Transparency and fintech: how modern banking works in terms of technology

Fintech as the new norm

The coverage of financial technology is growing every year: from 2019 to 2020, the number of

fintech startups almost doubled,the main growth was provided by the countries of Asia, the Middle East and Africa. According to Findexable, more than half of the leading cities in the field of financial technologies are concentrated in developing countries, including Russia. Payment services and neobanks are gradually becoming mass products. Moreover, users often start using mobile wallets before they open a bank account. According to a 2019 study by QIWI and NAFI, the share of adolescents who use electronic wallets is 7% higher than the share of those who have personal bank cards that are not linked to their parents' account.

It is logical that along with the market coverage it growscompetition, and hence the requirements for the quality of services. It is not enough for modern companies to simply offer favorable rates and an expanded range of services; it is important to build open communication with customers, and this can be achieved by increasing transparency.

Customers have preferred companies beforewhich openly disclose the terms of the contract, do not impose hidden payments and services. Surveys show that 73% of users are willing to pay more to brands that rely on transparency.

However, recently the request for transparencygrowing: companies are expected to be open at all levels - from communication in social networks to regular and detailed disclosure of financial indicators.

For this, companies use different means,for example, they use a friendlier tone-of-voice in communication with customers, improve the interface of applications to make them more accessible and understandable, and avoid hidden fees, tariffs and data manipulation.

However, transparency is often expressed onlysuperficially. We can recall the brokerage service Robinhood, which turned investing into an exciting game: because of this, novice investors did not take the tool seriously and imperceptibly lost hundreds of thousands of dollars.

A transparent fintech company works not only forthe level of UX and external communications, but also at the level of deep technologies. They are the ones who take the financial services industry out of the black box by showing what is under the hood of a service provider. Open Banking (including an open API), as well as the BaaS (Banking-as-a-service) and BaaP (Banking-as-a-platform) models, can achieve increased transparency today.

Open Banking - a new concept based onuse of open APIs (application programming interface). Created to improve the quality of customer service and provides an opportunity for third parties to use the bank data.

Open Banking

Banking services have worked for a long timeclosed platform models: all technology, innovation and data remained strictly within the system, and third-party developers could not access the environment in any form. This hindered the development and growth of competition, since market participants could not exchange information and integrate with each other. That all began to change in 2015, when the EU passed the second payments directive (PSD2), which encouraged banks to provide fintech companies with access to their data to increase competition in the payment services market.

Directive 2015/2366 / EU, also known as the second payment services directive / second payment services directive - EU directive aimed at expandingcompetition in the payment service market and harmonization of consumer protection legislation and the rights and obligations of payment service providers and their users.

Today Open Banking includes varioustechniques for increasing transparency and supporting collaboration in the financial sector. This is the exchange of data in real time, and the provision of opportunities for other players, and joint analytics of the collected information.

Moreover, all integrations are launched only byclient's initiative. For example, he wants to transfer data about bank expenses to a budget accounting application - the bank gives him such a right and the necessary tools for this.

This model is based on an open API,allowing customers to more freely manage their data and link banking products to third-party services of their own free will. The interest in API-tools is steadily growing: for example, in Britain, 97% of banks have already implemented them. In Russia, the technology is not yet so popular, so the Central Bank is going to implement it.

There are other integration formats: for example, a payment service provides its "engine" to a taxi aggregator, simplifying transactions. The market is constantly expanding, and intermediary services appear on it, for example, TrueLayer, which offers an API platform for developers in the field of fintech - by the way, during the pandemic, the company provided services for free. Many companies, including QIWI, are gradually moving towards an open platform format that provides third-party developers with access to payment infrastructure and data via API. So, in 2019, Visa launched the Visa Next platform, on which payment services for banks and fintechs are collected - they can be used both separately and integrated with each other.

Banks are also moving towards a single marketplace modelwith a wide range of services, where payments are just one element. The QPlatform open banking platform operates on the principle of a two-way marketplace. On it, banks and fintech companies can choose services from different categories: neobanking and KYC, credit conveyor and bank guarantees, green finance, payments and acquiring. The system works on the principle of the App Store: the company selects the necessary solution, tests it in the sandbox and immediately integrates it as a ready-made business unit.

Challenger banks, or neobanks - completely online (without a branch network) banks,built from scratch on new technology platforms, in contrast to the outdated infrastructure of traditional banks. Typically, neobanks offer higher interest rates, lower commissions (or none at all) and a higher class of service and support.

Connects to the Open Banking model astraditional banks and payment systems, as well as “challengers” (neobanks) and numerous fintech services, including those from related industries, such as insurance and real estate.

According to Barclay, 69% of companies believecollaboration with fintech companies is the best driver for the development of traditional banks. The partnership allows you to diversify services with minimal losses and connect third-party services to its platform, which the bank itself would hardly develop.

SaaS banking

Fintech companies and traditional banks gravitate towardscreating ecosystems that would combine dozens of services. But at the same time, the market is undergoing a reverse process - the segmentation of financial services. One manifestation of this trend is the proliferation of the banking as a service (BaaS) business model. In fact, the bank begins to work according to the SaaS model, that is, it offers a part of its infrastructure to a B2B client. If it provides several blocks at once in a complex - this is an example of the "banking as a platform" (BaaP) model. Both directions are closely related to Open Banking, since they cannot exist in a closed infrastructure. However, in the case of open banking, intermediaries only get access to certain data, while the BaaS / BaaP model gives the company access to certain financial services, including the White Label model. Usually, in this case, the bank provides tools, and the fintech company provides a user-friendly interface.

BaaS (from English banking as a service - bank as a service) - an innovative B2B service for banks to lease their infrastructure.

This approach allows you to create hybridproducts that include services from different developers. One such example is ING's Yolt platform, which contains both the products of the bank itself and its partners. Some create marketplaces based on banks with ready-made services from different suppliers - this allows the client to choose the best option, which also contributes to the development of transparency.

These business models affect more than justuser experience, but also for the development of the entire industry, since they create conditions for the development of startups, which often do not have the funds to create their infrastructure from scratch. As a result, competition intensifies and the quality of products in the market improves.

Transparency after COVID-19

Amid the COVID-19 pandemic, the demand for paymentservices have grown: people are less likely to use cash, and a third of Russian SMEs have connected online payments. Some banks have developed special solutions to help small businesses: for example, they provided restaurants with access to payment tools for free.

It is clear that the demand for digital serviceswill remain, which means that everyone will have to rebuild. The task of banks in these conditions is to create an even more transparent and accessible infrastructure for third-party developers.

The second task, which concerns andfintech companies, is to simplify onboarding for clients, including through increased transparency. The more understandable and accessible the services are, the more widespread they will be. New technologies only reinforce this trend. Mobile-first services allow customers to pay in the most convenient way, cloud platforms help banks develop the BaaS / BaaP model, and big data and AI enable them to extract valuable insights about customers.

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