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MarketLine Case Study

Marketplace Banking
New business model threatening
traditional structures
Reference Code: ML00024-030

Publication Date: July 2016

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OVERVIEW
Catalyst
EU-wide and UK-specific regulations will force banks to open up access to their customer data by January 2018. This will
have profound implications for both incumbent providers and the new entrants seeking to challenge their dominance.

Summary
Open banking will lead to the creation of new business models, including banking as a marketplace. Here, a
bank integrates third-party services into its own platform, effectively turning itself into a portal, or marketplace,
where consumers can access products from across the market in one place. This model has obvious
advantages for new entrants that lack the resources to develop a full range of in-house products, and it will
allow them to mount a credible challenge to established providers more quickly and cheaply than could
otherwise be achieved. Incumbents need to be alive to this threat, and also be willing to take advantage of new
opportunities, such as improving product provision, and converting fintech challengers into allies.

Marketplace banking will lead to higher revenues. Not only will banks gain from charging access fees to
partners, they will also be able to share the revenues from the sale of partner products. They can also access
data generated by their partners to identify new opportunities for targeted cross-selling.

Established banks can use a marketplace strategy to harness the expertise of fintech specialists and improve
the weakest offerings in their product ranges in a cost-effective manner.

Marketplace practitioners need to guard against the risks associated with sharing customer data with third
parties. They also need to minimize loss of control over product development by collaborating with partners to
co-create products, rather than passively integrating off the-peg products.

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TABLE OF CONTENTS
Overview ............................................................................................................................................................................. 2

Catalyst............................................................................................................................................................................ 2

Summary ......................................................................................................................................................................... 2

Current Status of Open Banking Initiatives.......................................................................................................................... 7

The OBS is set to go live in Q1 2019 ............................................................................................................................... 8

PSD2 will come into effect in January 2018..................................................................................................................... 8

The US trails the UK and EU in open banking initiatives ................................................................................................. 9

The MAS is promoting open APIs .................................................................................................................................... 9

Consumers are largely unaware of open banking ......................................................................................................... 10

Marketplace Banking suits new entrants ........................................................................................................................... 11

Marketplace providers challenge traditional banking structures .................................................................................... 11

Marketplace banking is ideally suited to new entrant ..................................................................................................... 11

Consumers will be presented with a safe environment .................................................................................................. 11

Marketplace banks can choose the level of integration ................................................................................................. 12

Starling Bank is already using the marketplace banking model ..................................................................................... 12

N26 has partnered with several providers to expand its offering ................................................................................... 14

Benefits and risks of marketplace banking ........................................................................................................................ 15

Marketplace banking offers new ways to generate revenues ........................................................................................ 15

Access fees will attract fintech providers to the marketplace ..................................................................................... 15

Commission fees on product sales another possibility ............................................................................................... 15

Data-driven revenue by leveraging external customer data ....................................................................................... 15

New revenue sources will be particularly advantageous for new entrants ................................................................. 16

Marketplace banking offers opportunities for providers ................................................................................................. 16

New entrants can become viable quickly and cheaply ............................................................................................... 16

Established banks can improve their product ranges cost-effectively ........................................................................ 16

Banks can convert fintech providers from threats into allies ...................................................................................... 16

There are threats associated with marketplace banking ................................................................................................ 17

The GDPR imposes clear data handling rules on banks ............................................................................................ 18

Banks risk weakening their customer relationships .................................................................................................... 18

Brand identities may become diluted ......................................................................................................................... 19

Banks will lose direct control over product ranges ..................................................................................................... 19

Conclusions....................................................................................................................................................................... 20

Marketplace strategy could be useful to incumbents ..................................................................................................... 20

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Appendix ........................................................................................................................................................................... 21

Sources ......................................................................................................................................................................... 21

Further Reading ............................................................................................................................................................. 21

Ask the analyst .............................................................................................................................................................. 22

About MarketLine .......................................................................................................................................................... 22

Disclaimer ...................................................................................................................................................................... 22

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LIST OF TABLES
Table 1: Timetable for implementation of PSD2 .................................................................................................................. 9

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LIST OF FIGURES
Figure 1: Timetable for the CMAs remedies for open banking ............................................ Error! Bookmark not defined.

Figure 2: Marketplace banks can choose passive or active approaches to product promotion ......................................... 12

Figure 3: Starling Bank is preparing to become the first UK bank to open its API to third parties ..................................... 13

Figure 4: Starling Bank is the first UK provider to allow full access to customers transactional data via its API............... 13

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CURRENT STATUS OF OPEN BANKING INITIATIVES
EU-wide and UK-specific regulations will force banks to open up access to their customer data by January 2018. This will
have profound implications for both incumbent providers and the new entrants seeking to challenge their dominance.
CMA has set a deadline for implementing access to open data by January 2018, and PSD2 also expected to be
introduced in 201.8 The Open Banking Standard is expected to go live in Q1 2019. Elsewhere in the world, Singapore's
authorities are eager to adopt a similar framework, and the US lags behind the EU and UK due to a lack of central push
from regulators. While there are supply side issues globally, there may also be a demand problem as consumers remain
unaware and largely skeptical of open banking initiatives bar for one or two demographics.

