Open Banking: An Innovation Ecosystem

In my blog post on innovation ecosystem I discussed how ecosystem fosters innovation and why governments and organisations should promote an ecosystem to encourage innovation.

Though Silicon Valley is widely known example of innovation ecosystem.  Open Banking is a government led initiative for innovation ecosystem.

Till few years back we can broadly classify companies into tech or non-tech.  But slowly classification will become invalid since every organisation will have to focus on technology led innovation and immerse technology into step of value chain.  Organisations such as GE and John Deere, Governments such as Estonian and UK have lot of focus on technology.  Tech and Non-tech – both are transforming and their businesses are overlapping.  The tech companies have cash, technology, customers, and resources to disrupt any industry.  The cash rich big tech companies such as Amazon, Alphabet (formerly Google), and Microsoft build their own ecosystem.  The non-tech companies are inspired by the success of the tech companies; they see disruptive technology both as threat and opportunity.
Today’s world is not linear and companies have to think more widely.  Companies (Industry Incumbents such as General Motors and Barclays) not just face competition from another company in the same industry but also from Digital Giants (Tech Giants) and Tech Entrepreneurs.  Digital Giants with technology edge at its core, transform the business, such as Amazon did in Retail, Apple did in communications, and Google did in Advertising.  Tech entrepreneurs (Start-ups) use digital technologies to disrupt the industry as Netflix did for movie rentals, Tesla did in automobiles, Uber in taxi service, and Kickstarter in business financing. 
Industry Incumbents, Tech Giants, and Start-ups can couple loosely to share complimentary resources, raise standards of industry, innovation, and customer services; for example, in the process of digital transformation a bank collaborates with other players in industry to create an innovative ecosystem.    
In the value chain, IT Infrastructure is huge cost for any bank and it is often termed as back office operations.  Banks consistently look for ways to optimise the cost and over time cut jobs or outsource to other IT companies.  IT infrastructure also require hiring technology resources and it is difficult because technologies keep on changing.  Upgradation in IT is complicated and learning is slow.  


Tech giants such as Amazon and Google are experts of IT and they manage huge data centres, they have highly skilled technical resources, they are either innovators of technology or they are very quick in adopting technologies, and provide cloud services (AWS, Azure, and so on) and channels (Apple AppStore and Google Play Store).

Banks face another challenge of technology led innovation because they considered IT as a supporting activity.  Tech Start-ups create a new value chain that is based on technology, the new value chain is a platform (Data -> Technology -> Service), because, they refrain from huge investments so they build services using technology.  A Digital only challenger bank will not invest in brick walls and human resources to sit in branches.  Start-ups have idea and passion but they still need data and access or reach to customers (held by Incumbent banks).
Cloud computing and Open banking are initiatives that change the traditional value system of banks, creating an innovation ecosystem.  Cloud computing enables bank to export data to cloud provider and use the advance technologies (as a service) to replace its legacy IT infrastructure.  Cloud providers not only provide data management but also latest technologies (Machine Learning, Analytics, Blockchain) as a service, making it easier for banks to focus more on business and be less worried about IT infrastructure and resources.  Open banking will require Banks to provide customer account information to third parties via APIs and allow third parties (such as Payment Initiation Service Providers) to initiate transactions ordered at customers request[1].  Combining Cloud computing and Open Banking, below is very high level of one value system.

Data Centre and IT Services are provided by the Digital Giants (such as Amazon), Banks write API’s (Application Programming Interface) that expose customer data and transaction services in secure way, and FinTech’s innovate and implement their ideas over the infrastructure. 
In past few years, companies have started accelerator programs and collaborating more and more with Start-ups.  Banks are now less reluctant to transfer their data to cloud managed by third party.  Cloud providers not only manage data but also, they provide high-tech services such as Google is providing services for image recognition and artificial intelligence API’s, which can be used by companies to build new business models.  Bank, Cloud provider, and Start-up’s combine to form a very efficient value chain and create innovations.   




[1] https://www.openbanking.org.uk/
  

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