Open Banking andThe Rise of Banking-as-a-Service 1

ContentsIntroduction.31. Structural Change – Disintermediation of the Banking Value Chain. 42. Open Banking Across the World.73. New Business Models.104. Open banking-driven Innovation – Tangible Customer Value.135. Embedded Finance and Banking-as-a-Service.216. Technology implications of Open Banking and BaaS.26Conclusion.29 2

IntroductionSince its inception in 2018 in Europe through regulatory initiatives like theSecond Payments Services Directive (PSD2) and Open Banking Standardin the UK, open banking has spread across more than 50 countries in theworld. From a typical compliance exercise, it has evolved into one aboutdeveloping innovative customer propositions for both retail consumers andbusinesses alike. Open APIs have become the standard of collaboration inan increasingly busy financial ecosystem where banks, neobanks, fintechs,payment disruptors and the ecommerce and technology giants strive fordominance in different parts of the banking value chain; a value chain thathas fragmented along manufacturing and distribution. Banks are exploitingopen banking to experiment with new business models to break into newmarkets, to consolidate market share in mature markets, or to defendagainst aggressive new entrants in others.We are now seeing the rise of embedded finance, the demand for aunified customer-centric digital platform to deliver both, financial andnon-financial products and services. Embedded or open finance (Open X)which includes not just mandated accounts and payments but all financialproducts such as mortgages, loans, pensions and insurance, creates evenmore opportunities for innovation. As embedded finance is spreadingto all consumer-facing brands, a particular new trend is gaining ground:Banking-as-as-service (BaaS), which has arisen under the umbrella of theopen banking framework. BaaS offers a radically different approach tofinancial services—one that deconstructs the old, traditional model andplaces its building blocks in the hands of a wider range of stakeholders.Modern technology is a prerequisite for success in open banking andeven more so, in participation in the BaaS world. All players in the openbanking eco-system, banks as well as nimble new BaaS providers or thefintech or technology brands consuming BaaS, require a resilient, secureand scalable technology platform that is cloud-native, API-first, built onmicroservices and enabled by AI. In order to succeed in open banking,incumbent banks running on legacy-based architectures need to digitallytransform by acquiring critical new technology capabilities, enabled bypartnerships with innovative banking software vendors as well as publiccloud providers. 3

1Structural Change –Disintermediation of the Retail Banking ChainThe chipping away of the banking value chainby non-traditional players plus the widespreadconsumption of digital banking services bytechnologically savvy, less loyal customers,combined with the high costs of operation ofincumbent banks mean that the end-to-endmanufacturing and distribution of bankingservices entirely within a bank will continueto decrease, and that manufacturing anddistribution will continue to diverge making itnecessary for banks to collaborate with otherplayers of the eco-system, be they fintechs,technology giants, telcos, retailers or other banks.This unbundling of the banking value chain willonly gather pace, as the disruptive technologiesmature in financial services.Unbundling of the banking value chainDistributionTraditionalModelSales &MarketingManufacturingServicingWhere is the valuein the chain?DisintermediatedModelSales &MarketingWhat is the value?ServicingWhere is the opportunity cost ofobtaining the ementOperationsWhat is the risk ofcreating the value?OperationsIs someone else better placedto gain the value?OutsourceInsource 4

Banks need to assess which elements of their value chain truly add value tothe end customer and which do not, how much value is created, what are theassociated risks and costs and what are the opportunity costs of divestment.Accordingly, banks may decide to focus on certain processes themselves,may consider outsourcing and other innovative partnership models forsections of their value chain or may in-source certain business from otherbanks, leveraging economies of scale and leading to the rise of new utilitymodels in the industry.Open Banking is the resulting global phenomenon of the disintermediationof the value chain and the move from competition to collaboration with otherplayers in a wider eco-system. It is a collaborative model in which bankingdata is shared between two or more unaffiliated parties through APIs in a bidto deliver enhanced capabilities to the end-customer. The third parties couldbe service providers or technology developers. The use of APIs as opposedto non-standard ways such as screen-scraping or manual downloads,improves the speed, ease and security of collaborating with third parties. Itmakes data, algorithms, transactions, business processes and functionalityavailable to other players in the banking eco-system.63%of financial executives say theirorganization’s Open Banking spendingincreased since 2019Source: Tink 2020Open banking - A collaborative model basedon sharing of data through APIsFrom:To:CustomersOwnChannelsCustomers3rd partyproviders3rd partydevelopersInternalAPIsOpenAPIsBankBank73%of UK financial executives havea positive attitude to open bankingcompared to 48% in 2019Source: Tink 2020 5

