Banks are preparing for another leap into an uncertain future. Even those who successfully escaped the murky waters of intertwining and opposing trends, have to pay a high price for their success. However, the costs will be even higher in the case of those, who make mistakes and fall into the treacherous whirlpools. Some Polish banks have already completed the first stage of digital transformation, and are at the forefront of this process in Europe. However, the race is far from over and the pressure is mounting.
The vast majority of Polish banks have already completed the stage of developing applications, and some are even able to use biometric tools in order to identify their customers. Some have changed their working environment and management methods, by flattening their organizational structures and attempting to unleash individual and collective creativity within the corporate shell.
All these activities have an effect both on the individual institutions and on the sector as a whole. According to the latest NetB@nk report published by the Polish Bank Association, at the end of the Q1’18 the number of individual customers who have signed agreements for access to online banking amounted to over 35.7 million, following an increase of 6.5 per cent y/y. There are some 16.3 million bank customers who log on to electronic banking at least once a month, which is over 400,000 people more than at the end of 2017.
The mobile apps are also a great success. The number of customers who have a mobile banking application and use it at least once a month has reached 6.27 million. This means, that more than a third of the customers (38 per cent) using online banking access their banking services using a smartphone. We should also mention the Blik payment system (Polish system of mobile payments). Back in 2015, when it was still in the early phase of its implementation, the system recorded 2 million transactions. However, in 2017, the customers already carried out 33 million transactions using that platform.
All these data suggest, that Polish banks are successfully tackling the challenges associated with the migration of services to the digital world. For several years now, some of the Polish institutions, such as mBank, have been the subject of apologetic case studies in renowned reports by Gartner or AT Kearney, where they are referred to as the European leaders in digital transformation. But this is only the beginning of the real change.
Who needs open banking?
Gurus of financial futurology believe that banks have to do much more in all areas — the business models, the risk analysis and assessment methods, the central systems, the operational models (especially in the area of cybersecurity) and, above all, the customer relations. One of the answers to these challenges is the British idea of open banking.
Open banking is the open access to data, allowing the customers — oftentimes closely tied to their bank at present — to freely move between various banks and other financial services providers. It is the breakdown of the information asymmetry between the customer and the bank, which should allow customers to select the optimal offer depending on their current situation. These are the ideas guiding the visionaries of the future.
These ideas also inspired the authors of the PSD 2 directive adopted by the European Parliament. The directive requires banks to provide access to the account — at the customer’s request — to Third Party Providers in order to execute a payment order or to manage it. Banks are working hard to fulfill the directive’s recommendations by September 2019. This is when the technical standards, prepared by the European Banking Authority and announced by the European Commission, will ultimately come into force.
“Open banking and the offer of non-banking services will determine who will become the digital leader in the future,” said Daniel Majewski from the consulting company Deloitte during the European Financial Congress (EFC) in Sopot in June 2018. “Platforms will be the basis of competition. These will be technology platforms, process platforms and market platforms. One example of such a platform is Alibaba,” said Shanker Ramamurthy, the director for strategy and market development at IBM.
The idea of open banking was first introduced in 2016 by the British Competition and Markets Authority (CMA). This quickly led to the emergence of a broad community involved in the development of this idea. The CMA ordered the 9 biggest banks in the United Kingdom to allow licensed fintechs to directly access data on behalf of the customers. The banks were supposed to „open up” already in January 2018, along with the entry of PSD 2 into force. However, this recommendation was only fulfilled by three institutions. There’s no question that the defenders of the fortresses of traditional banking are not too keen on the idea of open banking. “But why should we open up? (…) The main task of a bank is not to be open, but to meet the needs of the customers,” said Zbigniew Jagiełło, the CEO of PKO BP (the largest Polish bank), in a debate during the EFC.
Leaders and laggards
The Deloitte consulting company has carried out a study of banking services and banking products in 38 countries in Europe, Middle East and Africa (EMEA). A total of 238 banks were subjected to examination, including 15 banks operating in Poland. The authors of the study evaluated 826 various functionalities offered by the lending institutions.
