Allowing access to rich data sets through APIs will create a whole generation of financial service solutions. What will become very interesting is seeing how other industries as well as emerging Fintechs and start-ups might begin to use this data to augment services, or create new ones.
– Kent MacKenzie, Director (Deloitte, 1.6.2017)
It was confirmed on 15 August 2017 that German-based open banking and savingstech start-up Deposit Solutions (established in 2011), backed by Peter Thiel and various other well-known venture capitalists, has acquired its German-based rival Savedo. Deal terms were not disclosed. 1)Lepak, S. (2016). “Why terms of acquisitions are not disclosed?”. CoFoundersLab Discussions, 20.9.2016.
As noted in the official press release by Deposit Solutions,
With the acquisition of SAVEDO, Deposit Solutions is further expanding its B2C capabilities, adding more than 18,000 registered clients, 13 partner banks and two new regions – Austria and the Netherlands – to its existing portfolio.
Sure, I was surprised that Deposit Solutions decided to acquire Savedo, but as I have covered the emergence and convergence of the new European deposit marketplaces in the past, I’m not surprised as much as if I didn’t know and understand the industry at all. The European banking landscape has been changing for years, the rise of the open banking paradigm and new forthcoming regulation, especially SEPA Instant Credit Transfer (SCT Inst) at the end of 2017 and the second Payment Services Directive (PSD2) during 2018, act as catalysts for further changes. It’s a fact that these changes will profoundly effect on the financial services landscape, and for example, PSD2 has already created immediate threats from fintechs (ranging from payment initiation to account aggregation), and the so-called GAFAAs of the world are also aware of the new business opportunities created by the banking industry changes. 2)Accenture (2016). “Beyond the Everyday Bank“.
Various challenges and opportunities posed by the PSD2 are wide-ranging, e.g., intensified competition over customer ownership, developing extended business ecosystems, creating API capabilities, and the expanding the offering beyond the core. It will nonetheless take some time for the PSD2 to take full effect? Why? The main reason is that Regulatory Technical Standards on strong customer authentication and secure communication under PSD2 as recently pointed out by Elias Alanko, OP Financial Group’s Head of Anti-Fraud. “It is a controversial document drafted by EBA […] This document comes into force only after 18 months of implementation period, meaning that earliest adoption will be around February 2019. So do not expect anything drastic will happen next January”, he writes.
Banks and other financial institutions need to focus more on openness and transparency, and even more importantly, rethinking their whole business model, delivery, and distribution models, and make a conscious choice to position themselves for the future. 3)Accenture (2016). “PSD2 & Open Banking Security and Fraud Impacts on Banks Are You Ready?“; Accenture (2017). “Open for Business“.
Four strategic options for banks to go forward
Accenture has previously laid down two mindsets and four basic strategic options for banks to become an “everyday bank” playing a central role in customers’ daily lives. First, banks need figure out how ambitious they are, and to position themselves either as a “utility” (transaction-based approach) or as an “everyday bank” (customer-centric approach). Four strategic options, on the other hand, are the following (see Figure 1):
- Essential compliance (“a compliant core utility”) with the mandatory PSD2 requirements with minimum investment and effort. The bank will set up the necessary APIs, and possibly offer some simple white label solutions and a limited number of premium APIs.
- Facilitate and monetize access (“a utility platformer”) where the banks offer more advanced API platforms (especially for personal financial management and corporate treasuries) and create unconventional revenues by opening more data and banking services for clients and 3rd parties (e.g., providing consent-based access to customer information, statistics, and demographics).
- Provide advice and new services (“an extended bank”) is based on enlarging from the plain vanilla APIs towards new monetized data products, premium APIs, and solutions, and establishing AISP and/or PISP (e.g. account aggregation, personal financial management, etc. for AISPs and new loyalty schemes and advanced security features provided for PISPs).
- Expand ecosystem, and aggregate value (“an everyday bank”) is the most burdensome of the options available, but on the other hand, it can also be the most significant driver for future growth. In this case, APIs represent an opportunity to shift towards open banking, and therefore the bank comes to an “everyday bank” where the focus is on partnerships within and outside of the conventional financial services industry. Also, the bank can act as (a) advice provider, (b) value aggregator and/or (c) access facilitator. 4)Every option available has its pros and cons, opportunities and threats.
