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Fintech unicorns and a new financial world

07.05.2020
Soraya Jansen
Opinion

Fintech unicorns and a new financial world

Views, thoughts, and opinions expressed in the text belong solely to the author, and do not represent the views of the Support Centre for Data Sharing or the European Commission.

This article is the second part of a series on open banking and data sharing. After researching the topic, I believe that fintechs bring a positive change in the financial services sector because they build on the new narrative that people have ownership over their financial data.

 

Fintechs and unicorns

Financial technology companies, otherwise known as “fintechs”, have surged across the financial industry with promises to reinvent banking and improve customer experience. Fintechs have profited from revised financial data sharing and payment regulations in Europe, such as the PSD2 regulation, discussed in the previous opinion piece. A few fintechs, such as the Dutch digital payment service Adyen, have even reached what is known as a unicorn status. Here, a unicorn is a private company that is entering the public market with a valuation of 1 billion US dollars or more.1 Essentially, fintechs’ services are characterised by (data) interoperability and personalisation.2

Data interoperability is the ability of systems and services to create, exchange and consume data to ensure that they have clear and shared expectations for the contents, context and meaning of the data.3 Fintechs profit from the new PSD2 regulation as this legislation has accelerated the Banking-as-a-Service (BaaS) model. The BaaS model enables licensed banks to share data with other businesses to integrate digital banking and payment services directly into their own products. It works in the way that the business’ (non-banks) frontend is connected to the BaaS provider via API, allowing the business to offer digital lending services, account management and payment services themselves in their own apps and websites.4 The open banking providers connect to the bank’s system via API to retrieve the data (retrieving data is also considered a practice of data sharing). Often, the API layer between the bank and the open banking provider is provided by an API banking platform. BaaS should not be confused with Banking-as-a-Platform (BaaP), which refers to banks integrating services from other providers, mainly fintechs, in order to offer their customers a broader range of financial services from one bank account.5

Personalisation in the fintech industry refers to engagement systems wired into the data to reveal customer behaviour and drive a personalised experience. Customer engagement is not only based on financial data but is also focused on the personality of the customer.6 Personalisation is achieved through collecting more data on the personality and habits of the customer. For example, many fintechs, such as Yoyo Wallet and Bux, ask potential users to fill in a short questionnaire to find out more about their personality and habits. Overall, collecting more customer data also requires a stronger data platform with a greater scale to scale up volume, velocity and variety of the collected data.7

 

The new world of financial data sharing

While open banking allows fintechs to develop better personal finance applications, it places pressure on traditional financial service institutions to improve their own offerings. Open banking services and the practice of financial datasharing cultivate competition in the banking industry – forcing banks to either enhance their own financial service offerings or partner up with successful fintechs. Many banks have either chosen the latter option and partnered up with fintechs or have mimicked their competitor’s customer centric features.8 An example is the Dutch third-largest bank: ABN Amro. Its wealth management application Kendu, launched in 2019, has several similarities to the services of Nutmeg: a London-based fintech launched in 2012. Both are online investment management services that manage professional portfolios and provide an alternative to stockbroker platforms, where customers make their own trading decisions.9 10

Overall, open banking is transforming relationships between traditional financial institutions and their customers by shifting the narrative that customers themselves should have ownership of transactional data instead of their respective financial institutions. The next article of the series will provide a further deep dive into regtech applications and open banking.

 

In the meantime, please share your opinion on the future of fintech and new business opportunities. Give your opinion on our forum or share your knowledge and experience with fintech and open banking! 

 

Pixabay: Frankfurt
Image credit:
(C) 2020, Leonhard Niederwimmer