CMA has set a deadline for implementing open access to data


In February 2017, the Competition and Markets Authority (CMA) published its Retail Banking Market Investigation Order.
This set out the full list of remedies banks need to adopt in order to comply with the final report of its retail banking
market investigation, together with a timetable for implementation. In particular, it states that by January 13, 2018 banks
must satisfy the following requirements: Providers must make up to date personal current account and business current
account transaction data sets continuously available without charge, for: read access in accordance with the relevant
provisions of the Read/Write Data Standard; and write access in accordance with the relevant provisions of the
Read/Write Data Standard. The Read/Write Data Standard is defined as allowing a third-party to access account
information or initiate a payment on behalf of the customer (subject to the customers explicit consent) and which has
the features and elements necessary to enable Providers to comply with the requirements to provide access to accounts
subject to PSD2."

A separate Read-only Data Standard will also be created to facilitate access to information on branch and ATM locations
and branch opening times. It will also offer information on products, including prices, charges, features and benefits,
terms and conditions, as well as customer eligibility criteria. The investigation order further specified that both data
standards should encompass an open application programming interface (API) standard, data format standards, security
standards, and customer redress mechanisms. An Implementation Entity has been established, comprising
representatives from nine major banks and consumer interest groups, as well as observers from the Treasury, the
Payment Systems Regulator, the Financial Conduct Authority, and the Information Commissioners Office. The
Implementation Entity will be responsible for delivering and maintaining the data standards, and the requirement for
compliance with PSD2 means it will have to give special consideration to the needs of payment service providers.

Of particular importance for UK banks is that the CMAs deadline of January 2018 is 12 months earlier than the
equivalent deadline for implementing the Open Banking Standard (OBS), which will make for an intensive period of
preparation during the remainder of 2017. The full timetable for rolling out the data standards is as follows:

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Figure 1: Timetable for the CMAs remedies for open banking

SOURCE: CMAs Retail Banking Market Investigation Order Explanatory Note


MARKETLINE

The OBS is set to go live in Q1 2019


Work on the OBS, which started prior to the CMAs final report, is continuing. The two key milestones are: Q1 2018:
read-only access to customers transaction data via an open banking API; and Q1 2019: read-and-write access to
customers transaction data via an open banking API. However, these deadlines predate those set by the CMA. Given
that the CMA is demanding full read-and-write APIs to be in operation by Q1 2018, most of the work necessary to fulfil
the OBS deadline of Q1 2019 will be completed a year ahead of schedule.

PSD2 will come into effect in January 2018


PSD2 is due to come into force across the EU on January 13, 2018 (the same day as the CMAs deadline), and has the
broad objectives of promoting efficiency and integration in the payments market, creating a level playing field for
payments service providers (including new entrants), improving the safety and security of payments, protecting
consumers, and lowering prices. Regardless of the outcome of Brexit negotiations, the UK will remain a member of the
EU for at least two years following the triggering of Article 50 scheduled for March 2017 and is hence obliged to
comply with all EU legislation, including PSD2, for the duration.

In February 2017, the Treasury published its proposed plan for implementing the directive in the UK, to which it has
invited responses from interested parties. The consultation sets out the scope of PSD2, explains its key provisions and
the governments proposed approach to implementation, and consults on options for implementation. It specifically
addresses authorization, capital, safeguarding and prudential requirements, transparency and information requirements,
conduct of business rules, and Account Information Services and Payment Initiation Services. The deadline for interested
parties to respond to the consultation was March 16, 2017.

Also in February 2017, the European Banking Authority (EBA) produced its final set of draft regulatory technical
standards (RTS) for strong customer authentication (SCA) and secure communication. This sought to address concerns
raised by interested parties to its initial consultation paper, particularly with respect to exemptions from the application of
SCA. As a result, the final draft RTS includes further exemptions that are intended to allay these concerns.

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Table 1: Timetable for implementation of PSD2

Deadline Event
July 2017 EBA guidelines concerning the information to be provided in an application for the
authorization of payment institutions.
EBA draft implementing technical standards on the information to be provided by
competent authorities to the EBA for the register.
EBA guidelines concerning the establishment, implementation, and monitoring of
the security measures, including certification processes, in relation to operational
and security risks.
January 2018 EBA draft RTS on cross-border cooperation and passporting.
EBA draft RTS on operation of central EBA register.
EBA guidelines on complaints procedure.
EBA guidelines on improving incident reporting.
Member states to adopt and publish implementing laws, regulations and
administrative provisions necessary for compliance.
July 2018 Deadline for payment institutions to comply with Title II requirements.
Autumn 2018 Expected date EBA SCA RTS and security measures will apply.
January 2021 Commission will submit a report on the application and impact of PSD2.