“With Temenos, we can pursue new and untapped market opportunitieswith differentiated products and services that will put us at the forefront ofOpen Banking and Payments modernization opportunities. We lookforward to continuing to innovate with Temenos.”Chris CatliffPresident and CEO, BlueShore Financial, Canada“This is an exciting time for us. Cloud offers the enhanced scalability andflexibility we need to pursue aggressive growth plans, while we can see realsecurity benefits from modern public cloud infrastructure. Open Bankingoffers a real opportunity for us, too, and Temenos will be our first portof call when we kick off these initiatives.”Dan DickensenFormer CIO, EQ (Equitable) Bank, Canada“As we move into a new phase in our banking journey, we are sure that thepartnership with Temenos will continue to contribute to our success, helpingus to adapt to evolving regulations and market conditions and embrace theopportunities created by Open Banking. We are confident that theself-service capabilities, rich integration features to connect to third-partysolutions, STP, and scalability of Temenos solutions will enable us to growand enhance our services.”Mark SawyerGeneral Manager, MyLife MyFinance, Australia 6

Open BankingAcross the WorldWhile PSD2 in Europe and the UK’s Open Banking Standard launched by theCompetition and Markets Authority, are the pioneering initiatives started threeyears ago to promote competition and innovation in the industry, at least 50countries across the world are now well on the path to open banking. Someare opting for a more regulatory-driven approach modelled on Europe andUK such as Australia, Canada and Hong Kong and more recently, Braziland Mexico in Latin America and Bahrain and Saudi Arabia in the MiddleEast, with mandated API standards and data access. Others are followinga more market-driven approach such as the US driven by the rise of nimblefintech challengers and those in Asia like China and India driven by paymentdisrupters and ecommerce giants.Amongst the regulated markets, Australia stands out from the crowd for havingthe most ambitious and innovative approach to open banking. Australia’sPrudential Regulatory Authority mandated open banking implementation forits Big Four Banks along the lines of the UK but moved beyond open bankingby implementing in parallel the Consumer Data Right, an open data economywhereby citizens cannot only request financial institutions to share their datawith third party providers of financial services but also companies in othersectors like energy or telecoms.2Canada is another example where the Banker’s Association has beenfocussing on digital identity as a precursor to an Open Banking Framework.It has now started the second phase of its “consumer-directed finance”consultation on open banking.Amongst the market driven ones, China is an interesting example where giantslike Alipay and WeChat Pay exploited their huge social media and gamingplatforms and customer bases to embed financial services like wealth and AIdriven lending into their platforms. They needed to develop payment systemsin a country where credit card penetration is low. They were able to do thisand expand beyond payments under a relatively benign regulatory regime atthe time, and with a more receptive customer base. Today, Alipay is rapidlyexpanding beyond China to European markets with the goal of having twobillion users in the next decade. 7

