Will Open Finance Democratize Banking? | Jose Luis Navarro

Alex: What's the biggest lie people believe about open banking or open finance? Right now, everybody, and welcome to the Charistic Code podcast. I'm your host, Alex, and today I'm joined by Jose Luis Navarro, one of Europe's leading voices on open banking and open finance infrastructure. And we're diving into whether open banking's evolution is actually democratizing finance or just creating new gatekeepers with better pr. Jose, welcome to the show.

Jose: Thank you very much, Alex. I'm really glad to be here with all of you and I'm ready to have a friendly Exchange on our BoC in embedded finance and open marketing.

Alex: Yeah, absolutely. I think we've spoken on this podcast before about open banking. I hope to get a fresh perspective because it's evolving technology, it's evolving approach to doing business in banking. So let's begin with how do we translate open banking and open finance into simple everyday language if we remove all the industry noise? What is open bank in practice when comparing the bank's perspective with the customers?

Jose: I understand that people not really familiar with open banking. So open banking concept is really crystal clear is the bank has to open its information. Okay. It comes from the regulation. There was a payments regulation, the PSD2 and coming soon, the PSD3, where the banks are obliged to share under the consent of the final customer the information, transactional information or payment information of that customer and we are obliged to share it with third parties. What does it mean? Is like you are for example a user of portfolio app in your mobile phone. If you give consent to that portfolio app, and I like a bank receive the consent from that app saying this customer wants you to share his information with me. I had to do it. Okay, so it looks simple. I think it's good for the end customer. But it means a change of mindset for the banks because we are not serving our customer directly, but we are being requested to give information for another company, another fintech, another partner to serve that customer. So it has more changes than initially you could envision with open banking. Why?

Alex: To summarize from customers perspective, it just opens up lots of data points for them. So you know you can enrich the user experience leveraging different data sets. And on the bank side, it's just another level of challenge how to operate within this environment when you have.

Jose: Yes, yes. I mean, I think you sum it up really well. For banks it was a New regulation, new obligation, but it changed fundamentally how you serve the customer and it open new way of doing it. So it's open banking could be said that is the kickstarter of the sharing information outside your bank. Okay. Even though open banking is regulatory, I think it opens a way or a green field which we call the finance, open finance, which is beyond regulation. And actually I think it's good for the three persons involved, which is the banks, the partners and the final customers. Because as you said, the final customers now can use the information they have originally in the banks or in other companies in their own behalf. Okay. To achieve maybe a loan, to achieve maybe better rating or to achieve for example an insurance. I think there are benefits for each one of the actors here.

Alex: By the way, what are the differences between open banking and open finance?

Jose: Yeah sure. Open banking is just the regulatory part and it affects mainly by now the payments, accounts or payment information. You can initiate a payment or you can request transaction from a payment account. And open finance is a little bit currently beyond that regulation. So imagine that I use the same method as open banking but for giving you a loan. Okay, that's not under open banking. Open banking is restricted to the payments, it comes with a regulation. But when I said that it opened a new way of business, I'm referring to that open finances, for example insurances, loans or confirming factoring. So you can serve in customer, which is retailer, which is company. Okay, they are companies and that part falls into the finance. So I told you before for open banking, I received the call from a third party saying I have the consent of this customer, give me the information and that's it, that's your interaction like a bank. But for embedded finance it's not like that. We like a bank talk to a partner and we co create about. Okay, what do you want? Because this is a financial service the partner is going to offer to their customers, to their employees, in their own experience in their app, the web and so forth. So what do you want to solve? What problem do you want to solve? What exactly do you need for your customers and how are you going to build it together? So there is a fulfilling co creation and actually you are helping the partner to serve better the customers. And the range of products is not limited to payment accounts.

Alex: What's the most call it dangerous category to open up and why?