SOURCE: HM Treasury: Implementation of the revised EU Payment Services Directive (PSDII) MARKETLINE

The US trails the UK and EU in open banking initiatives


While the formal introduction of open banking in the UK and the EU is less than a year away, there are no equivalent
initiatives in the US, meaning that data sharing is being left to the discretion of individual providers. According to the US-
based Center for Financial Services Innovations October 2016 report CFSIs Consumer Data Sharing Principles: A
Framework for Industry-Wide Collaboration: The diversity of business models, application functionality and technical
methods within the data sharing ecosystem makes ensuring consistency in the timing, volume and content of data
transfers challenging.

The report also noted that: Many financial institutions and important infrastructure players rely on older computing
systems that limit their ability to implement and manage new technology such as APIs or consumer-facing dashboards.
Solving these challenges will likely take time and significant investment on behalf of many industry participants.

The implication is that, left to their own devices, banks will implement open banking solutions at a slow pace, if at all. A
coordinated industry-wide approach is needed to facilitate progress by agreeing common standards, and government
regulation could help in this respect. However, indications are that the current White House administration is keen to
adopt a more relaxed, business-friendly approach to regulation, particularly towards financial services, and the
prospects for such a development are therefore remote.

The MAS is promoting open APIs


The Monetary Authority of Singapore (MAS) is keen to promote the countrys fintech sector by making the regulatory
environment more conducive to financial innovation and facilitating the creation of an ecosystem for developing new
technologies. To this end, the MAS is promoting an open API architecture for the banking industry, with the aim of
establishing Singapore as an API center of excellence. In a speech given in November 2016, the managing director of
the MAS stated We are actively pushing financial institutions to develop and adopt APIs, and to offer as many of them
as possible to the broader community.

In November 2016, the MAS, together with the Association of Banks in Singapore, published its Finance-as-a-Service
API Playbook.

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This document sets out the advantages of open APIs, provides guidance for common standards for information security,
data exchange, and governance, and identifies over 400 APIs that can be implemented across the financial services
industry.

Consumers are largely unaware of open banking


Aside from the supply side technical and logistical challenges faced in making open banking a reality, the demand side,
in the form of consumer demand for open banking-related services, is also potentially problematic. Research by Equifax
published in January 2017 found that, only 12 months from launch, 90% of UK consumers had not heard of open
banking. This suggests that a sustained marketing campaign is needed to raise public awareness; however, the CMAs
timetable suggests public education efforts will only start in Q4 2017, three months before launch at most (see Figure 1
above).

Moreover, suspicion about the concept of sharing banking data via APIs was high. 45% of respondents claimed they are
unlikely to use open banking and 60% stated they would not give consent for their data to be shared with third parties,
with concerns over security and unsolicited marketing approaches cited as the chief deterrents. This suggests that
fintechs cannot rely on open banking on its own to boost consumer uptake of their services. There is some good news,
however.

The survey found that younger consumers, particularly those aged 2534, were significantly more likely to use open
banking than the general population. More importantly, consumers warm to the idea of open banking if there are
demonstrable benefits: 64% stated that improved monitoring of fraudulent account activity is an important benefit, 53%
would appreciate the ability to compare competing current account offerings, and 51% would like to monitor their
spending and view all their accounts in one place.

Promoting open banking as an abstract, generalized concept will not win over consumers, but if a publicity campaign can
effectively promote the tangible benefits and rewards that can be gained from a variety of clearly explained examples,
then a significant proportion of consumers can be won over. Yet this will not happen overnight: consumer attitudes may
be slow to change, and public education initiatives will have to be sustained for several years for open banking to
maximize its impact upon financial services.

If consumers do embrace the concept, the impact upon the banking landscape could be huge. As HSBC states on its
newly created developer portal: By early 2018 well deliver new APIs that will allow personal customers and small
businesses to share their data securely with other banks and trusted third parties. This is nothing short of a revolution in
banking and will change the face of financial services forever.

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MARKETPLACE BANKING SUITS NEW ENTRANTS
Marketplace banking is capable of disrupting the industry, opening it up to newcomers outside traditional structures which
can act as barriers to entry to those without significant capital. Banks must be careful when establishing their
marketplace however, selecting products which keep consumers safe while also constantly innovating and competing.
There must also be questions asked about how fully integrated the marketplace will be. Banks could either offer third
party services under its own brand, just offer completely different competitor brands, or somewhere in between. In the
UK, Starling bank is in pole position to become the first full marketplace bank, whereas in Germany N26 has also begun
to seek further commercial partners to expand its ecosystem.

Marketplace providers challenge traditional banking structures


Marketplace banks, such as Starling Bank and N26, share certain characteristics in common. They are typically new
entrants, unencumbered by traditional legacy systems. They have modern core banking systems, often custom-built in-
house, thus giving them the ability to manage their own core banking functions. They have their own banking licenses,
and hence are permitted to hold deposits. They generally focus on offering just one in-house product, usually a current
account with an associated payment card. Other products and services for example personal loans, mortgages,
investments, insurance, and cross-border payments are provided through partnerships with third parties, with
integration into the banks own interface enabled via open APIs.

Marketplace banking is ideally suited to new entrant


This model holds many attractions for new entrants. Firstly, their modern IT systems are able to handle the demands
placed upon them by API-enabled integration with external providers systems. This gives them a competitive advantage
over established banks, which typically have older, less flexible systems that are not as suited to this type of structure.

