1 Digital financial services and open banking innovation are bank s becoming invisible

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Digital financial services and open banking innovation: are banks becoming

invisible?

Valeria Stefanelli1, Francesco Manta1, Pierluigi Toma1

1University of Salento, Department of Economic Sciences, Campus Ecotekne, SP6 Lecce-Monteroni,

73100 – Lecce, Italy

Abstract

Digitalization in many economic sectors drove the financial system to adapt to new paradigms of

technological transformation. Moreover, the extant regulatory framework forced the financial system to

reconsider its business models and its relationship with the market. Such reasons generated also in the

banking sector a new model of competition within the ecosystem never seen before in this sector. The new

ecosystem of banks and financial institutions lacks a common framework that not only synthesizes the

development lines of open innovation in the banking sector, but also regarding the planification of strategic

choices and organisation within the new ecosystems. The present study aims to inquire the strategic

positioning of European banks toward their digital transformation strategies, by analysing the decision-

making processes that occurred between 2015 and 2019. A qualitative analysis on partnerships and the

adoption of Application Programming Interfaces (APIs) development in support of new service models was

carried out. Results have relevant policy implications for regulators, linked to the business evolution and

the risks of outsourcing, and managerial implications for the followers, specifically on the plan of service

integration to diversify and boost their activities in the segment of customer relationship management and

care, providing a better user experience.

Keywords: finance, strategic management; technology management; Fintech; open banking; invisible

banks.

1. INTRODUCTION

In recent years, new digital technologies (machine learning, Internet of Things, big data, blockchain, etc.)

have generated profound changes in the various economic sectors at an international level (Downes &

Nunes, 2014). Such demand for evolution boost research to follow up new frameworks in the field of

innovation management (Chae, 2019), fostering the concept of ‘digital innovation ecosystem’, stressing the

outstanding relevance gained by heterogeneous factors that contribute to the evolution of such networks

(Hu et al., 2016). This evolutionary trend, which involve many actors at different levels, has is pivot in the

essential role of big data and analytics, which are considered disruptive and transformative elements for

innovation (Raguseo, 2018). They, indeed, proved to carry many benefits to the economic activity,

determining a considerable increase in investments in big data skills and resources (Gupta et al., 2018). The

changing pattern of the new digital ecosystem is forcing the banking sector to adapt to new business

models that take into account the need for digitization and the rethink of their core services and processes

to better dialogue with customers (Bank for International Settlements, 2018). This process is both

spontaneous, pushed by the birth of financial technology, and fostered by governments in the frame of the

EU digital agenda, which require financial firms to encourage the switch to digitization and the adaptation

of users to digital products and services. In some areas, indeed, the process of open banking development

is market driven (i.e., China and the US), in other countries is prescriptive (i.e., the EU) or in other is

encouraged by the issues of guidance and central support (Bank for International Settlements, 2019). The

financial sector is among those most affected by this change. Traditional banks, in fact, are committed to

repositioning their business model, both for the need to recover efficiency and profitability and to seize the

opportunities offered by digital technologies. In this glance, the shift to the business model of Banking-as-a-

platform (Omarini, 2018) is shaping the new paradigm of sustainable and attractive opportunities for

financial institutions. These changes are also necessary to respond to changes outside the sector, linked to

the evolutions and new needs of increasingly digital and demanding consumers (Financial Stability Board,

2019; Bank for International Settlements, 2020; Bank of Italy, 2021).

Such changes also include recent regulatory interventions, like the PSD2 legislation on digital payments,

aimed at regulating competition access to the European payments market and guaranteeing greater

protection and transparency for users (Associazione Bancaria Italiana, 2020). In this perspective, the PSD2

has recognized the access to the market of new operators, the so-called Fintechs, whose market

competitiveness lies in high technology, used for the supply of innovative products or services, in the ability

to analyze large amounts of data, in the dynamic and lean business structure. Since these are very often

start-ups, these service providers are subject to a preliminary regulatory framework still in definition,

instead of that envisaged for credit institutions, which are subject to stricter norms. These opportunities

have allowed Fintechs to undermine certain points in the value chain of banking services, focusing mainly

on the payments sector, but generally having a widespread throughout the financial services sector. Thus,

many differences at different territorial levels, does exist in the state of the art and the evolution of the

Fintech sector (International Monetary Fund, 2019).