It’s important to notice that various banks around the Europe have already taken steps to ensure that they execute the selected strategic options, and as we can predict from the basic literature on strategic management and industrial economics, companies anticipate future changes by investing in things which they judge to be beneficial for future growth and/or profitability. anks know that their long-standing monopoly over various payment services in the EU will cease from 2018 so they need to get ready to compete against new players, fintechs and nonbanks alike. As Miguel Simões from BNI Europa states in a recent white paper, “The enforcement of PSD2 and open APIs will drive a shift from bank-centric interactions to customer-centric interactions. This change will promote increased competition and new market entrants in the payments industry, ultimately leading to shorter innovation cycles.”
In Finland, various financial services companies have already taken steps to prepare for the upcoming new regulation, e.g., some companies like OP Financial Group and Aktia Bank have acquired and/or established new digital payment services during the past few years. Also, alike. In Finland, various financial services companies have already taken steps to prepare for the upcoming new regulation, some companies like OP Financial Group and Aktia Bank have acquired and/or established new digital payment services during the past few years. Finnish ATM operator Automatia, together with their partner banks and Tieto, has managed to release, develop and expand their new real-time mobile payment platform called “Siirto.”
For example in the Nordics, Nordea Bank has been aggressively pushing its PSD2 agenda forward with its rather courageous open banking initiative. The initiative was launched in early 2017 with a release of individual APIs and sandbox environment, and according to Nordea’s Jarkko Turunen, in one stroke they had over 130 sign ups from 3rd party developers ready to give their shot. Earlier in July the same year, it was told that the first pilot program is under way. There are several documents publicly available that describe in some detail Nordea’s current thinking around open banking, PSD2, and APIs. From Figure 2, it appears that Nordea is at least aiming to become an extended ecosystem partner bank or even an everyday bank. 5)Nordea: “PSD2 and Open Banking“; Richter, C. (2017). “Open Banking – PSD2“. Nordea and XMLdation Breakfast Seminar, 20.5.2017. See my key takeaways from Alma Talent Events Payment Summit 2017.
It’s noteworthy that Nordea selected just a couple of years ago Temenos’ T24 core banking platform to replace its separate legacy core banking systems with one platform solution. As it was pointed out to the press release, the new core banking will create “a common architecture across all the Nordic countries, significantly reducing the number of IT systems in use.” It’s not surprising that “the selection process was ‘extensive'” as pointed out in an interview of Nordea’s Joseph Edwin in September 2015.
Our PSD2 strategy is to make Nordea fully compliant – that’s a given of course – but we are trying to do this in a proactive manner, seeing it as an opportunity to generate benefits not only for our customers but also for Nordea. We believe we can create a platform on which we can build for the future. Our strategy is also to consolidate activities in Nordea so we gather our strength into building one platform which serves all the product units in Nordea.
– Gunnar Berger, Head of Cash Management Solutions Nordea (PSD2 and Open Banking: Defining Your Role in the Digital Ecosystem)
I can’t say for sure, but I assume that launching open banking initiative is closely related to the implementation of T24 and Nordea’s simplification and digitalization programs. In that case, if Nordea would have continued business as usual, someone might ask if Nordea could have managed to go forward with the initiative in the first place? It seems that senior people at Nordea perceive the core banking transformation as must-do instead of one-day-someone-perhaps-does. 6)If you are interested to further understand Nordea’s core banking transformation, see Joseph Edwin’s public presentation from last year.
What about the European retail deposit marketplace and savingstech?
So how does all of this relate to Deposit Solutions acquiring Savedo? There are multiple things to consider. First of all, it’s not entirely uncommon for a fintech to acquire other companies through mergers and acquisitions, and as it was recently pointed out Haskell Garfinkel, fintech co-lead at PwC, reverse mergers are one of the potentially surprising trends in the fintech space for 2017. There have been some worries about fintech M&As slowing down but as it was pointed out by Laura McGuinness, FinTech Programme Lead at Accenture, at the Finnish Fintech Talks this spring, there is no indication of fintech financing globally slowing down. On the other hand, I would not go as far as Bloomberg’s Edward Robinson in interpreting that Deposit Solution’s acquisition of Savedo is “a sign that dealmaking in the financial-technology sector may be heating up.”
My interpretation is that Deposit Solutions was primarily interested in acquiring an undervalued savingstech startup to get new clients, new talent, and possibly Savedo’s innovative product offering. At its completion, Deposit Solutions will get over 12 000 European savers, a considerable number of new European partner banks and possibly a new brand (if Savedo brand is not discontinued). The ultimate faith of Deposit Solutions’ single-account deposit solution ZINSPILOT is yet unknown. Maybe Deposit Solutions prefers to keep both brands and rely on the hypothesis that the acquisition of Savedo will create further economies of scale in the long run. Deposit Solutions has been growing fast in the recent past, and they have been building capabilities to further enlarge their open banking for deposits business; Raisin is still growing and executing quickly. They have also managed to sell their open architecture platform for retail deposits to over 10 European countries and several financial institutions ranging from Deutsche Bank to First Fidelity Bank (see Figure 3).
