EXCLUSIVE: “The Open Road” – Dharmesh Mistry, AskHomey and Maria Harris, HBSG Technology Working Group in ‘The Fintech Magazine’
Dharmesh Mistry, CEO of AskHomey, an app that stores and organises all a home’s key information, and Maria Harris, Chair of the UK’s HBSG Technology Working Group, which is creating a data standard to be used in home buying, look at how open banking has paved the way for something much more exciting
The landscape for banking is constantly changing, yet it seems banks themselves are slow to change. New competitors, both fintechs and neobanks, are innovating and capturing customers who have been forced to use digital channels – not only driven by COVID, but also by the acceleration of branch closures and worsening telephone banking response times. In the 90s, banks targeted answering calls within three rings, these days I’d be happy to be only third in the queue!
At the same time as open banking regulation was introduced to drive more competition, privacy laws have become increasingly stringent to protect customer data and to ensure customers know how their data is being used. As I see it, there are four key challenges for banks – which are probably underestimated by most people outside of the industry when they are comparing legacy providers’ measured pace with innovators’ haste – as well as a big opportunity as they move from open banking to open finance on the journey towards open data.
CHANGE AND CHALLENGES IN INNOVATION
So, why is it that banks seem to lag in innovation? What is it that allows neobanks to compete with them, head on, and for fintechs to reinvent individual product lines and capture customers from banks? It’s not that ‘banks don’t know how to innovate’ or that ‘senior management are risk adverse’. There is no simple answer, the picture is complex and not the same across banks. The four key things presenting a challenge to banks in driving innovation are:
The larger a bank is, the more silos it will have. These silos can be a multitude of things:
- Reach – banks that are located in many countries often have geographic silos, managed in country or part of a region, like Europe
- Brand – sometimes brand is used to focus on specific segments like wealth, or product lines, like mortgages
- Customer segments – for example, retail banking, business banking and wealth management, each offering quite different product lines
- Product – often each product line is a separate organisation, like cards, mortgages, accounts
- Channels – internet, branch and telephone banking are separate departments and sometimes even separate companies, e.g. First Direct for HSBC
- Processes – like fraud, AML/KYC, origination, onboarding
So, it’s no wonder that the ‘single customer view’ (knowing all the products and interaction a customer has with the bank) is something that still escapes the ability of many of them to see. The organisational separation of silos is one of the biggest challenges for banks. For them to think about owning end-to-end customer journeys, crossing internal silos will be a big hurdle and, as such, it may be time to restructure for the digital era. It is also something that fintech’s and neobanks will only face once they scale and are compelled to extend to different product lines, channels and customer segments.
Such ‘growing pains’ are almost inevitable
Larger banks do invest in innovation in many ways, from funding start-ups, to running hackathons or partnering. Many have innovation teams looking at new technologies and trends. Innovation is generally measured by how successful it is and that generally means customer adoption. As tech strategist Geoffrey Moore wrote in his seminal book Inside The Tornado, technology adoption takes time, starting with innovators and moving to early adopters, then early majority, late majority and finally the laggards. Even mobile banking has taken 15 years to reach mass market (when more than 50 per cent of the customers use the technology). So, whilst innovation can be quick, it can also be many years before it is widely used.
“Not only has open banking had global influence in banking but also in cross-vertical open data initiatives”
This can present a challenge when a business case to fund investment into the innovation is based on the standard five-year plan. For example, what would it take for the mass market to adopt the metaverse? I would argue that the experience needs to be close to life, something very hard to distinguish from the real world and not the gaming graphics we have today. This could be 15 years away; hence, it might be well over a decade before any bank makes a return on any investment in it. Hence, financing innovation can be a challenge.
The third big challenge I see is regulation, not only the many different and evolving rules being introduced, but also how some can seem to contradict others. On the one hand, we have open banking freeing up (with customer permission) customer data; on the other, we have the General Data Protection Regulation (GDPR), trying to protect customer data.
We’ll soon have open finance, which frees up access to a broader range of data for non-bank-account-based financial products. However, in open banking we saw great innovation of customer experience and especially in onboarding new customers, whereas most of these types of product require advice and have strict rules about how they are sold and to whom.
The last and most obvious challenge: the technology landscape is vast in breadth and at the same time maturing rapidly in depth for a single technology. Take something like AI, often a single line item but which now has many subtopics focussed on increasingly specialised aspects of it. Multiply this by the silos in a bank and the challenge quickly exacerbates.So, in defence of banks innovation is complex and difficult. The scope and breadth for innovation is huge but that itself creates a challenge to prioritise and fund projects. That said, a focussed approach is possible, as Claire Calmejane has shown both at Lloyds and Société Genéralé ,where she has overseen innovation. Her approach was to align innovation to each of the bank’s core goals. Another way to do this is to start from the future and work backwards, focussing on banks’ key asset… data.
THE BIFURCATION OF BANKS
Given the challenges, it’s natural that innovation in most banks simply drives improvements in existing products and processes. However, innovation that changes a business model will have the biggest impact. I believe the next biggest change is already occurring and that the impact of that change will fundamentally reshape banking.
It will always be the case that only banks can create and operate banking products because that’s what regulators dictate. However, the change that open banking has brought is that anyone with customer permission can use banking data to improve a customer experience. They may go further with embedded banking and partner with a bank to provide banking services. Hence, increasingly, we have seen the bifurcation of banking – a splitting of roles between distributors that are innovating the customers’ experience, and banks that focus on providing banking-as-a-service (BaaS). Larger banks will be able to do both, while smaller banks may have to choose between one or the other, based on their resources.