Considering this, banks must rethink an internal strategic and organizational reorganization in order not to

risk losing significant market shares. Regardless of the strategy that each bank intends to adopt, the digital

transformation of the business has now become inescapable (Omarini, 2018; Anand & Mantrala, 2019;

Khanboubi & Boulmakoul, 2019; Ayadi et al., 2021; Appio et al., 2021). According to a report issued by the

Italian Bank Association (ABI - 2022), banks are constantly converting to a service provision mix more and

more oriented toward the digitization of their core products: the main strategy pillars watch to the

reduction of physical desks, the increase of services provided via ATM, and the increase of interfaces for

customers, like the increment of POS payment devices provided and the sharp increase of electronic

payment transactions (European Commission, 2015; European Banking Authority, 2018). Some scholars

argue that such changes are becoming more effective as banks are intensifying partnerships with Fintechs

and hiring digital officers (Hornuf et al., 2021) All these changes have been enhanced by the breakout of the

pandemic, which reduced and resized the physical activity of financial intermediaries and enhanced the

attitude of consumers toward digital and mobile retail banking (Baicu et al., 2020).

Some studies (Temelkov, 2018; Vives, 2019), underline how Fintechs can qualify as an opportunity for

banks that intend to enter productive and/or commercial collaboration and partnerships, in a logic of open

banking. Banks, by sharing their data with external fintech or big tech subjects (such as GAFAAs), offer new

services and financial products (or already existing services, but provided in a more effective and efficient

way), which constitute an added value for customers. Everything is provided through platforms open to

collaboration and integration through interoperability standards between different software, i.e., the

Application Programming Interfaces (APIs, Premchand & Choudhry, 2018).

In light of this context, the aim of the present study is to examine the characteristics of the banking

ecosystems, which, according to our best knowledge, are barely explored. For this reason, this work

analyzed the strategic positioning of the major European banks in terms of digital transformation,

observing the choices made by those financial institutions in the period between 2015 and 2019. The

assessment was conducted by taking as a reference the partnership choices made with Fintech and API

development initiatives. The analysis conducted made it possible to frame the strategic direction of the

banks under investigation, as potential followers of the overall banking system, considering the appropriate

changes and timing. The results of the analysis have a significant impact on banking policies and

supervisors, financial intermediaries, and managers, Fintechs and start-uppers.

The remainder of the paper is organized as follows: paragraph 2 outlines the theoretical framework and

studies on the topic of digital banking strategy, to support the formulation of the research question.

Paragraph 3 describes the methodology, sample and data adopted in the empirical analysis to support the

construction of the strategic positioning map. Paragraph 4 illustrates and discusses the results. The last

paragraph illustrates the conclusions of the work, the limits and possible policy and managerial implications

for the banking sector.

2. BACKGROUND AND LITERATURE REVIEW

2.1 Digital and financial ecosystems

In the last two decades, there has been a growing interest in the concept of ecosystem in managerial

literature and practice (Iansiti & Levien, 2004; Dhanaraj & Parkhe, 2006). The financial sector also highlights

the emergence of digital ecosystems (Palmiè et al., 2020) based on financial technology (Fintech). In this

work, the emphasis is on the concept of disruptive innovations and how this can destroy existing industries.

In this context of disruptive and large-scale evolution of digital economy, banks and financial institutions

are the most involved in this running pace evolutionary path, because of their central role of intermediation

among actors, as well as the products and services provision to firms and private entities. Intermediation

costs, payment services, loans and trading are of utmost importance in assessing the efficiency of all the

economic sectors, and the creation of a highly competitive environment in terms of time and financial costs

require the configuration of new business models. Moreover, together with public spending, banks and the

financial system are the most important actors supporting the economy in the processes of green and

digital transitions (Bank of Italy, 2022).

Fintechs have evolved rapidly and are reshaping the banking sector, payments, commerce, financial

investments and even the very concept of money with digital currencies. The FinTech ecosystem includes

both established companies such as banks and insurance companies, and completely new companies (such

as start-ups) that develop new concepts and new business models based on Fintechs. Unsal et al. (2020)

also provide a technological approach, based on APIs, to build a financial ecosystem.

