News & Insights

On a collaborative level, financial institutions must realise that data sharing in financial services (i.e. Open Finance) is another two-sided market. For two-sided markets to function effectively, efficiently and at scale, collaboration is required to create the necessary trust. This trust is enabled by collaborating on a ‘soft infrastructure’ in which agreements are made about the business, legal, operational, functional and technical requirements of data sharing. Various initiatives are already underway (e.g. the Berlin Group and the SEPA API Access Scheme) and financial institutions should monitor these initiatives and make informed decisions about whether to participate.

Which developments do you foresee related to the digitalisation of financial services in the near future?

Mounaim Cortet

In the near future, one key trend that will impact the digitisation of financial services – in line with the European push towards an Open Finance Framework in 2024 – is the concept of ‘embedded finance’. Embedded finance enables the seamless integration via API technology of a financial product or service in a non-financial platform to support the related customer experience. Demand is already growing beyond embedding payments to a range of other financial products such as payment accounts, card issuing, lending and insurance products.

For financial institutions, embedded finance provides an additional distribution channel to reach customers beyond their own platforms. In essence, the distribution of financial products via platforms is nothing new, but the next generation of embedded finance is different due to the seamless integration of financial products into digital interfaces that users interact with daily. This enables financial institutions to safeguard their presence at the point where value is created. Similarly, non-financial businesses (e.g. merchants, digital marketplaces, business software vendors) with sizeable client bases with high-touch interactions can act as ‘distributors’ to strengthen their core customer journeys and client relations (by additional data that is obtained) and to move to adjacent revenue streams without incurring the overhead of a regulated financial institution.

Other noteworthy digitalisation trends that will impact on financial services in the short term include developments in the ‘infrastructure layer’ and ‘experience layer’. These developments will also reinforce each other to enable next-generation financial services. In the infrastructure layer, we will witness accelerated adoption of instant payments (SCT Inst) driven by the European Commission’s new regulatory proposal. This will create a new track that will power new value-added services in the experience layer in the shape of new solutions for instant, account-to-account payment initiation, request to pay, and buy now, pay later.

Central Bank Digital Currencies (CBDCs) are another relevant infrastructural development that is gaining momentum with most likely medium to long-term implications. While the monetary objectives of such solutions seem evident, there are still many unknowns regarding the exact customer needs and use cases such solutions seek to address and regarding the potential role(s) of incumbent financial institutions. Nevertheless, CBDC is such a big development that financial institutions cannot afford to ignore it in the short term and they must start thinking about and exploring strategies and scenarios now.

You explicitly talk about trust being a basic prerequisite for successfully tapping into the various digitalisation opportunities. So where do banks stand on trust?

Mounaim Cortet

Banks have established themselves as trusted money custodians by keeping money safe and facilitating the secure transfer of funds. Using payments as an anchor product from which to conduct the cross-selling and upselling of other products, such as savings, lending and insurance, banks became indispensable in their customers’ everyday financial lives, both in the physical world and in the digital realm. Today, however, competition in the payments and banking space is intensifying and banks therefore risk losing their long-held trust position in the sector. In addition, as a result of the ongoing digitalisation of financial services, data is becoming the new battlefield for banks and other players. To respond to this, financial institutions can move towards a position as a trusted ‘data custodian’ in the data economy, facilitating identity and data sharing transactions on top of their current role as trusted ‘money custodian’. Banks have the credibility, experience and potential to facilitate data-driven digital transactions at scale, but they need to start reconfiguring those capabilities to become resilient in the data economy.

How does digital trust differ from that in the analogue world?

Douwe Lycklama

Trust in the analogue world is built over time. Interactions are mainly physical, augmented with paper-based information exchange – think of meetings, letters and faxes. Digital trust is instant and remote, which is exactly the opposite. The availability of data enables trust. For example, Airbnb can broker a transaction between two unknown people – the traveller and the host – because Airbnb collects and maintains data about both parties. Parties who own data can charge a fee for providing trust.

