dr. markos zachariadis associate professor of information ... · swift network (scott and ......
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Warwick Business School
Dr. Markos ZachariadisAssociate Professor of Information Systems Management & InnovationFinTech Research Fellow, CDI, University of Cambridge
Warwick Business School
Currently:- Associate Professor in Information Systems & Management, Warwick Business School- FinTech Research Fellow, Cambridge Digital Innovation (CDI) University of Cambridge
Previously:- Research Associate at the London School of Economics, Dept. of Management, Information Systems & Innovation Group- Research Associate at Judge Business School, University of Cambridge- Visiting Scholar and Tutorial Fellow at London Business School, Dept. of Management Science and Operations- Research Assistant at the Centre for Economic Performance, London School of Economics
Technological Innovation in Financial Services
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What drives change in financial services?Trans-Atlantic cable in 1858(Garbade and Silber, 1979)
Demand
Organizational & Market Structure
Technology
RegulationLSE Big-Bang in 1986(Clemons and Weber, 1990)
Securities Immobilisation
in 1973(Donald, 2012)
SWIFT Network(Scott and Zachariadis, 2014)
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Banks underperforming• Banks’ profits (ROE) fell dramatically since the financial crisis and never
bounced up.• IT was a “luxury” when banks needed to cut costs.
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Banks lost credibility
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Technological advances and customer expectations rose Technologies that did not exist before
2006/2007:iPhone, iPad, Kindle, 4G technology, Uber, Airbnb, Android, Oculus, Spotify, Nest, Bitcoin, Blockchain, Square, Instagram, Snapchat, WhatsApp, Google Chrome, Kickstarter, Pinterest, Venmo, Slack, Google maps, etc.
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Emergence of FinTech New technologies brought further appetite to
entrepreneurs and investors to explore the market in financial services.
> Fin.Tech *noun* : (abr. ForFinancial Technology) aneconomic industry composed ofcompanies that use technologyto make financial systems moreefficient.
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FinTech taxonomy- Mobile payments- Cryptography, P2P,mobile money
- Market platforms,data standards- Bettermarketconnectivity
- Socialtrading,Robo-advisors, algos- Analytics
- Sharing economy- IoT, wearables,
sensors
- P2P- Banking as
platform,mobile
banking
-Crowdfundingplatforms, angels
Source: WEF (2015)
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Areas of Disruption
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“Unbundling” of the bank
Source: CB Insights
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The FinTech/Bank narrative… The good, the bad, and…. the regulator!
- Banks and incumbent financial institutions: financial crisis, charge high fees, low transparency, etc.- FinTechs jump in to save the day!- The regulators push for a more fair playing field breaking Banks’ monopolies and giving a chance to FinTechs to innovate for the benefit of the consumer.
Banks and FinTechs compete for the same market- …only to realize after a while that they can’t make it on their own – banks need the innovation and FinTechs need the customer base.
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Access to data to improve market outcomes To enhance competition regulators needed to break up
banks’ monopoly. December 2014: First report by Open Data Institute /
Fingleton Associates report.
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PSD2 & Open Banking going live
August 2016: After concluding there was too little competition in UK banking, the Competition and Markets Authority (CMA) ordered the UK’s nine biggest banks to open up their data to third parties.
November 2017: Final version of PSD2 by European Commission.
January 2018: PSD2 & Open Banking went live.
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Regulatory context Payment Systems Directive II (PSD2):
Payment Initiation Service “a service to initiate a payment order at the request of the payment service user with respect to a payment account held at another payment service provider”Account Information Service “an online service to provide consolidated information on one or more payment accounts held by the payment service user with either another payment service provider or with more than one payment service provider”
Open Banking Working Group (OBWG):“designing a detailed framework to enable thedevelopment of an open API standard in UK banking”
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OB Implementation Entity The Open Banking Implementation Entity (OBIE) is the company set up by
the CMA in 2016 to deliver Open Banking.
Governed by the CMA and funded by the UK’s nine largest banks and building societies: Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS Group and Santander.
Key roles:- “Design the specifications for the Application Programme Interfaces (APIs) that banks and building societies use to securely provide Open Banking”- ”Support regulated third party providers and banks and building societies to use the Open Banking standards”- “Create security and messaging standards”
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What’s an API? API: {Application Programming
Interface} “set of functions or procedures
used by computer programs”to access, control or transferdata from other operating systems (Jacobson, et al., 2012)
“electrical sockets that have predictable patterns of openings” into which, other applications that match those patterns can “plug in” and consume them in the same way electrical devices consume electricity (Berlind, 2015).
InternalPrivate
ExternalOpen/Public
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Conceptualizing APIs As technology APIs offer the possibility of integration: “a way for
computers to talk over a network” (Jacobson, et al., 2012). As software products APIs need to be priced, product-managed and
promoted - bring product to market (Parker, Van Alstyne, etc.). As boundary resources APIs can “control and coordinate/cultivate”
platform ecosystems (Ghazawneh & Henfridsson, 2013). As mini-contracts they can be used to lower transaction costs and
eliminate friction between a principal and agent.