Secondly, new entrants usually have limited human and financial resources, and hence would find it challenging to create
a full suite of products to cover all of their customers needs. The marketplace model allows them to focus the bulk of
their resources on creating a single core product (typically a current account) that is market leading and offers
enhancements that other established providers are unable to match due to their antiquated systems. To satisfy
consumers needs for other products, the bank will form selected partnerships with third-party providers of credit,
investment, insurance, and other products. These third-party products would be chosen by the host bank in accordance
with their own standards for factors such as quality, reliability, and pricing.

Consumers will be presented with a safe environment


Marketplace banks will therefore act as walled communities, where their customers can choose from a selected range
of approved products and services. It will be the job of the host bank to manage this marketplace and ensure it
continuously improves and evolves in order to keep pace with changing consumer needs and preferences.

A key consideration for banks is whether they should play an active or passive role in product selection: Passive product
selection is when the bank lets them choose from all the available hosted products from third-party lenders, without any
further intervention. This is very similar to the approach adopted by price comparison sites, where users are presented
with all available options after entering their requirements. Active product selection is where the bank assesses the
customers requirements against the available products, and recommends the most suitable option for them.

Active product selection entails the host bank playing a more prominent mediating role between customers and third
parties. It will have to collect the relevant information from customers prior to product selection, and make its own
assessments of their needs. From the consumers perspective, active product selection offers the most seamless and
integrated user experience, although it does limit their freedom to make their own choices. There is therefore a trade-off
between ease of use and flexibility that every marketplace bank will need to consider. Another issue is that active product
selection may constitute advice, which means banks would have to comply with regulations around fact checking and
affordability checking. The extra burden this places on banks means they may be more likely to adopt a passive
approach, at least in the short term.

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Figure 2: Marketplace banks can choose passive or active approaches to product promotion

SOURCE: GlobalData
MARKETLINE

Marketplace banks can choose the level of integration


Another consideration for marketplace banks is that of branding and integration. There are three main alternatives to
choose from; white label, co-branding or separate branding. When considering which approach to adopt, banks need to
consider several factors, including the credibility and profile of the selected third parties, how consistent the user
experience should be, the extent to which the bank is willing to promote third-party involvement, and whether consumers
should have mediated or unmediated access to third parties.

White label sees all third-party products assume the host banks branding, meaning that to consumers the marketplace
aspect is, if not completely hidden, then in the background. This approach is suited to banks that wish to provide a fully
integrated user experience that is consistent with what consumers currently receive. This approach is also most suitable
for banks that wish to employ active product selection=.

Co-branding is a halfway house between white labeling and separate branding, whereby third-party products are
promoted as, for example, XYZ Bank Global Payments, powered by ABC Fintech. This is an ideal approach for banks
that wish to retain control of customer relationships, but also want to let their customers know they are using best-in-class
products to add value to the relationship.

Separate branding entails letting all third-party products retain their own distinct brands and identities. This is the
recommended approach for banks that wish to make their marketplace a centerpiece of their proposition and that view
easy access to a wide range of best-in-class products as an effective way to acquire new customers and retain their
loyalty.

Starling Bank is already using the marketplace banking model


The Marketplace Platform is due to launch in March 2017, and in April 2017 Starling Bank will become the first UK
provider to open its API to outside developers by hosting a hackathon. This is the first step in its desire to go beyond
integration of existing third-party services and encourage the creation of tailor-made applications. During the three-day
hackathon, participants will have full read-and-write access to nine separate APIs, including customer details, account
information, card information, and crucially, transactional data.

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This means Starling Bank will be the first provider in the UK to allow access to users transactions, including details from
Mastercard, Faster Payments, and direct debit transactions.

The only product Starling Bank will design and build in-house is a current account, delivered exclusively via a mobile app.
This is intended to be best-in-class, and, it is claimed, will offer intuitive money management tools that will let users easily
keep on top of their finances, including comprehensive push notifications. Other products will be available to customers
via the banks Marketplace Platform, which will integrate offerings from a range of third-party providers, including new
fintechs. Users will, for example, be able to easily transfer funds from their current account to an investment or P2P
lending product from within their Starling Bank app. In March 2016, Starling announced its first such partnership with
TransferWise, through which customers can make foreign currency payments.

Figure 3: Starling Bank is preparing to become the first UK bank to open its API to third parties

SOURCE: Starling Bank


MARKETLINE

Starling Bank anticipates that it will be able to offer its customers a choice of multiple partners for each product area, and
it will adopt a separate branding policy so that customers are always aware when they are using partner-provided
services. Over time the bank intends to expand the number of partners on its Marketplace Platform, and extend its reach
beyond financial providers to include companies operating in the lifestyle and retail sectors. The bank is already
experimenting with API-enabled Google Home integration, through which customers will be able to carry out voice-
activated commands, such as OK Google, ask Starling how much I spent last month.