Jose: I would say that we have the bank, we have the partner that embeds the API and we have the end customers then then year could come to the different levels of this change or the Value change for the banks. The most dangerous part is the risk bearing products. Or are there risk bearing products? Sorry about my English. Why is it? Because the embedded finance adds a layer of difficulty on how to trust the end customer that is requesting for a loan. For example, it could be a difficult kyc. It could be you don't have enough information. It depends on the countries. If they have a positive or negative borough, you don't really have access to the data. Imagine that is even more complex for the kyb. If it's a company that you have already some interaction with that company, maybe you have information enough to make a proper kyb. If not, you are on your own. It's really difficult. And that part is a risk for the banks. I will say the main risk for the partners which embed the API. It could be that they are offering a new service is a financial service in a non financial experience. So they are expecting that their customers are served properly. And by served properly, imagine a loan. If you are offering a loan to your customers and turns out that because of I told you the difficulties on the KYC KYB, you are neglecting or you are denying 70% of the loans that what experience falls in the partner. So the customers get angry with the partner. That is embedded API. Of course, this is an example of an immature product, right? And that's why we are working all of us scratching our heads about how to have the most mature products in the market. And this kind of problems not happening. But this is a risk. For example, okay. And for the end customer, I think for the end customer, really this is a financial service and they know financial services. They work similar as in the bank. But then there are more layers of intermediary players. You need to make sure that all the players are in the same value chain. Okay. They are thinking in providing value to the end customer the same way. If not, it can occasionally problems. Imagine there is a dispute and then the end customer found thinking. Okay, I have a vintage and the vintage is with an aggregator. The aggregator was with a bug. Who can I complain to? How can I complain to? This is part of how we are evolving as well. I mean, this is a green field. We are learning, we are fixing. I think the fundamental thinking of the market is good, but it has to be brisk. It has to be like more cohesive than it is now.

Alex: Interesting. I like how you draw the line between open banking and open finance. What's the biggest lie people believe about open banking or open finance?

Jose: Right now about open banking, I will say that this about the security of the data. So open banking, as I told you before, it requests the consent of the customer. What does it mean, the consent? You have to select which bank you want to get information from and you have to give a consent to the bank saying okay, I consent this third party to use my information, okay. And that is a risk itself. And after we come from a situation of screen scrapping, okay, before open banking was born and in between, because it didn't disappear with the PSD2 that exists the screen scrapping and the screen scrapping was really risky operation where you give your login of the bank to a third party and the third party use that login to scrap all the information to call and scrap information. And PSD2 initially was born with the intention to eliminate the screen scrapping. In the end PSD 2 couldn't do it. Okay, I think PSD 3 will be better on that. But that ambiguity in the system made that a lot of people think open banking is more about screen scrapping and that is not safe. And that data, that data could compromise your integrity or your accounts. And actually it's not like that. Open banking is quite regulated and banks need to store the consent, need to know the customer has a consent. If it's there are problems, we will say okay, we have the consent and the consent was given this day. As we are re regulated, that problem doesn't happen. But is the biggest fear of other people that this is a screen scalping version 2 or 2.0.

Alex: To understand the success of embedded finance we must first in my opinion understand who is building its foundations. And with so many technology providers entering the sector, what is the current landscape of these new players?

Jose: Well, we said before that embedded finance open banking fundamentally changed the mindset of the banks. And why? Because before it was the bank and the customer. And if the customer wants anything from the bank goes to the bank either physically or logically. Right. But it turns out that like we are sharing our services either through open banking or embedded finance with third parties, we are enlarging the ecosystem. And then that ecosystem initially was three, three steps. The bank, the partner, embedding the API and the end customer. But it turns out that appear aggregator. So now we can think on four to five steps and, and also we have, we have the regulation that could be the framework, okay, that sets the field and then you have the banks. And the banks are the license trust and financial service. Financial service will never stock system. They are needed. What is changing is how the final customer uses them. And from where, okay, that's what is changing. So you have the banks with the financial services. Then you could have the aggregators or open banking initiators. There are companies that are appearing in each one of the countries that aggregate from one side all the banks, and for the other a lot of SMEs or companies. So it's much easier to propagate APIs through them. Obviously it's easier than going door to door to 100,000 of SMEs. Say, go, why don't you embed my APIs? They may not have the me, they may not have the team. And there appear this kind of aggregator. Some of them are really famous. Okay. And those guys are really proficient gathering companies and they are really professional linking banks. So in the end they are part of the ecosystem as well. Okay. And they are an important part. And also we have the partners or the fintechs that could embed the API directly or through these aggregators. And we have the final customer. The final customer could be retail or could be a company. So this is not the most complex. There could be even more complexity. Okay, Imagine that you have an ERP or a core banking that also embed APIs, and then you have even one more level inside. But you can see the ecosystem becomes complex and that complexity has to be solved by the players as the end customer. The end customer has to be the final beneficiary of this complexity. So the new ecosystems you will find are a bank, a partner and a customer, a bank, an aggregator, a partner and a customer, a bank, core banking, maybe aggregator. So it goes from 3 to, I won't say n, but from 3 to 4, 5. But the end customer is the key, is the key person. If the end customer doesn't feel it has value and that the value is fair, this whole chain won't work.