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From APIs to platforms
? ?Blackberry Nokia
2007 20% 50%
2013 2% 2%
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Digital Platform RevolutionFIRM YEAR
FOUNDED EMPLOYEES MKT CAP(2016)
BMW 1916 116,000 $53B
UBER 2009 7,000 $60B
MARRIOT 1927 200,000 $17B
AIRBNB 2008 5,000 $21B
WALT DISNEY 1923 185,000 $165B
FACEBOOK 2004 12,691 $315B
KODAK 1888 145,000 $30B (heyday)
INSTAGRAM 2010 13 $1B (acquisition in 2012) Source: 2016 Parker & Van
Alstyne, with Choudary
- “Uber, the world’s largest taxi company, owns no vehicles; Facebook, the world’s most popular media owner, creates no content; and Airbnb, the world’s largest accommodation provider, owns no real estate”
- Tom Goodwin (Havas Media)
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Most famous global brands
% is growth relative to prior year, $ is value of brand equity
2016 Parker & Van Alstyne, with Choudary – licensed under Creative Commons Attribution-ShareAlike 4.0 International (CC BY-SA 4.0).
Source: Interbrand 2015 % is growth relative to prior year, $ is value of brand equity
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13 of these are platforms
2016 Parker & Van Alstyne, with Choudary – licensed under Creative Commons Attribution-ShareAlike 4.0 International (CC BY-SA 4.0).
Source: Interbrand 2015 % is growth relative to prior year, $ is value of brand equity
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Platforms overtaking products
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Transaction-Cost Economics The rules of the competition for ‘hierarchies’:
- Positive economies of scale: Businesses created efficiencies through reducing marginal costs and sourcing production in house.- When transaction costs were high it would make sense to integrate operations and control value production.
Choice of a different organizational model – the market:- When transaction costs fall (e.g. search, coordination, negotiation, information asymmetry costs) then is makes more sense to buy the product instead.
Platforms sell reductions in transaction costs not products!! (Munger, 2015).- Core of the firm will shrink but periphery will expand.
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Platform theory Platform is:
- Business model that creates value by enabling interactions between external producers and consumers (Parker, Van Alstyne, etc.).- Selling reductions in transaction costs not products – e.g. iTunes/Napster or UBER/P2P Austin Market where the platform bears the risk! (Munger, 2015).- Open infrastructure and set governance conditions (Gawer and Cusumano, 2002)
Platform can:- Scale more efficiently by eliminatinggatekeepers (e.g. You Tube)- Unlock new sources of valuecreation and supply (Airbnb)
2016 Parker & Van Alstyne, with Choudary
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Platforms leverage network externalities Network externalities (or network effects) are present when “the value
of membership to one user is positively affected when another user joins and enlarges the network” (Katz and Shapiro, 1994).
These are common in telecommunication networks (e.g. telephone, fax networks).
The value of the fax is subject to how many people have fax-machines!
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Great value in network effects… Positive network externalities:
- Same side network effects (Zachariadis, 2010)- Cross side network effects (Economides, etc.)- Data-driven network effects: the larger your network grows, the better your platform curation can become (Van Alstyne, et al.)
NYU Finance Prof. Aswath Damodaran ($5.9B) vs. UBER investor Bill Gurley ($17B) (2014)
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APIs in banking: “platformification”
Ability to create a business“ecosystem” and add valuefor clients.
How to go about and do that? What are the choices banks
and non-banks have in orderto adopt platform strategies in financial services?
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Open Banking/ Bank-as-a-Platform
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Changing banking architecture• Open Banking will potentially change the way banks operate and will
lead to a more ”modular” architecture and way of organizing.• Banks operate on a traditional “pipeline” business
model/arrangement. They produce everything themselves (vertical integration).
• Opening up their APIs will potentially allow to 3rd party developers to deliver parts of the value chain of the banking service (e.g. distribution, or API layer, etc.)
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Banking transformation
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Four types of emerging platforms We have identified 4 (and a half) types of
platforms that have emerged due to PSD2 regulation:- Incumbent bank platforms- Challenger platform banks- API Aggregator platforms- Account Aggregator platforms + services
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Incumbent bank platform Owns/controls most
layers from Core banking infrastructure, interfaces, distribution channels.
Adding white-labeled services cautiously (services2customer).
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Incumbent banks slow to adopt
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Others slightly faster
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Challenger bank platform Owns/controls most layers from
Core banking infrastructure, interfaces but supporting many distribution channels via TPPs.
Marketplace arrangement: adding and integrating to FinTechs(fintech2customer).