As I have been observing the evolution of these new European savingstech players, Deposit Solutions has always stood out. Why? As contrarian Peter Thiel, one of the venture capitalists with skin in the game, notes in his Zero to One: Notes on Startups, or How to Build the Future, Deposit Solutions seems to have managed to take bold risks, keep on course (even when times have been hard), create non-competitive position (by focusing on the B2B instead of only B2C market), and managed to focuses on the product as much as on sales. More precisely, Deposit Solutions has managed to create proprietary technology, network effects, economies of scale, and branding advantages over a short period of time. They are not relying on conventional approaches, but instead, it seems that they have managed to adequately answer Thiel’s seven questions on product innovation secrets, and grow fast since 2011.
Why I think that Deposit Solutions business model and strategy will be successful? First of all, they are doing two-speed business: they have been able to grow both at B2B and B2C sides. Also, their pitch to the European banks, already fearful of losing the control over the customer relationship due to upcoming regulatory changes and regulatory and supervisory pressures, is a good fit in the current European fractured deposit business landscape. Secondly, and more importantly Deposit Solutions, as well as other European B2C or D2C (direct-to-customer) deposit mediators, in practice allows individual retail clients to bypass the relative burdensome process of opening, managing and monitoring several personal savings and fixed-term accounts by providing the consumer single-page view, something close to a dashboard.
Yet again Deposit Solutions differs from its competitors. Deposit Solutions’ customers are able to manage everything with a single account as clearing accounts are opened either at Fintech Group Bank or a Sutor Bank. Due to this non-bank approach, Deposit Solutions doesn’t need to have a banking license. On the other hand, Raisin sets up an individual bank account in every bank you make a deposit to, and thus the operational lead time is longer, and operating model is more complicated. Thirdly, and just to restate what I just said, I think that these new deposit marketplaces, whatever their secret business model is, are beneficial for banks as they can acquire European cross-border retail deposits from a potentially humongous number of potential savers without setting up expensive operations, infrastructure, marketing, and support services all over Europe up front. Deposit Solutions’ vision, to become the ultimate marketplace for deposits, is intriguing as they are not actually competing with banks for the customer ownership that is one of the biggest fears due to the rise of fintechs and regulatory changes (PSD2 in particular).
Sure, there is some serious doubt about the fact that does individual saver really benefit from this as he could possibly negotiate better terms in every single case, and some people just prefer to consolidate all their financials to a single provider. Nonetheless, I personally find the value proposition of these new players attractive both for savers and banks, and I recently laid down my reasoning favoring interest arbitrage. What differentiates Deposit Solutions from its main German-based competitors, Raisin and Savedo (competitor no more), is the way they perceive the problem of European deposit markets to be. 7)Currently, Raisin has over 30 partner banks all over the Europe and the volume of deposits brokered just hit over 4 billion euros.
I hope all the best for Deposit Solutions and Raisin, and we’ll see what happens next in the European savingstech space. One thing is sure: PSD2 will surely strengthen (open banking) savingstech’s value proposition.
Erratum: Thank you Zoran Temelkov for pointing out an error in the beginning of the article. The acquisition was, of course, confirmed in August 2017, not in August 2018.
|↲1||Lepak, S. (2016). “Why terms of acquisitions are not disclosed?”. CoFoundersLab Discussions, 20.9.2016.|
|↲2||Accenture (2016). “Beyond the Everyday Bank“.|
|↲3||Accenture (2016). “PSD2 & Open Banking Security and Fraud Impacts on Banks Are You Ready?“; Accenture (2017). “Open for Business“.|
|↲4||Every option available has its pros and cons, opportunities and threats.|
|↲5||Nordea: “PSD2 and Open Banking“; Richter, C. (2017). “Open Banking – PSD2“. Nordea and XMLdation Breakfast Seminar, 20.5.2017. See my key takeaways from Alma Talent Events Payment Summit 2017.|
|↲6||If you are interested to further understand Nordea’s core banking transformation, see Joseph Edwin’s public presentation from last year.|
|↲7||Currently, Raisin has over 30 partner banks all over the Europe and the volume of deposits brokered just hit over 4 billion euros.|