Although Fintech is a sector characterized by strong growth - especially in the last 5-6 years -, it represents

only a small market share compared to financial institutions (Vives, 2017). This growth was most evident in

the US and China, with Europe slightly lagging behind. The United States has the largest Fintech industry in

the world with 4.7 million companies. Most of the European Fintechs are concentrated in the UK with

820,000 companies (Riyanto et al., 2018). They have mostly developed in the insurance sector, deposits,

loans, and capital raising, digital payments, investment management and financial advisory (Financial

Stability Board, 2017). For all these market segments, Fintechs have the potential to reduce brokerage costs

and expand access to finance for customers not served by traditional financial institutions.

For banks, one aspect to consider is that one regarding Big Data management. Financial institutions are

currently facing the industry transition to Big Data (or the open banking platform paradigm) and for this

reason, according to the literature, there is a link between the financialization of the economy and a

significant increase in information flows in the banking sector (Klioutchnikov, et al., 2019).

Moreover, Vives (2019) describes digital disruption in the banking sector by examining its impact on

competition and its potential to increase the efficiency and well-being of consumers. The results highlight

the ability of disruptive new technologies to lead to greater efficiency in the provision of banking services.

Therefore, banks will move towards a model based on a customer-centric platform, which will be managed

through the Application Programming Interface. These changes represent major challenges for incumbents,

who must increasingly seek to reduce the costs of physical branches and try to reach new standards of

services offered, to face the strong external competition from new entrants.

Whether Fintechs represent a threat or an opportunity for incumbents will largely depend on the bank's

strategic approach and its desire for cooperation (Temelkov, 2018). The difficulties for SMEs to receive

loans from traditional banks, together with the other factors listed above, have made the breeding ground

for fintech start-ups for every service offered by the traditional bank (Patwardhan, 2018). In this situation,

banks risk losing customer base and profits. According to the literature, due to competition, banks risk

losing approximately between 29% and 35% of their revenues (European Banking Authority, 2018). But if

banks started the digital transformation process of their business in time, they could not only maintain

their position as industry leaders, but they could also increase their profits. This potential loss of profits is

already in itself a valid reason for banks to consider the prospect of collaborating with fintech companies.

This aspect is of high concern from a supervision perspective: according to the Eurosystem supervisory

body, the digital transformation and the cybersecurity of financial institutions are respectively in the

priority axes 2 and 3 for the next three years (European Central Bank, 2022).

2.2 The digital challenge for banks

In addition to the same analysis, a study conducted by the consulting firm Accenture with 25 senior

innovation managers of the participating banks within its Innovation Lab in London and Dublin, highlights

three issues to be addressed for digital transformation: the degree of openness, collaboration, and

investment (Skan et al., 2014). In the first case we refer to a process, on the part of large financial

organizations, of involving external technological solutions. This is widely present in the fintech approach

culture and translates into the integration of external systems with the banking core business using specific

technologies, the so-called APIs, to offer value-added services.

According to the report conducted by Ernst & Young in 2017 (Ernst & Young, 2017), both the actors

involved will obtain advantages from the stipulation of commercial partnerships, only if correctly

addressed. Leading organizations should seek the simplification of internal processes and increase the use

of external utilities, platforms, and micro-services where possible. All with a view to a component-based

architecture, which resembles a set of interoperable building blocks, which will drive next generation

innovation and efficiency.

Continuing with the analysis of the literature, to give more value to their customers, amid the regulatory

framework offered by the PSD2, banks should offer their products and services in an open architecture of

Personal Financial Management, offering for example account aggregation services, as well as comparison

skills on commissions, rates, and performance across different accounts. Indeed, many financial institutions

look to the future of their business as digital platforms with some physical branches, explicating the open

banking paradigm (Rousseau, 2019; Camerinelli, 2020).

This paradigm entails a new vision and a new way of operating. Many financial institutions, including in the

Private Banking sector, have started hiring managers from Silicon Valley, integrating new tools and

functionalities into their core businesses, typical of other sectors of commerce, through APIs (Bender,

2015).

Nazaritehrani and Mashall (2020) highlight the positive correlation between market share and profit for

banks, statistically analyzing this relationship through a survey conducted at the most important Iranian

bank, Shahr Bank in Tehran. In particular, the study reveals the positive relationship between the impact of

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1Digitalfinancialservicesandopenbankinginnovation:arebanksbecominginvisible?ValeriaStefanelli1,FrancescoManta1,PierluigiToma11UniversityofSalento,DepartmentofEconomicSciences,CampusEcotekne,SP6Lecce-Monteroni,73100–Lecce,ItalyAbstractDigitalizationinmanyeconomicsectorsdrovethefinancialsystemtoadaptt...

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