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Digital and “challenger” banks There are more than 40
challenger banks in the UK at the moment
Majority are digital banks (no branches – app only) and are native to open APIs as well as platforms.
Low costs; some have banking license/others sub-license.
Operate on the basis of modular architecture; often “borrow” a core banking engine (Wirecard; Fidor, etc.)
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Neo-Banks ”getting it”
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API Aggregator platforms Owns/controls the API layer
infrastructure by putting forward the technology, APIs, etc.
Cloud arrangement controlling information in the process.
Marketplace arrangement: adding and integrating banks to FinTechs(come control over curation).(banks2fintechs)
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Bud- Sign up: https://thisisbud.com- Link all your accounts on bud (white-labelled for banks)- Search for services/fintechs on their listings- Consume other products via bud platform- Open APIs (or screen scraping e.g. Yodlee)
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“Bank-less” API marketplacesOpen source APIs for banks (since 2010):
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Account Aggregator platforms + services Owns/controls the distribution
layer by providing a customer interface that gives access to all bank account info.
Marketplace arrangement: adding and integrating to external services (either in finance and/or to utilities, etc.) –(bank2customer2service).
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Loot Bank app- Sign up: Loot.io- On-boarding in 5 minutes- Receive instant account- Receive pre-paid MasterCard via WireCard(white-labelled)…
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Yolt by ING Bank (in the UK)- Account Aggregation- PFM tool- Payment initiation- Compare offerings
(energy deals, Foreign Exchange, international payments, etx.)
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Challenges around Open Banking Open Banking and PSD2 implementation hasn’t
been easy. Both Banks and FinTechs face different
difficulties. Various challenges have emerged:
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Brand equity For Open Banking, “branding is a big challenge… I am seeing the logo
many times, getting frequent reinforcement of the relationship that I have with my bank. If I start to do that somewhere else, that reinforcement is gone.”
APIs open the possibility of “white labeling”
“The battleground will be either on the channel and customer engagement side [choice of platform or marketplace] and the services provided [value proposition].”
Challenges for smaller players as they try to establish their brand and compete with incumbents:“…one negative experience can be very hard to over come.“
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Brand equity
“Are you ok being Nascar? If you keep your brand, can you get the best FinTechs?”
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Establishing Trust Scale and trust are on the side of the incumbents “Banking, no matter how fun theymake it, isn’t really fun – ideallywhat you want is peace of mindand minimal interaction. This giveslarge and established banks a hugeadvantage.”
Smaller players may struggleto “convince” customers to trustthem with their money (securityconcerns).
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Time-to-market vs. security Fintechs: “We need the banks to get to the consumer, and the banks
need us, we are the small guys who can innovate, but even if they realisethat, how do you move a giant at the same speed as yourself?”
Banks: “I’m absolutely sure we will have a case somewhere, also in our portfolio, where something doesn’t all work right and we’ll have to deal with that. That was one of the discussions we had with compliance, how do we manage reputation in that case?”
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Enhance transparency Banks and other providers will need to revisit and justify pricing of their
services as APIs will expose costs:
“if you look at all the regulation – PSD2, IDD, etc. – they are all specific about how you have to be very explicit regarding how you charge for your financial services... how [you] justify the cost… you have to unbundle so it has to be very easy for me to buy only what I need…”
Banks and TPP will compete on service quality as comparisons will be much easier to communicate via APIs.
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Who “owns” the customer?
Modularity in services –
the “unbundling of the bank”
Customer data ownership?
Wider access to customer
intelligence and the “sharing of the customer”
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Collaboration with Smaller Players (Fintech 2.0) Collaboration is a relatively new concept in banking Will banks be able to let go of their traditional business model
and rethink revenues/security standards/data to collaborate? APIs have been within closed systems so far (private) Lessons from mobile payments (Ozcan, 2014)
Will regulation/market make it easier to co-create products and services? API standardisation will ease the process of working with
developers
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Partner or Acquire? Will banks go the route of acquiring or
partnering with competitors? Lessons from academic studies on co-opetition
Thinking again about transaction costs and the cost to integrate versus “partner” based on a platform (or market?) model.
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Competing with other platforms and building an Ecosystem A future where banks (& fintechs) will potentially
need to compete with technology / platform providers (e.g. Amazon, Facebook, Alipay, Apple) at a more leveled playing field.
This may be a particular challenge for banks as they have much less experience than these other players in building ecosystems.
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’Platform-as-a-Bank’ Platform-based “high-tech” companies moving into the
finance space – platform envelopment (major overlap of client-base! (Eisenmann et al., 2011).– Facebook Messenger allowing for TransferWise X-border Payments- Facebook registered for E-money license in Ireland (December 2016) moving into payments.- More will follow… (e.g. Amazon Payments/P2P Lending, etc.)
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Email: [email protected]: @MarkosZachLinkedin: https://uk.linkedin.com/in/markoszachariadis