A snapshot of Open Banking across the globeUKCANADAOpen Banking Working Group UKI comprising9 major banks set up by Competition &Markets Authority; became the Open BankingImplementation Entity (OBIE) in 2018Canadian Banker’s Associationfocusing on Digital Identity as firststep towards Open BankingEU/EEAHONG KONG- Revised Payments ServicesDirective for accountaggregation and paymentinitiation in 2018- Berlin Group and othercountry initiativesOpen API framework paperissued by HK Monetary Authorityfor banking in Jan 2018; APIXAPI platform launchedCHINADriven by fintechs,ecommerce giantsand paymentdisruptersUSSOUTH KOREA- Driven by rise of fintechs, e-commerce giantsand BaaS- Limited regulation e.g., OCC financial charterand 2018 Treasury report affirming third partyaccess to consumer dataFinancial ServicesCommission focusing onOpen banking ecosystemINDIADriven by payment disruptersbut also by regulation (UnitedPayments Interface) in 2016MEXICOFintech law passed requiring banks to publishopen APIs with oversight by Central Bank(BANXICO) for digital certificatesSINGAPORE- Early adopter - launched the “Financeas a service” API playbook with 270 openAPIs published by Nov 2017- Forward regulation by MonetaryAuthority of Singapore (MAR) but nonbindingBRAZILCentral Bank leading Open Banking Projectbeing implemented in parallel with instantpayments PIXNIGERIAOpen Technology Foundationto develop open API standardsSource: Press ResearchSOUTH AFRICAReserve Bank to establishregulatory sandboxRWANDAModelled on PSD2 plusregulatory sandboxRegulatory-drivenSAUDI ARABIAOpen banking initiativelaunched by SaudiCentral Bank (SAMA) forearly 2022BAHRAINBahrain Open BankingFramework (Bahrain OBF)launched by Central Bankof Bahrain in 2020Market-drivenAUSTRALIA- Prudential Regulatory Authority (PRA)mandate for phased implementation of OpenBanking by the Big Four banks in parallel toConsumer Data RightBoth 8

Open Banking Implementation Entity (OBIE)Case StudyIn the UK, the Open Banking Working Group, a consortium of 9high street banks, was set up in 2015 by HM Treasury to developthe Open Banking Standard, a framework to guide how OpenBanking data should be created, securely shared and used byits owners and those who access it using open APIs. The intentionwas to develop common technology, security and data protectionstandards across the industry for open data such as current accountterms and conditions or credit data, so as to maximize its potentialvalue through reuse. In addition, the UK’s Competition and MarketsAuthority (CMA) published a report in late 2016 requiring banksto implement open banking by 2018 in order to acceleratetechnological change in UK banking and to help new entrantscompete more fairly with the larger incumbent banks. The UK’s OpenBanking Implementation Entity (OBIE) was established at the sametime. Funded by the industry and operating under the aegis of theCMA, it is a central programme and platform that supervises theimplementation of open banking in the UK, champions the openbanking ecosystem and provides critical infrastructure services tothat ecosystem such as directory security and dispute managementservices.OBIE has been instrumental in the development of Open Bankingin the UK and is widely seen as a success by the rest of the worldincluding Europe with its PSD2. By December 2020, it had morethan 300 regulated providers, including fintechs, in the ecosystemwith 102 having live offerings in the market through the OpenBanking App Store. Another 450 are in the pipeline. Morethan 3 million UK consumers and businesses now use open bankingenabled products to manage their finances, access credit and makepayments and API call volume has increased from 66.8 million in2018 to nearly 6 billion in 2020. The focus of OBIE now is deliveringtrue customer value, going beyond the regulatory mandate bycreating a premium set of services on top of the existing regulatoryAPI framework and standards, which will be targeted at specific usecases. “That’s when it really takes off: all the data in one place builtaround serving the consumer,” said Imran Gulamhuseinwala, theTrustee of OBIE.The app store run by the UK’s OBIE currently has 100 different openbanking mobile applications and online products across consumer,business and technical services. 9

3NewBusiness Models46.6%of respondents want to act as a true digital ecosystem(offering own and third-party banking and non-bankingproducts and services to own customers as well as to otherfinancial services organisations)Source: EIU Report 2021Third partyOpen Banking Business Models(inspired by the European Banking Association)APIManufacturerPlatform (B2B2C/ IAPIAPIAPIAPIManufacturingManufacturingTraditional full-service bankDistributor (B2C/ n reality, banks will pursue amultitude of these business modelsdepending on their business strategyand market position in differentbusiness segments and geographies.In markets where they dominate, theymay choose to provide a full front-toback-service as well as aggregate 3rdparty products to build their own digitalecosystems. Citi bank has recentlylaunched a digital lending platformdesigned to provide access to creditto SMEs looking for loans for up to 10 million to connect seamlessly withseveral regional, local and communitybanks. Idea bank in Poland has built asimilar eco-system for SMEs and startups but providing accounting, cash flowanalytics, promotion support and evenbook-keeping for Uber drivers. Gobankin the US teamed up with Uber to offerbanking services on the ride-sharingplatform gaining access to Uber’s vastcustomer base. To enter new markets,banks may decide to offer their servicesto third-party distributors or participatein an existing eco-system.DISTRIBUTIONOpen banking is leading banks toco-exist with and co-evolve withmultiple players in the banking ecosystem. Open banking has seen thetraditional full-service bank morphinto new business models such as the‘aggregator or distributor’ where thebank sells third-party products to itsown customers, the ‘manufacturer’where the bank sells its ownproducts to other customer-facinginstitutions, or the ’platform’ wherethe bank facilitates the exchangeof financial products and servicesbetween multiple distributors acturingOwnThird partyAPIPRODUCT CREATION 10