Figure 4: Starling Bank is the first UK provider to allow full access to customers transactional data via its API

SOURCE: Starling Bank


MARKETLINE

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N26 has partnered with several providers to expand its offering
N26 was established in Germany in January 2015 and has since expanded to provide retail banking services in 17
European markets. Its core product is an innovative mobile-based current account that offers users real-time transaction
notifications, personalized updates, and categorized spending reports. As with Starling Bank, N26 is expanding its
product range through partnering with third parties and integrating their products into its UI.

In 2016, N26 partnered with TransferWise to allow customers to transfer funds in 19 different currencies from within the
N26 app. N26 has a similar arrangement with vaamo, an investment robo-advisor, to offer investment services, branded
as N26 INVEST, to its customers. Customers can invest either a single lump sum or monthly instalments in a choice of
readymade portfolios, and investments can be viewed simply by swiping right from the transactions screen in the N26
app. For both services, N26 has opted for co-branding, using the Powered by TransferWise/vaamo formula.

These partnerships have created new revenue streams for N26. For example, customers have to pay a minimum
monthly fee of 1.90 to use N26 INVEST, and the annual management charge ranges from 0.49% to 0.99%, depending
on the amount invested. This revenue is much needed, as N26 has come under pressure from the cost of operating
customer accounts. In May 2016 it closed hundreds of accounts, with little warning, on the grounds that the customers
concerned were making too many ATM withdrawals. Each withdrawal incurs a fee of up to 2 for N26, which can be a
considerable cost for the bank to bear given that it does not pass these charges on to its customers.

N26 is also focusing on more traditional sources of revenue, and in February 2017 it launched N26 Credit, an instant
credit proposition. Borrowers can apply in-app for a loan worth 1,00025,000, repayable over one to five years, with
rates starting from 2.99%. However, this in-house product has come to market noticeably later than its partnership
offerings: this contrast highlights the importance of partnerships in launching new products far more quickly and cheaply
than is possible without outside help, thus helping the bank to achieve viability in a more realistic timescale.

Without the revenues stemming from these partnerships, there would be an increased risk of N26 running out of cash
before being able to generate an adequate return on investment. In the banks own words: In so doing [integrating
partners into its financial platform], N26 doesnt need to develop every product in-house, but rather focuses on the
worlds best fintech offerings and solutions, bringing them onto its platform and making them available with just a few
clicks.

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BENEFITS AND RISKS OF MARKETPLACE BANKING
Marketplace banking offers several important benefits for incumbents. Banks can levy fees on third parties for the right to
be hosted on their platforms, and share the revenues associated with the sale and use of third-party products. Banks can
gather information on products their customers hold elsewhere, and recommend better alternatives. Access to spending
data from tie-ups with retailers means banks can make targeted sales approaches. The marketplace model allows banks
to bring fintech companies inside their tents and work with them as allies. Alongside these benefits, however, there are a
number of possible downsides banks need to plan for. Banks will lose exclusive ownership of, and access to, customer
data, thus removing a vital component of their competitive advantage. Data loss is inversely related to the level of
integration of partner products. Third-party access to customer data raises the risk of data breaches, leading to damage
to trust and reputation. Customers may start to identify with their banks partners rather than the banks themselves, and
come to see the latter as little more than a portal. Outsourcing product provision involves losing direct control over the
future evolution of product ranges, which may become problematic where the interests of the bank and its partners
diverge. Banks may also become too dependent on their partners for product innovation and scale back their own
development efforts.

Marketplace banking offers new ways to generate revenues


Traditionally, banks have generated revenues and profits through net interest margins, penalty fees, and charges
associated with the sale and use of their own products. The marketplace model, where a banks only in-house product
may be its current account, renders many of these historical sources of revenue nonexistent. However, while old revenue
sources will be eliminated, they will be replaced by new ones based upon third-party involvement, including access and
commission fees, and data-driven revenue. This model will be particularly advantageous to new entrants.

Access fees will attract fintech providers to the marketplace


Third parties have to pay a fee, either one-off or recurring, to gain access to the host banks marketplace. External
providers will be willing to pay in order to gain access to an existing customer base. Where established banks adopt a
marketplace strategy, the customer base will number in the millions, making this an attractive proposition for fintechs
seeking to scale up. One of the biggest challenges facing any fintech provider is customer acquisition, and many fintechs
have simply run out of financing before managing to gain enough customers to achieve viability. By hooking into an
existing banks base, this becomes far less of an issue, and will be worth paying an access fee for.

Commission fees on product sales another possibility


As well as levying upfront fees for access to their marketplaces, banks can also charge commission fees, where they
gain a share of the revenues associated with each new product sale. This acts as a useful additional stream of income,
and provides incentives for the host bank to actively promote its marketplace and for third parties to constantly improve
their products in order to retain favored status.

Data-driven revenue by leveraging external customer data


While access and commission fees are fairly conventional in nature, and merely replace revenue that has been lost
through the discontinuation of the traditional banking model, integration of external products and services opens up the
possibility of completely new, data-driven sources of revenue. This revolves around the bank leveraging the external data
on its customers to which it now has access. For example, where a customer holds a third-party credit product, the host
bank can assess the interest rate that applies to the product, and make a recommendation for a cheaper alternative from
its own marketplace, or from its own range (if available). In both cases, the host bank stands to make money.

