How technology is driving the era of open finance
Digital technology is promoting the transformation of financial service models, ushering the financial industry into the era of open finance from the closed service system in the past
The financial industry always stands out as the pioneer of cutting-edge digital technology, which shows different characteristics at different stages. To date, the influence of digital technology on the financial industry has gone beyond the improvement of a specific business. Digital technology is promoting the transformation of financial service models, ushering the financial industry into the era of open finance from the closed service system in the past, and also driving the value chain restructuring of financial services.
User-centric open finance
At different stages of development, the centre of financial service models is changing. Enhancing the power of users stands at the core of open finance. That is, the financial services are really organized in a user-centric way.
In the early days of development, financial services were institution (outlet)-centric. To get access to financial services, users had to visit the outlets of institutions, and the expansion and extension of institutions’ services were also driven by outlet expansion. Although banking outlets were usually located near to the user groups, their sites were fixed and never changed with the user scenarios, while the way of interaction was unidirectional, i.e. from users to outlets. The fact that financial resources were relatively scarce and financial institutions had more dominance was at the core of the institution-centric model. What’s more, technical limitations weakened the service efficiency. Financial institutions adopted a service model that benefited themselves more. The centralized brick-and-mortar service outlets could reduce the institutions’ service costs but increase the users’ access costs because each user had to pay differently for the cost of finding the outlets, transportation and time.
The advancement of internet, mobile internet in particular, has facilitated the change of financial services to become application-centric. Mobile internet has broken through time and space restrictions, and smartphones have become the new central point of connecting services and users. Compared with personal computers, smartphones are owned by specific individuals, and the service providers can establish the connection of “service intelligent terminal person” by developing the app. Different from the traditional outlets, the replication cost of the app is almost zero, which is equivalent to establishing an outlet for each user on the intelligent terminal, slashing the users’ costs of getting financial services. In parallel with the shift to the application-centric model of financial services, the efficiency of connecting financial services with users is greatly improved, but there is still a clear separation between products and applications. Different institutions and different services often have independent applications.
After entering the era of open finance, financial services have become more user-centric. At this stage, as the users have more power, financial services are paying increasingly more attention to the user demands. This is reflected in the service contents and the service channels: On the one hand, the provision of services is not overwhelmingly the same but specific to the different users; and on the other hand, the channels of financial services are integrating with the scenarios. What is at the core of scenario-based is actually the further deepening of the user-centric model, i.e. changing from non-specific-user-centric to prioritizing more precise user scenarios. Unlike when the users had to search for the right services for themselves in the past, the services are customized so that the users can get easy access to the services they demand at any time. This includes the scenario integration of online application gateways and also the integration of online and offline scenarios, further decreasing the costs and thresholds of users to access financial services and improving the user experience.
Transforming the value chain
According to JD Finance Research Institute, open finance emphasizes the reform on the supply side of financial services, but its purpose is to construct a user-centric financial service provision system. The development of open finance is mostly seen in the opening up and integration of various financial service providers in users, channels, services and technologies in the process of restructuring the value chain of financial services.
Users: In the era of open finance, it is very easy to migrate the user scenarios on the basis of the Internet’s efficient connection. It becomes impossible for financial services to segment the users geographically and to monopolize the provision of financial services to the users. The users’ financial services are not restricted to single service providers any longer but are changing with the scenarios. In this context, financial service providers need to establish an open account system, open and integrate this account system in alignment with the changes in users and user scenarios. Only in this way can they provide users with diverse, uniform and premier financial services.
Channels: Channel gateways between the institutions’ services can integrate with one another. Many institutions still maintain their application gateways which are independent, and make available comprehensive service functions in the gateways, but embed some of the functions into other applications, especially the applications in such scenarios as production, consumption and entertainment, which are the scenario-based channels. The users can get easy access to a variety of services in a few core applications or scenario applications, thereby further reducing the costs of obtaining services and improving the user experience.
Services: Driven by digital technology, open finance reports an increasingly higher efficiency of financial services, and different types of institutions give rise to professional division of labour based on differences in comparative advantages. Many institutions still retain a complete service chain and links on this chain, but different types of institutions need to devote themselves to certain chains and links based on their own comparative advantages, thus providing competitive services and winning a place in the process of value chain restructuring. The next step in the professional division of labour is the integration and innovation of different types of institutions such as financial institutions, technology service companies, and user scenario organizations to create and provide better financial services.
Technologies: The open-up and integration of the above aspects requires the support of an open technology system, such as open account system, standardized interface technology, scenario-based service solution, and open core system. In the process of building an open technology system, we must rely on cutting-edge digital technologies such as big data, cloud computing, artificial intelligence, and the Internet of Things to effectively improve the efficiency of financial services. Digital technology is an important driving force for the development of open finance. Only when financial services go digital and online can they integrate and innovate with the help of open application programming interface (API), software development kit (SDK) and HTML5 (H5).
Some institutions have already commenced their exploration of open finance. In April 2017, Shanghai Huarui Bank launched a SDK-based product for comprehensive financial services. This product, using the Internet technology to integrate financial services directly into the production and life scenarios, searches for and serves customers under cooperative scenarios. In November 2017, JD Finance and ICBC jointly introduced ICBC Xiao Bai, a result of deeper opening up and integration practice. ICBC Xiao Bai is the first H5 card-like digital financial platform in the financial industry and also the industry’s first bank on the Internet platform. On July 12, 2018, Shanghai Pudong Development Bank premiered the first API bank in the financial industry, which integrates the scenario finance into the Internet under the API architecture and provides the easy-to-use cross-industry services to better meet customer demands and improve their experience.
In conclusion, the advent of a new era of open finance will put the institutions incapable of keeping abreast with the changes at a disadvantage in competition, weaken the non-competitive development restrictions such as geographical location upon emerging institutions, and provide a fairer arena for financial innovation. This trend will become particularly obvious as the digital natives, i.e. those born after the 1990s, take the dominant position in the economy and society. In this process, traditional financial institutions need to embrace an open and innovative technology, and also try to reform their management system, thus gearing up for and adapting to the changes, and staying competitive.
The article has been translated from Chinese and edited for style and clarity. This is an excerpt of the original article that first appeared on the Financial Market Research, a magazine sponsored by China’s National Association of Financial Market Institutional Investors (NAFMII). The author is research analyst at JD Finance Research Institute.