Alex: Jose, given the speed at which open banking is evolving, where should a traditional bank begin?

Jose: I think this is a, a really good question. And actually it's like, how to say, like the elephant in the room, right?

Alex: Yeah, yeah. Maybe you can share your experience, you know.

Jose: So if I had to give an an advice to a bank that has to start is you need to think first, what do you want to become in this value chain? So we say ecosystems are getting complex, right? We say that no matter the you go against, the market is changing and the final users are getting used to do financing without going directly to the bank. That's happening already. So you need to make sure where do you want to play in this value chains? There Are some banks and it's quite legit choice that say, no, I will just give license and I will just create products. But vanilla products, okay, I won't really care about the end customer because I don't feel up to the challenge or it costs too much. Fine. Those banks exist and they are creators of backing and back office for other companies to have their customer base. And that's okay. Other banks think, okay, I want to play, I need to play the open banking because it's regulatory, can escape from that. But then I want to play also the game of embedded finance. And when you do that, which is what BBA said, you have to think up to which level. I want to bet for embedded finance. So embedded finance is a fundamental change on the way of doing banking. You don't do banking anymore looking inside for your own channels or your own people. It's about you need to learn how to do banking outdoors the open market and the open market outside of your channels. That means that you need big investment, not only technological investment, but also like a process investment. Also like a product creation. The product has to be different. The how to say servicing has to be different. Post sale has to be different. The way of selling has to be different. It's not the same that you are selling a product where I say I bring you to my channel and then you log into my channel and you work. This is not like that. This is okay, I will send you maybe a solution. But that solution will be in your journey, in your app, in your web. And it will work if you promote it because you are the one that has the customer base. That customer base will have to benefit from the API from my bank. And in the end the relationship, okay, you access to that customer as well. Right? But that's something that has to be thought at the beginning. And actually you have even to teach the partners how to act because they are not financial experts. They are experts in other segments, maybe they are retailers. And suddenly they have an offering which is financial offering. So that means that you had to bet and you had to invest and that investment. This is an in between, right? Between being the best of embedded finance and being just initially embedded finance. How much you can change your bank, how much you can invest, how much are you going to change? I think most of the banks in Europe at least we are in between like more or less degree of investment. Some banks have invested a lot and you see them that they are the ones that appear we bba, we know we are doing well as well. We appear like we are one of the leaders of embedded finance and so forth. We know some banks are doing even much more. We know another banks are doing it and they don't claim it. Okay, they do it in secret. But I feel all the banks we are in between and even I tell you some of them decided that they're not going to play this game. And that's fair, that's good.

Alex: By the way, looking beyond borders of Spain, or we can take it even broader borders of Europe. The impact of embedded finance and open banking is already redefining entire industries. What successful strategies or implementations in other countries have caught your attention? And what key lessons do you think we could import to our own markets?

Jose: I will say that regulation is always the Kickstarter. So regulators feel test the countries and they realize there is a need maybe for initiative for immediate payments and better regulated. And they are looking to other places. For example in South America or Latin America that we have a lot of banks there in bba we feel that they are looking at what Brazil is doing, what Europe is doing, what the PhD to achieve what us is doing. So they are trying to learn one from each other. But usually the Kickstarter is always regulation and the Kickstarter serves just for that, for kickstarting. Okay. Just with the pure regulation you won't make the best feel for embedded finance. So one example that we like a lot is from us, the US they are market driven and that's really good. But being market driven also requires a little bit of regulation. Because if not they could have a trust problem. If they feel everything is in the hands of the market. They say but where are my security, my trust? How can I feel secure about this? So we feel those countries that are learning now from experience of others, like Brazil is trying to do it, like for example, I know Colombia is trying to do it as well. They start strong regulatory but then they they have room for the open market. Those are the best examples. We know some players are more advanced or at least more futuristic advanced like Australia. That Australia is not even talking about open finance, talking about open data, which is the next level. Right? Because we talk about open banking. Banks share data, open finance, okay, we could through co creation and data of the partner and the banks we can do something some product value for the end customers. And open data will be every single segment. Not only banks will share data. And if all the segments are sharing data, the problems that could be solved for the customers are beyond financial problems, right? Go to vital problems. And that's really the far ahead Objective of all of this, why it started with open banking? Because banks are highly regulated, so it's easy to have a regulation. Why is not moving along to regulate other segments? Because who regulates all the segments and how can they get in the same synchrony as the banks? Right. So I think it's natural that it started from the banks. It has to move to the other layer. So we like for example the example of Australia, as I told you before, we like the market driven. We like the right mix of regulation. Market driven markets.