However, the possibilities extend beyond financial products. If, for example, a bank enters into a partnership with a
retailer, as Tandem has done in the UK with House of Fraser, it can access the retailers data to identify where a
consumer has made a high-value purchase such as an electrical good or furniture item and make a recommendation for
warranty cover or another relevant financial product. The bank can go even further and make a recommendation for a
complementary retail product, such as a sound bar to accompany the purchase of a flat screen TV, for which it will gain

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commission from the product seller. In this scenario, there is even the option to cross-sell a personal loan in order to
finance the purchase.

New revenue sources will be particularly advantageous for new entrants


All three sources of revenue give new entrants a major opportunity to gain a competitive advantage over incumbent
operators. Tightening regulation around interchange fees and the cross-selling of products such as PPI and packaged
bank accounts has placed significant pressures on the ability of banks to generate non-interest related revenues. UK
banks also face particular issues due to the persistence of the free-if-in-credit current account model, which limits their
scope to earn regular fee income from their core product.

Consequently, UK banks have the lowest income per capita in Western Europe, and are the most dependent upon net
interest income for their revenues across Europe: while net interest income accounts for an average of 69% of total retail
banking revenues across Europe, this rises to 82% in the UK (source: AT Kearney, The 2015 Retail Banking Radar:
Time to Reinvent Your Banking Model). This has become a critical issue in the UK, given the effect the prolonged low
interest environment has had on compressing these margins. Therefore, banks that can successfully exploit additional
sources of revenue can gain an edge over the rest of the industry, and reduced dependence upon net interest margins
will give them greater freedom to undercut competitors on rate.

Marketplace banking offers opportunities for providers


The adoption of marketplace banking will lead to beneficial outcomes for both new entrants and incumbents. New
entrants can quickly achieve scale reasonably quickly and effectively, while established providers can improve product
ranges by eliminating costs associated with product development. Banks can also coopt smaller fintech providers into a
mutual ecosystem, helping to deter the threat from larger fintech companies which could be a theat.

New entrants can become viable quickly and cheaply


The marketplace banking model is ideally suited for new entrants seeking to achieve scale within a reasonable period of
time and start to earn a return on their investments. Newly established banks generally have limited financial and human
resources, and thus cannot realistically expect to design a full range of products that is universally of high quality.
However, by adopting a marketplace approach, such banks can channel the bulk of their cash into designing a single,
market-leading product (usually a current account) and effectively outsource the provision of other key products to third
parties. Marketplace banks can therefore provide their customers with a complete range of products, all of them market
leading and fully integrated with each other, at speed and low cost. For start-ups with limited capital, this is a vital
consideration.

Established banks can improve their product ranges cost-effectively


The benefits of marketplace banking are not exclusively reserved for new entrants established banks can also gain a
competitive advantage by adopting this model. Although incumbents have far deeper pockets than new entrants, they still
face the issue of limited resources due to pressures on net interest margins and reduced opportunities for cross-selling-
related revenues. This means that their ability to innovate their product ranges is restricted, especially where it may not
be possible to demonstrate a quick return on investment.

Deploying a marketplace strategy will enable such banks to overcome these barriers by virtually eliminating the costs
associated with product development. Universal banks are rarely able to offer market-leading solutions across all product
sectors, and third-party partnerships are an ideal way to remedy any weak spots in their consumer proposition.

This should lead to higher levels of customer satisfaction, advocacy, and loyalty: consumers will become more engaged
with their banks and have less reason to consider switching to rivals. With a wider and higher quality range of products to
choose from, cross-sales should rise, leading to increased income from revenue-sharing arrangements with third parties.

Banks can convert fintech providers from threats into allies


Many established banks are fearful of the potential threat posed by fintech entrants, particularly niche providers that are
focusing on the most vulnerable or profitable parts of the value chain. These challengers are not going to disappear, so

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banks should consider partnering with them rather than treating them as adversaries. Banks may have to share revenues
with these partners, but this is preferable to losing customers to them altogether. Banks can also use such partnerships
to counter the threat from the most successful fintechs. Where a fintech appears to be achieving dominance in a
particular field, marketplace banks can make tactical alliances with smaller, rival fintechs. By making it easier for their
customers to use these substitute providers, banks can challenge their biggest, market-threatening fintech rivals.

There are threats associated with marketplace banking


Although marketplace banking offers several advantages for both new and established banks, there are corresponding
risks that providers need to be aware of. There is an increased security risk associated with handling more data, and
there are EU and national government regulations as to how firms must handle it. Banks also risk undermining
relationships with customers, diluting brands, and lose control over product ranges.

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Data control and security risks are magnified
The main risks revolve around customer data, firstly in terms of the ownership and control of this data, and secondly with
respect to the security of this data. Regarding data ownership, banks have until now had exclusive access to their
customers data. This gives them a huge advantage over third parties as they have a much deeper understanding of their
customers behavior, preferences, and habits, as well as their financial standing and creditworthiness. However, open
banking strategies, including the marketplace model, involve banks sharing this information with partner providers, thus
ceding their competitive advantage to some extent. In extreme cases, it may even be possible for a third party to take
complete ownership of the relationship, thus depriving the host bank of access to important transactional data.