Among the EMEA markets four groups can be distinguish: the digital champions, the digital smart followers, the digital adopters and the digital latecomers. Polish banks are classified as digital champions (the national averages were obtained on the basis of the results of the five largest banks in each country). In the group of the most digitally mature markets Polish institutions are joined by banks from Russia, Spain, Switzerland and Turkey.
The group of digital smart followers includes banks from the Czech Republic, Finland, France, Norway and South Africa. Digital adopters are the German, British, Dutch and Swedish banks, which may be surprising given Sweden’s involvement in the development of fintech companies. Similarly surprising is Israel, which was ranked among the digital latecomers, along with countries such as Ireland, Latvia and Slovenia.
The authors of the study point out, that banks worthy of the title of digital champions offer in their mobile banking services a wide range of functionalities which are relevant for the customers, but also guarantee a compelling user experience. It is also important for the users of mobile banking to be convinced that it simplifies their lives at every stage of the relationship with the bank — from the gathering of information about the institution’s offer, through the daily use of the bank’s services, to the termination of cooperation. More than 8,000 clients of the studied banks were asked about their opinions on this topic. Deloitte experts also checked whether all the functionalities are equally effective from the customer’s point of view across all the channels, that is, in the bank’s branch, and in banking via a desktop computer or laptop and a smartphone.
Although the Polish banking sector was classified as a digital champion, the results of the individual banks turned out to be highly varied. Three of them were ranked very highly. However, three other were included in the category of „digital latecomers”. Deloitte did not identify the individual banks concerned.
How do the banks build their position?
A significant part of the customer’s relationship with the bank is moving to the internet. This is an obvious trend. On the other hand, no one is able to predict when will physical bank branches, and therefore also people working there, stop being useful. Consequently, it is not clear at what pace should they be closed down, which would allow the banks to cut costs.
Changes in this respect are being introduced in a very cautious and selective manner, although there is a visible trend towards a reduction of the physical network. The data from the Polish Financial Supervision Authority indicate that the number of bank branches decreased from over 15.3 thousand by the end of 2013 to over 13.4 thousand by the end of the previous year, i.e. by 12.3 percent. In this period employment fell by 5.7 per cent.
This is hardly the revolution in banking services that was supposed to be launched by fintechs, that is, technological companies bringing new quality to financial services. Such revolution occurred in many countries — the United States, France, Germany or the United Kingdom — where banks were technologically backward but at the same time generated high profit margins on their operations. The Polish sector has avoided that scenario, but in other countries even the market leaders have lost their shares in various segments of the services market, especially in the payments market.
The new service providers, and especially payment service providers, managed to bring down the fees and commissions, as a result of which free transfers became the norm. In many markets the fintech companies were the first to introduce genuine instant transfers. Before that a bank transfer took up to several days to be completed. The reduction of the interchange fee by the European Parliament has strained the profitability of the banks’ alliance with the organizations issuing payment cards. Fintech companies were not able to conquer the Polish payments market, although they gained a foothold in some niches, such as the purchase of transport tickets. The most frequently cited evidence is the example of PayPal, whose market share in Poland is negligible.
This was due to the fact that Polish banks were able to build an infrastructure for instant transfers, entered the eCommerce market with pay-by-link functionality, efficiently expanded the services of the National Clearing House, and in recent years also introduced the Blik payment system. In this situation it was difficult for innovators to fight for a mass audience and build the required scale of operations. Moreover, in order to reduce the costs of innovation, Polish banks were able to harness the ingenuity of domestic fintech companies, following the example set by the leaders of the digital world. Only the online currency exchanges and lending companies managed to carve out a modest but clear share in the market, which, incidentally, carries a considerable risk in light of the increasing deterioration of the economic climate. “There has been some outsourcing of innovation,” said Grzegorz Cimochowski, a partner at Deloitte, during the EFC.
