Asia's 'open banking' opportunity
Technology can enable new business models for financial institutions
With few aspects of the financial industry seemingly immune to the potential impacts of technological innovation, incumbent financial service providers in Asia face a fundamental choice.
On the one hand, they can maintain their current full-service business models and try to defend margins against challengers with the potential to provide clients with equivalent scale and greater customization at lower cost. On the other hand, they can reinvent their business models, pivoting to an "open banking" platform model where they would sit atop a vast third-party supply system and focus their capital investment on their digital user bases.
Looking at the current state of Asian banking, one could be forgiven for leaning towards the first option, as deep client relationships nurtured by manpower-intensive, "high-touch" agency networks have long underpinned profitable operations.
However, markets have changed and banks in Asia, like their global peers, must now contend with a laundry list of challenges that range from increased regulatory complexity to margin pressure due to low interest rates and prolonged macroeconomic uncertainty. At the same time, a new generation of younger clients is increasingly willing to engage with financial services providers via online portals and smartphone apps.
As with myriad consumer-facing industries before, the financial services market in Asia is transitioning from a service-based model -- in which agency networks grow relationships and revenues by delivering more services to individual clients over time -- to one in which user experience is paramount.
To keep up with this shift, banks must re-evaluate their value propositions and core competencies to ensure that they are offering a clear value-add across their customer base, core geography, product expertise and customer service levels.
In many cases, this process will likely reveal a need to shed the full financial service provider model -- under which banks own and control all aspects of production and distribution -- in favor of an omni-channel open banking model for reaching clients across product classes.
Historically banks have not been known for their agility and responsiveness to customer demand. One reason for this is that they are highly regulated and run their services on complex, expensive patchworks of legacy systems that do not easily facilitate change. Banks have also typically preferred to exert full control and ownership over all aspects of production and service when bringing new products to market.
Some financial services providers have already recognized the need for change and moved to adjust their business models, most notably by adopting "white labeling" solutions under which they resell, under their own brand, products from specialized providers. However, there is a need to further change mindsets and move to an "open banking" business model under which application programing interfaces, or APIs, enable banks to deliver the services of multiple third parties.
The leveraging of API software has the potential to deliver a customer experience that is more personable and user friendly, while at the same time creating great cost-effectiveness, agility and flexibility. This combination will enable financial service providers to select and regularly review the value derived from the various supporting building blocks on which they can construct their own business proposition with partners.
Ultimately, the open banking model allows banks to take a less capital-intensive approach to pursuing new business opportunities and new sources of revenue. Rather than investing upfront in all the market connectivity and infrastructure needed to deliver a product or service, a bank may first test the water by delivering to clients via an API-based service in partnership with a third-party. Depending on the customer response, the bank can continue down the same partnership path or ramp up investment if it sees opportunities to broaden or deepen its core value proposition.
More than cost savings
In addition to delivering the potential for cost-effective digital revenue growth, the shift to an experience-based banking model may also help to achieve other priorities, such as attracting and nurturing future industry leaders. Since the global financial crisis, banks have struggled to attract high-quality graduates, many of whom have preferred the ethos and opportunities offered by the giants of e-commerce and consumer technology.
Banks that demonstrate their understanding of how digital technology innovation is reshaping peoples' lives will have the best chance of recruiting the talent that can develop the business well into the future. With its principles pioneered and proven in other consumer-facing industries, open banking is going mainstream. There are many ways to benefit from this new model and few alternatives to doing so.
Banks in Asia are uniquely well positioned to take advantage of the open banking model. The region's key financial hubs -- Hong Kong and Singapore -- have put their support behind the emerging sector of financial technology, or fintech, creating an environment in which many innovative, young financial services providers are looking for established platforms through which to reach a wide client base.
You cannot predict the future, but you can prepare for it. An open, flexible architecture is a pre-requisite if banks in Asia and globally want to act nimbly in response to changing market conditions and customer preferences. Technology has given us the tools to collaborate in new ways with third parties, as well as new ways to increase customer satisfaction and loyalty levels. To really maximize the latter, banks should first exploit the former.
Adam Reynolds is Asia-Pacific chief executive of Saxo Capital Markets.