By Deepanker Venkatesh, Senior Manager, Wealth Management Practice Head, Wipro Technologies Limited and Ankur Dani, Senior Consultant, Wipro Technologies Limited
Customer data is to banks what blood is to the human body. It is due to this criticality and competitive advantage associated with customer data that means banks become reluctant to share it with third parties. There is a constant fear of losing customers and business to other institutions who can use customer data better than the bank which owns the customer relationship.
But today the question is, whether banks get to decide who controls the flow of data? It is at this juncture that the concept of open banking comes into play, and in doing so it is putting control back into the customer’s hands.
Open banking helps financial services customers to securely share their financial data with other financial institutions. It provides an opportunity to transform the value chain of banking – in how banks engage customers, provide products and services, and work with third parties.
Open banking requires opening up banks’ application program interfaces (APIs) to third parties, who can use the shared consumer data to create innovative products and services.These third parties can also showcase ways for banks to create new revenue sources and generate value for all members of their ecosystem. It’s worth reviewing some examples to see how this could work in practice.
Open banking capabilities – Use cases
- Better credit scoring by means of account aggregation
Third party apps could help lenders get a 360-degree view of the customer’s financial situation and risk level. This will allow lending decisions to become more robust and new credit uptake will happen in accordance with customers’ overall financial health. Questions like “how much are my total assets worth?”, “how much can I spend?” and “where can I get better interest rates?” become answerable with a higher degree of certainty.
- Better up-sell and cross-sell opportunities suiting individual behavior and lifestyles
A third party app could look at all data which customers give permission for it to view and then offer the best suited price for the product the customer is interested in. If the app results in selling the product to the customer, it would increase the bank’s revenue via increased distribution of services and new revenue streams.
Conservative assumptions to quantify the bank revenue in above case:
- Value of insurance product is $50,000
- Bank pays referral fee = 0.05% of insurance value (i.e. $25) to a trusted third-party
- Size of bank’s customer base = 1 million
- Only 1% of customers (i.e. 10,000 customers) have mobile banking access,
- Only 10% of those customers (i.e. 1,000 customers) take the insurance product.
So for every deal which is captured on the third party app, banks are paying a referral fee of $25 * 1,000 deals = $25,000 only. Against this the bank is generating a revenue of $50,000 * 1,000 = $50,000,000.
- Access to superior product offerings via comparison
A third party app could link a customer’s primary banking relationship with their secondary banking relationship and see how their investments in the primary relationship are performing as compared to the investment avenues available in the secondary relationship, with similar product risk levels. If a better alternative is found, the secondary relationship could be switched using a quick and easy “single button switch” process and by following a step-by-step guide on how to liquidate the existing investment.
This will result in the customer getting better returns with the new product, increase in the AUM (assets under management) of the secondary relationship and the primary relationship would be eventually forced to improve their product catalogue. The typical market efficiency scenario would play out here.
Monetizing open banking the right way
- Direct Revenue:Bank(s) sell or license transaction data APIs to third party.
- Indirect Revenue: Bank(s) pay a referral fee to the third party, or take a cut of transactions from the market place.
Benefits to banks and customers
- Expanding customer reach – Open banking helps banks in expanding customer reach to un-served and underserved customers.
- Increased distribution of services – Open banking helps banks to create new revenue from increased distribution of services via third-parties.
- Increased transparency – It increases customer transparency and satisfaction, and integrates the banking experience closely with the life of customer.
Implementation across globe
Open banking draws its momentum from regulation and governmental drive. It is gaining momentum worldwide but the extent to which different markets are ready to support the success of open banking varies widely.
Developed markets have started to implement relevant use cases and certain geographies have started reaping the benefits described in this article. To align fully with consumer expectations it is pivotal in today’s society that financial services firms monitor these trends and review appropriateness to their business in order to achieve success.
ECB stays put but warns about surge in infections
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.
Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.
Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.
She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.
Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.
Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.
(Editing by Catherine Evans)
Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.
BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.
“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.
As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.
In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.
But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”
While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.
“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.
NO EXIT EYED
Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.
Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.
Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.
He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.
“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”
(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)
World Bank, IMF agree to hold April meetings online due to COVID-19 risks
WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.
The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.
This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.
(Reporting by Andrea Shalal; Editing by Chris Rees
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