We’ve already seen a huge consolidation of banks and, going forward we will see even more as providing banking products and services becomes a race to scales, to achieve the lowest cost and best product flexibility. This will require BaaS providers to develop or adopt modern banking cores that are Cloud-native and open.
The granularity of services offered will allow these banks to attract a broader set of partners/customers for BaaS than fintechs alone. Another key factor for successful BaaS will be the ability for new products to be created easily, quickly and without limitations on features. One solution to this challenge is to support programmable products to allow partners to extend core system capability without constraint from the core system itself.
We are already seeing this possibility enabled through technologies like smart contracts.On the distribution side, we have seen expansion as neobanks and fintechs pick off products and customers segments. Today, there are banks that focus on the needs of immigrant communities, musicians, truck drivers, the LBGTQI+ community and many more. To date, there has been little innovation in banking products/services specific to those segments, their differentiation largely coming from content and marketing focus. However, we are starting to see the green shoots of the next generation in this space that will leverage a broader trend… open data.
THE ROAD TO OPEN DATA
Outside of financial services, there are open data projects in many other sectors such as real estate, healthcare, and utilities. Some of these projects have benefitted from seeing open banking in action, so not only has open banking had global influence in finance but also in cross-vertical initiatives.Often these projects will refer to the way that open banking operates to justify/prove their own solutions. And the players interested in these individual open data initiatives largely come from within their own industries. They are operating in silos similar to the banks’. However, in UK real estate, something interesting is happening.
This is an industry that demonstrates how open data projects can enable customer journeys to seamlessly span verticals and enable multiple parties to exchange data to facilitate that in a safe and secure way.
Today, the process of buying a house in the UK is largely manual and paper-based. Once a buyer’s offer is accepted the buyer’s solicitor gathers information about the property to inform the buyer. This can take several weeks. If the buyer pulls out, the entire process is restarted for a new buyer. This highly inefficient process can take months, especially if there is a chain of buyers and sellers, trying to complete their purchase on the same day. The process involves many parties: estate agent, solicitors, mortgage broker, surveyor and lender. Each party will have to validate the identity and perform know your customer (KYC) checks.
“The work of the HBSG will revolutionise property transactions, dragging an industry that lags others in digitisation into a new era of automation and intelligence”
As information is gathered, it often needs to be shared with another party and this is done through post or email or by rekeying on to multiple systems. On average, the process now takes 126 days. It’s no wonder almost a third of sales fall through.
Every failed sale costs the buyer on average £2,700 which means up to £1billion is lost every year. The UK government and industry collaboration group, Home Buying and Selling Group (HBSG), was set up to improve this inefficient process. It aims to do this through digitisation, which presents an opportunity to re-think how properties are bought/sold.
The first output from the group is a new data standard, including the BASPI (Buying and Selling Property Information), which provides a single source of truth for property transactions. In redesigning the process, the group has put responsibility for producing a digital property pack onto the seller, so a pack of upfront information is produced once and shared with any buyer. This not only reduces the time to complete but also saves duplication of effort if a buyer falls through, for whatever reason.
Whilst conceptually similar to the Home Information Packs that were introduced in 2003 and subsequently scrapped, the key difference now is that property information is digitised. By digitising the data, it can not only be exchanged more easily, it can also be understood by software that can automate the process.
To enable this to happen safely, the group is introducing a property trust framework, based on the four data principles that make up FAIR (Findable, Accessible, Interoperable, Reusable):
- Findable: Data is digitally formatted, using an open industry standard and stored on modern systems with meta data to describe it in a richer context. This enables property data to be searchable by a machine.
- Accessible: The trust framework is open, freely available, and agnostic to any specific or proprietary technologies. It can be operated peer-to-peer (data can be exchanged directly between two parties) or via a network that simplifies the connectivity of multiple parties on one transaction.
- Interoperable: An open API and data standard, based on common data dictionaries and published schemas, allows all parties to exchange data easily across APIs, regardless of the platform used.
- Re-usable: The trust framework ensures that there is full data provenance: the source or provider of the data is recorded and auditable to engender transparency and trust of the data so that it can be reused rather thanre-sourced by different parties.
The BASPI is on its third published iteration while work on the trust framework is continuing. Early pilots of the trust framework have already demonstrated both peer-to-peer and network exchanges of the data between different third parties. And those involved have already gone further than exchanging data by introducing automation, for example for the collation of property search data.
It’s very clear that this development will bring about the same kind of innovation and improvements that open banking has provided for financial services. What is compelling about this work is that it shows how players from different verticals can come together to create not only an open data standard but also a framework for exchanging that data safely. Such a trust framework is necessary because, unlike with open banking, which exists in an industry vertical where the data is trusted because it comes from a bank, many different parties from different industries are involved in conveyancing.
We believe that the full implementation of the work of the HBSG will revolutionise property transactions, dragging an industry that lags others in digitisation and the exploitation of technology generally into a new era of automation and intelligence. And just as open banking has influenced other open data projects, the trust framework will also influence other cross-industry opportunities.
So, to conclude, open banking has shown:
- Customers want to get value from their data and are willing to share it with third parties
- Data can be exchanged, with customer permission, in a safe and secure way
- Making data available openly will drive innovation
- Open technologies are available now and don’t require extensive funding or proprietary skills/tools to use them
Open finance moves this on by drawing on financial data from a broader product set. But open data will have a much larger impact as it brings huge opportunities to drive innovation across verticals – because most major customer journeys, and especially life stage events, will involve multiple verticals and parties.
Co-author: Maria Harris
Maria Harris is responsible for creating a data standard for property sales and implementing an open data trust framework that can be used by many actors from different vertical involved in the home buying process. Maria has a strong track record in this space, having launched digital mortgages with Atom bank and has also being involved at the outset of open banking.
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