Alex: Interesting. I feel like overall the direction is very positive. Different regions do it in, you know, their own way. What I'm interested about is a lookout in five years, call it five years from now. In your opinion, will open finance be remembered as the thing that democratized financial services or the thing that centralized data power?

Jose: I will say that it will democratize the services. And why? Because first, data is alive. It's really difficult to centralize data. Easy example. Banks have data about you, but we don't have the whole data about you. We don't know, for example, how are you interacting with utilities that are not in our bank. We don't know that. But also we don't know about how your social networks and how famous are you in social networks. And we are not used to get that data for taking decisions. Even we have our silo of data. First we are obliged to share it, which is already democratizing. And second, the data is alive. There are happening so many innovation milestones right now that a lot of the data that could be important 20 years from now is not recorded anywhere. A lot of the data we were using for scoring 15 years ago are not valid anymore. And I put a really is example as well. Gig economy, right? One gig economy, one person that for example is living doing TikTok videos and that person tried to ask for a normal loan. The normal loan in a bank, normal loan doesn't even know how to recognize him or her. Right? Because okay, do you have a contract? What? How you earn money. So that part of the gig economy is not even recorded, has to start now being recorded. And that data, the data that banks have traditionally not care about, now they have to care. And that in fact is a democratization of the data as well. Because the most important data is the one that is outside, not only the one that you have inside. It's a, it's a rough example. Okay, but I think.

Alex: Yeah, but, but it makes total sense. I love that. I like how our conversation evolved from starting about talking about open banking Then we added another layer of open finance and now we are at open data. I think it, it just paints, you know, the whole structure beautifully. And I don't think we've explored at that level of granularity before, so really enjoying that. But the conversation about data also brings my last question and it's about our own financial data. So if someone's listening to this and thinking about their own financial data, what's the one thing they should do differently tomorrow?

Jose: My advice for individuals or maybe SMEs or sole traders with their own financial data is that all open banking, open finance, even open data in the future, is here to serve the customer. So the customer is the central piece. Why is that? Because if the customer doesn't feel happy with the products, they won't consume them and then this will die. They will die. Sorry. And then why is that important? What's the message here? So your data, not only the banking data, your data is yours for your profit. Doesn't mean that you are going to get money from the bank for your data. Okay, it's not about, oh my data, how much is worth my data. It's not like that. It's not like that. But then you need to make sure and you need to be a little bit careful about, okay, what's the offering? If I share my data, what will I get for this data I'm sharing with you after seeing the data, what will you do with that data and do I think is fairest change? And that's what they have to start doing. For open banking, it's obvious because it's regulated. So I give you the consent, you get data from my bank thanks to the data from my bank. Maybe you can have better advice in advisory app, for example, about how to invest and so forth.

Alex: But again, it's only about payments.

Jose: Well, it's all about payments. But payments data, as is the easiest because it's the most straightforward exchange, is easy for you to feel that you are getting the value, enough value for the data. And second, you have to make sure that the data is used for the original purpose, okay. And not used for later like calling you or okay, fine, it has to be fair and it has to be regulated. Okay? Now for open finance it happens the same. We need to make sure that the data we are using gives the end customer a proper value and that that proper value is recognized by the customer. And here it may not be the end customer selling the data, it could be the partner selling data. Imagine a partner from a utility, say, okay, we give you some data on how the payments or how the bills are being paid for my customers or for my providers. So you can give them a confirming factor in whatever. Okay. So in the end there is a selling of data even if this is a one to one agreement, but the final value ends into the providers and the provider had to feel okay. This relationship between e.g. bBA and the utility company is worth for me because thanks to that I have, I have access to easier like working capital or easier building finance or you know, I mean in the end all this exchange has to be worth for the end customer. And that's why I think the customer need to start thinking that this is an opportunity for them.

Alex: And I think we can finish right here this positive note, looking at this whole conversation as an opportunity for the end customer and for the whole industry. And yeah, Jose, thank you very much for this conversation. I enjoyed it a lot and I hope the listeners also enjoyed that.

Jose: So thank you very much. Alex, it was really nice talking to

Alex: you and for the listeners, thanks for listening to the end. And don't forget to hit the like button in YouTube, subscribe to the channel and also leave comments and feedback on the podcasting platforms that you may be listening this at. And yeah, see you in the next episodes. Bye bye.