Ownership of data will be governed by the degree to which third-party services are integrated into the host banks
platform. Where there is full integration under a white-label or co-branding arrangement, the host bank will retain full
access to all transactional data. However, where the host bank redirects a customer to the relevant partners UI, it may
lose sight of data generated within that interface.

To minimize this risk, banks should sign agreements with partners that specify clear instructions for data sharing,
including an obligation for partners to allow their hosts access to all data pertaining to customer-partner transactions.

Data security is a huge issue, and much of the preparatory work around PSD2 and the UKs open banking initiatives is
concerned with agreeing standards, protocols, and procedures for the secure sharing of information, and agreeing the
division of responsibilities in the event of problems. According to Dean Young, head of product management and delivery
at eWise, procedures for dispute handling are yet to be agreed upon. He also stated that responsibility for security is
being devolved to the banks, meaning individual providers may implement authentication procedures in different ways,
thus making the adoption of a common standard more difficult.

One aspect of PSD2 that will work to the advantage of incumbent banks with respect to data control is that, although the
directive will force banks to offer third parties full access to non-sensitive data, it will be left to the banks to decide which
data qualifies as non-sensitive. Banks, being risk-averse as well as wanting to protect their market position may
decide to err on the side of caution in this respect in order to limit their exposure from a liability and compliance
perspective.

The GDPR imposes clear data handling rules on banks


Banks also need to be aware that the General Data Protection Regulation (GDPR), which will affect how firms use
personal data, will come into force across the EU in May 2018. The GDPR is broadly similar to the UKs existing Data
Protection Act, but adds extra obligations on data controllers. The main difference is that data controllers have to
demonstrate how they comply with the GDPRs principle, for example by documenting the decisions they take about a
processing activity. Individuals must give their clear consent for their data to be used, via some form of affirmative action
on their part, and they have a right to withdraw their consent at any time.

Under the GDPR, individuals have a right to be informed, a right of access, a right to rectification, a right to erase, a right
to restrict processing, a right to data portability, and a right to object. In terms of marketplace banking, the most
significant of these is the right to data portability, as this gives individuals the right to obtain and reuse their personal data
for their own purposes across different services. This means banks will be compelled to allow their customers to use their
data with third-party services, such as account aggregators. However, the GDPR only specifies that data files should be
provided in a commonly used data format, such as CSV. It makes no requirement for real-time, continuous access to
data to be offered. As such, the GDPR is less onerous than PSD2 or the UKs OBS.

Banks risk weakening their customer relationships


One of the key drawbacks to the marketplace strategy for established banks is that they will lose the exclusive
relationship they have with their customers. At present, the majority of consumers with personal loans favor their own
banks, due to the convenience of application, speed of receiving funds, and likelihood of being approved. In a
marketplace, banks risk being undercut by rivals that can lend at lower rates, leading to reduced interest-based
revenues. Similarly, where consumers buy other products from marketplace partners, banks will lose the associated fee

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and commission income, although this will be mitigated through the revenue-sharing agreements that have been
negotiated with those partners. Nevertheless, the potential gains resulting from higher engagement levels, increased
loyalty, and higher sales due to a greater availability of high-quality products will offset these risks.

Brand identities may become diluted


Banks have spent many years establishing and refining their brand identities in order to maximize loyalty and
engagement levels. However, under the marketplace approach, consumers may start to identify more with the third
parties than the host bank, and end up viewing the latter as little more than a portal for accessing preferred products.

This issue will be most acute where banks have opted to maintain separate branding of partner-sourced products, and
where they have elected to grant consumers unmediated access to these products. Providers can reduce the impact
upon brand identity by choosing a white-label or co-branding strategy, or by adopting active rather than passive product
selection, whereby the bank makes product recommendations to its customers rather than leaving this entirely to their
discretion.

Banks will lose direct control over product ranges


Another concern is that marketplace banks lack control over their product ranges. In contrast to products that are
developed in-house, third-party products are largely beyond the influence of the host banks. This means they may have
little say over the evolution of these products, potentially leading to a growing divergence between the requirements of
the banks and their partners. In extreme cases, this may necessitate a termination of the partnership, leading to
disruptions in service continuity.

A related risk is that marketplace banks effectively decide to outsource product development and innovation to their
partners, thus reducing the incentive for them to develop their own services. As a result, the continuing pressure to
reduce operating costs may lead these banks to make cuts to associated spending, leading to long term damage to
research and development capabilities.

To avoid this scenario, banks should consider active partnerships with third parties where they work together to co-create
products, rather than passive partnerships where they merely host off-the-peg products that have been designed with no
input from the bank.

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CONCLUSIONS
Marketplace strategy could be useful to incumbents
Although the marketplace banking model holds most relevance for new entrants that lack the resources to develop a full
range of products in-house, established banks cannot afford to ignore the concept. Incumbents will be affected, both by
the increased competitive threat posed by challengers that practice marketplace banking, and by the opportunities from
which they can benefit by adopting this approach themselves.

