Marketplace Banking
New business model threatening
traditional structures
Reference Code: ML00024-030
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Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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.
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
Catalyst............................................................................................................................................................................ 2
Summary ......................................................................................................................................................................... 2
N26 has partnered with several providers to expand its offering ................................................................................... 14
New revenue sources will be particularly advantageous for new entrants ................................................................. 16
Banks can convert fintech providers from threats into allies ...................................................................................... 16
Conclusions....................................................................................................................................................................... 20
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Sources ......................................................................................................................................................................... 21
Disclaimer ...................................................................................................................................................................... 22
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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:
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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.
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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 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.
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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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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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.
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.
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
SOURCE: GlobalData
MARKETLINE
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.
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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
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
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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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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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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.
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.
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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.
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.
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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.
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.
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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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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
Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017
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Marketplace Banking: New business model threatening traditional structures ML00024-030//Published 07/2017