From the customer’s point of view, data, privacy and data security are elementary prerequisites. How do new technologies such as IoT, big data or augmented reality affect the opportunities and risks in this regard?

Douwe Lycklama

Privacy is top of mind in every private and public – or, in other words, political – discussion about data. At the same time it is an ill-defined concept because privacy is contextual. For instance, when you are ill, you may be less concerned about sharing your medical data because that will increase your chances of recovery. Risks related to terrorism, the climate and health can improve people’s willingness to share data for the greater good.

In Europe the GDPR has given people a lot of legal rights. However, it does not give them practical tools to exercise those rights. The only tool so far is the ability to click to accept or decline cookies. Apart from that, people have no idea about how to control and monitor their data. In the ‘Everything Transaction’ world, users will gain control over their data. As a result of this ‘data sovereignty’, users become part of their transactions and will be able to share in the proceeds; the ‘data benefit balance’ shifts in their favour. Data sharing – and therefore privacy – will become a more conscious activity. This will not happen overnight, as it calls for more awareness and capabilities from all the end users. However, we know that it is possible, because we have seen that people are able to learn all sorts of digital skills such as texting, online messaging and other social media-related behaviour.

How does the rise of platforms – which has also affected banking – relate to the developments behind ‘Everything Transaction’?

Douwe Lycklama

Over the past decade, large platform companies (better known as ‘BigTechs’) have gained a strong foothold in e-commerce, payments and other financial services driven by the development of the ‘interactive internet’ – or in other words, the use of the internet for interaction in addition for publishing and reading information. These platform players have created a trust mechanism in their platforms to support secure transactions. In parallel, these players have built a monopoly position based on the data they generate from the transactions performed on their platforms, and how they leverage that data for their own purposes and monetise it. While there has been some improvement, most customers remain in the dark when it comes to how these companies are collecting and using their personal data.

You say that the next phase of the internet will be about moving from institutional to infrastructural trust, and getting a grip on your own data. Can you elaborate on that?

Douwe Lycklama

As explained, the internet started as an information medium and evolved into an interaction medium. This was a window of opportunity for platforms to step in and organise the much-needed trust to enter into a digital transaction. And the rest is history… These platforms have managed to build and scale their business model globally due to the internet. However, the next phase of the internet, which is referred to as the ‘transactional internet’, offers a new window of opportunity to reorganise how we create trust around digital transactions. In this case, trust is organised on an infrastructural level instead of being placed in large institutions with their closed-loop platforms. A key design principle of the transactional internet is that you own your own data and that you are provided with the tools to decide who has access to it and for what purpose. We refer to this as ‘data sovereignty’.

Do we control digitalisation or does it control us? What are our chances of controlling the further evolution of digitalisation?

Douwe Lycklama

Unless the digital space is organised based on data sovereignty as a core principle, it remains to be seen who will control whom. However, several market developments imply that we are moving in the right direction. For example, in essence the reforms and proposed regulations by the European Commission aim to create digital spaces called ‘data spaces’ where data can be made more available. In addition, they aim to empower customers using digital services to stay in control of their data. Besides that, we expect that customers will become increasingly aware of the value of their data and will look for ways to make their data work outside of the organisations holding that data. This is expected to spark new two-way value exchanges within open digital ecosystems, which are cross-industry networks of actors who interact online to create value in new ways.

Mounaim Cortet

As a result, there is an emerging need for ‘data custodians’ to enable the seamless exchange of data in open digital ecosystems. The role of a data custodian offers new ways to remain relevant in the domain of personal data sharing and access rights. We strongly believe that financial institutions can lay claim to the role of data custodian in their customers’ daily lives by engaging in emerging digital ecosystems where data-driven digital transactions take place – and where digital trust is required, in the same way as it is for facilitating transactions in the payments domain.

This interview was originally published in Der Bankblog, 28 November 2022.