Marketplace banking offers several important benefits for incumbents. Banks can levy fees on third parties for the right to
be hosted on their platforms, and share the revenues associated with the sale and use of third-party products. Banks can
gather information on products their customers hold elsewhere, and recommend better alternatives. Access to spending
data from tie-ups with retailers means banks can make targeted sales approaches, for example for extended warranties.
It is impractical for banks to be best in class across their entire product ranges. Integration of superior third-party
products will remedy any weaknesses far more quickly and cheaply than banks can achieve on their own. Instead of
keeping fintechs on the outside and treating them as adversaries, the marketplace model allows banks to bring them
inside their tents and work with them as allies. This will lead to a win-win situation, where banks gain from access to
innovation and fintechs get access to a large customer base. New entrants are smaller than incumbents, have shorter
chains of command, and are less risk-averse, meaning they can develop and bring to market new products much more
quickly, thus giving them a competitive edge. Where these entrants also use the marketplace model for deposit products,
this will limit their capital adequacy obligations, further adding to their flexibility. Although established banks cannot easily
mimic the internal structures of new entrants for legacy and cultural reasons, they can emulate the outcome by
harnessing fintech knowhow through partnerships.

Alongside these benefits, however, there are a number of possible downsides banks need to plan for. Banks will lose
exclusive ownership of, and access to, customer data, thus removing a vital component of their competitive advantage.
Data loss is inversely related to the level of integration of partner products. Third-party access to customer data raises
the risk of data breaches, leading to damage to trust and reputation. Minimize these risks by agreeing and enforcing
strict standards protocols for data sharing, only sharing data on an as-needed basis, and careful selection of partners.
Customers may start to identify with their banks partners rather than the banks themselves, and come to see the latter as
little more than a portal. Using a white-label or co-branding strategy will increase the likelihood of customers viewing their
bank as the primary provider. Outsourcing product provision involves losing direct control over the future evolution of
product ranges, which may become problematic where the interests of the bank and its partners diverge. Banks may also
become too dependent on their partners for product innovation and scale back their own development efforts. Reduce
this danger by forming active partnerships where products are co-created, rather than passively integrating off-the-peg
products.

A properly implemented marketplace strategy will give established banks a material advantage over their counterparts
that maintain a more conventional in-house approach to product provision. To maximize the chances of success, banks
should take into account the following considerations : Identify which products should remain in-house and which should
be outsourced, establish the criteria to be used when selecting partners, decide to what extent the bank should retain
ownership of, and access to, customer data, choose either white-label, co-branding, or separate branding of partner
products, opt for either passive or active product selection, and Specify contractual terms for partnerships.

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APPENDIX
Sources
AT Kearney (2015) Time to Reinvent Your Banking Model [accessed March 2017]

Bank Innovation (2017) Starling Bank Integrates API into Google Home [accessed March 2017]

CMA (2017) The Retail Banking Market Investigation Order 2017 [accessed March 2017]

CMA (2017) The Retail Banking Market Investigation Order 2017 Explanatory Note [accessed March 2017]

Equifax (2017) Equifax finds 90% of Brits have not heard of Open Banking [accessed March 2017]

EBA (2017) Final Report: Draft Regulatory Technical Standards on Strong Customer Authentication and common and
secure communication under Article 98 of Directive 2015/2366 (PSD2) [accessed March 2017]

EBA (2017) Press release: Regulatory Technical Standards on strong customer authentication and secure
communication under PSD2 [accessed March 2017]

Finextra (2017) Consumers unaware of Open Banking Equifax [accessed March 2017]

Finextra (2016) Number26 closed accounts because customers made too many ATM withdrawals [accessed March
2017]

FusionWire (2017) N26: Germanys fastest growing bank aims for pan-European app-only future [accessed March 2017]

HM Treasury (2017) Implementation of the revised EU Payment Services Directive II [accessed March 2017]

LinkedIn (2016) Why "Marketplace banking" is better for newcomers while "Platform banking" fits incumbents [accessed
March 2017]

MAS (2016) "Singapores FinTech Journey Where We Are, What Is Next" - Speech by Mr Ravi Menon, Managing
Director, Monetary Authority of Singapore, at Singapore FinTech Festival - FinTech Conference on 16 November 2016
[accessed March 2017]

MAS (2016) Finance-as-a-Service: API Playbook [accessed March 2017]

Medium (2017) Finding a Business Model for Challenger Banks [accessed March 2017]

N26 (2017) N26 leverages banking license to offer real-time consumer credits [accessed March 2017]

Starling Bank (2017) The first of its kind: APIs, Open Banking and a Hackathon [accessed March 2017]

Starling Bank (2017) This is the list of Starling APIs that will be available for you to use during the Hackathon [accessed
March 2017]

Further Reading
Retail Savings & Investments- MarketLine Industry Profiles

FinTech: Innovation to be fully adopted by banks rather than growing separately- MarketLine Analyst Insight

The future of artificial intelligence in banking: AI will impact and transform the banking sector- MarketLine Case Study

Retail Banking: Still difficult for new entrants, but they are growing in significance

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