Despite the losses in the fee and commission income, the situation of Polish banks is comfortable. They control the market, and there are no „digital rebels” on the horizon that could upset this state of equilibrium. Could the PSD 2 directive change this balance of power? “Poland is a country with relatively low margins, the clients make few transactions, take out few loans and leave few deposits. Without large financial outlays, it is difficult to obtain a large scale of operations,” says Brunon Bartkiewicz, the president of ING BŚK. “I believe that for that to happen, we would probably need PSD 3, if such a directive is ever put in place,” adds Daniel Majewski.
What doors could the Polish API open?
There are two factors determining the decisions of the new players: the strong position that the banks have already built, and the analysis of the costs and the profits available on the Polish market, which is becoming less and less profitable for banking operations. The third factor will be the design of the interface opening the banking fortresses, that is, providing access to the accounts to Third Party Providers such as fintech companies and other banks performing services at the customer’s request. Will it truly open the doors to the fortress or will it rather strengthen its walls?
The role of this interface will be played by the Polish API, but this matter is not so simple. According to the original plans, it was supposed to be a common standard for all banks in the Poland. However, this will not be the case for two reasons. Firstly, small banks, such as cooperative banks, will not need so many functionalities. Secondly, the large banking groups are building their own APIs anyway, so the Polish banks belonging to these groups will have the API decided by the given group. Ensuring the consistency of these projects may turn out to be quite a challenge.
That is why the National Clearing House has launched works on an API hub, which should be ready for testing in March 2019. One can understand the idea of a hub as a place that integrates the various APIs and entities. However, in this way the architecture is becoming increasingly complex, given that there are already five other pan-European API concepts.
In general, the implementation of the PSD 2 directive is supposed to be supervised by the national regulatory bodies. This increases the risk of disintegration of the European markets. There is also one other risk. At a time when the State Treasury controls banks holding around half of the banking sector’s assets, the regulatory bodies do not necessarily have to be interested in a more open Polish API. And the banks may not be interested in that at all.
The original design of the Polish API only provided for one method of access to the account — pay-by-link. The subsequent version, revealed in April 2018, already provided for two methods, which is the minimum required by the technical standards. In addition to the pay-by-link method in which the user is redirected to their bank’s website where they log on to their account, there will also be a mechanism where the authentication is carried out through an external authorization tool, e.g. a single-use code confirming that the user has granted access to the account. The third version of the design expands on variants of both these main methods, introducing some new functionalities.
Deloitte’s research shows, however, that for the time being the Polish banking sector is among the most „closed” systems in Europe. The system’s „openness” is measured by the value of the banks’ assets that have been opened by APIs in relation to the value of the entire sector’s assets. It turns out, that in Poland third parties have hypothetical access to less than 5 per cent of the sector’s assets through the open API, while in the United Kingdom, the Czech Republic, Slovakia, Finland, Estonia and Lithuania that share exceeds 50 per cent. “Banks are heavily digitized, but open banking is the Achilles’ heel of the Polish banking sector,” says Daniel Majewski.
Deloitte claims, that after the stage of open banking, the development of the banking industry will lead to the emergence of a new system described as beyond banking. This will be a platform-based business approach where multiple services are provided to customers in an integrated and coherent package through an ecosystem of different service providers. In this system, banks will only be one of many providers of financial services, but they will have the chance to integrate the entire package of services available on the platform. Open banking and the ability to integrate banking services with non-banking services will determine the future of lending institutions.
Polish banks may benefit from the advantages they have achieved and further strengthen their position. The „openness” enforced by the EU regulations will only weaken these advantages in a very gradual way. The previously obtained position enables the Polish banks to observe the development of future trends with a more relaxed attitude. At the same time, however, this comfortable situation could also prove to be dangerous. Complacency could lead today’s digital leader to turn into a peripheral fortress which will lose its customers.