growth so is compelling from a growth perspective. The more products/services the more customers the more products/services. However, the hidden gem here is about owning online time/interaction.
The more time customers spend in your ecosystem, the more you learn about them, and the better you can personalise offers. Here, higher levels of engagement drive greater opportunity to capture wallet share. Their experience driven mini apps also allows ecosystem players to identify needs earlier, so they are far better positioned to make timely and relevant offers than “transaction led” banks. This is a very compelling strategy and one that puts the customer at the centre of it closed garden.
This begs the question: Where are the ecosystems with banking embedded in Europe and the US, is the door being left open to the East? Will it be a tech player or bank that takes up the ecosystem battle?
I’m not saying that there is no place for traditional banks or pure play “manufacturers”, or that open banking is dead. I’m just saying that the future of banking will come in many forms, but Europe and the US have to create their own ecosystems to compete with the East.
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.