Open Banking: Opportunities for smaller financial institutions

Open banking gives small and medium-sized financial institutions the ability to gradually renew their offering or to expand their portfolio with digital products and communication channels. With short decision-making routes and their historical proximity to customers, they fulfil key requirements to respond to the interests and tastes of various sections of the population with their offering.

At its heart, open banking consists of modular functions that can be integrated into the core banking system step by step via open APIs. This makes the technology attractive for smaller financial institutions such as savings banks, cantonal banks and cooperative banks. They can use the software they need in a way specific to different products and projects and thereby accelerate the market launch of new services. Thanks to short design and development cycles, they can keep up with major banks and offer their clients attractive contemporary services. They can either develop the new applications themselves or cooperate with fintechs.

Reach increases with digital banking

This allows locally or regionally positioned banks to achieve two things: they can continue to be attractive in times of diminishing loyalty to the bank around the corner and reach out to customers outside the regional catchment area with digital products. Generally, the services rolled out via open banking will more heavily target younger consumers, millennials, thereby contributing to long-term establishment of the customer base. Banks are expanding their range both regionally and demographically.

Chris Skinner even thinks that small and medium-sized institutions have an advantage in digital transformation. By contrast, major banks all too often resemble immovable giants. He reports of people “who celebrated huge successes in the digitalisation of a small bank only to then be poached by a major bank and be sucked up in a pantheon of resistance. It is equivalent to no longer being a big fish in a small pond where all the other fish follow you, but instead being a small fish in a big ocean where all the other fish are just waiting for you to be eaten up.”

Open banking at St. Galler Kantonalbank

Falk Kohlmann fully utilises the freedom of the “small pond”. He oversees digital banking at SGKB (St. Galler Kantonalbank). In an interview with the Swiss MoneyToday online magazine at the Swiss Digital Finance Conference, he set out the direction of open banking projects: “Internalisation of external services and externalisation of in-house services.” He is aware that financial services companies are becoming an ecosystem with permeable boundaries: “Instead of bank-central models, we may arrive at overlapping networks over time.”

Not only the interfaces are important for the interplay between banks to work. Falk Kohlmann notes two more points: “On the one hand, governance within the meaning of API and access management, that is, how do the external services register so that they can use my services and how can I continue to make access secure without compromise? And the second point is commercialisation. This means, what is free of charge so that I can add certain services in order to expand my own offering and what is paid for by the customer or by the provider or partner? And how is automatic settlement carried out?”

Public APIs with differentiated API management

Whereas the question of monetisation needs to be discussed and answered within the company itself and with product providers, the onboarding of new partners can be designed securely with technical means. Our Digital Banking Hub has three layers:

We have designed our public API solution in such a way that authentication via the OAUTH2 market standard and differentiated API management guarantee a high degree of security. The software contains the approvals management for customers and monetisation models are also already integrated.

Digital banking takes a hybrid approach at SGKB, in which online and offline channels interact and give customers as much freedom as possible. “It’s important that they can obtain everything from one source and choose between digital services or combinations of digital and physical services. And on request, purely personal, non-digital interaction should continue to be possible with us”, says Falk Kohlmann. His regional institution uses the flexibility of an open banking environment to be the “smart fast follower ahead of our peers”.

At the same time, the bank is also setting itself apart as a “first mover”. Last year, for instance, it brought its #HäschCash savings app to market, which allows users to put money aside in a game-like way. Solutions designed as MVP (minimum viable product) show how SGKB thinks from a customer perspective. Their feedback is integrated in the enhancement of digital applications. In this sense, at its heart open banking means being open to what customers want and like, regardless of the channel they use to contact their bank. Here, savings banks, cantonal banks and cooperative banks benefit from their traditional strength: their direct link to the people in the city or region.

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