The ecommerce and technology giants like Amazon, Rakuten, Ant Financialand Tencent first merged the value chains of various industries to offer financialservices from platforms. Being more central to their customers’ lives and betterable to exploit the mountains of incredibly valuable customer data they ownedenabled them to do so. Many banks today aspire to create a platform like Airbnbor Google or WeChat i.e. to enable transactions between buyers and sellers fortransactions across different related businesses offering a shared solution, within thecontext of a well-defined value proposition under their own brand with the valuebeing generated by the transactions themselves.In the context of retail banking, such a platform could be around a lifestyleproposition such as buying a new home, with the bank orchestrating not justfinancial services but also services that help the customer insure, renovate andfurnish the new home all integrated into the bank’s platform. For businesses, anexample of a platform is RBC’s Ownr which offers end-to-end administrative,regulatory and advisory services to entrepreneurs setting up and managing a newbusiness in Canada from registering the business as a sole proprietorship or anincorporation to building the brand and helping with business insights. With such amodel offering a one-stop shop of personalized services, a customer is more likelyto remain within the platform ecosystem.Percent of respondents who trust big techto handle financial needs:58%65%Source: McKinsey - Future of Banking Consumer Survey July 2019A large bank in Europe embarked on a digital transformation with Temenos to deploy cloud-native TemenosTransact and Infinity. The new technology platform not only enables the bank to improve operating efficiencybut also allows them to participate in third party eco-systems to create new revenue streams and distributionchannels whether in real estate or car dealership or a home moving company. 11

Increasingly favourable customer attitudes towards banking with brands like Google and Amazon combinedwith the truly digital and compelling propositions that these giants and other disruptors provide, imply asignificant erosion of the banking revenue pool. Citi predicts a loss in business volumes of up to 50% inpayments and investments and up to 35% in consumer and business lending and mortgages to new entrants by20251. This means that banks have to act fast to maintain and gain market share in the world of open bankingwhere proprietary data is no longer the source of competitive advantage it once was.However, banks have several historic advantages – rich transaction data, trusted client relationships, complianceprowess and capital – that they could exploit to create their own platforms. McKinsey estimates that banks thatcan capture a share of some non-banking markets through the platform model could elevate their ROE by 5%above the current industry average2.Top Benefits to Banks from Open Banking44%39%37%31%17%Revenue growthfromnew customersRevenue growthfrom new productsand servicesRevenue growth fromnew APIs anddeveloper servicesMarket sharegrowthChurn rateSource: Tink 20201. Citi Research Global Digital Strategy “Bang and Fuse” Model2. McKinsey: Remaking the bank for an eco-system world October 2017 12

4Open banking-driven Innovation –Tangible Customer ValueOpen banking continues to be driven by the original regulatory objectives of increasingcompetition and accelerating innovation using APIs. Despite PSD2 having a very limited focus,and while the regulation has not yet had the impact many had hoped for, the concept of usingopen APIs has had a transformative impact on the industry as market leaders, both incumbentbanks and new entrants, go beyond the regulation to provide innovative experiences andproducts to consumers and businesses alike, giving them more choice and greater control overwhich financial products and services they consume and from whom.Open banking’s ultimate success depends on end-customers’ awareness and acceptancewhich in turn depends on the additional tangible benefits it brings – greater personalization,a better experience with improved convenience and responsiveness, more transparency, andaccess where none existed. Financial services providers need to go beyond mere accountswitching and aggregation to provide next-generation financial services not only to existingcustomers but also extend their reach to under-served or unbanked segments, by accessingand mining open banking data from multiple third-parties in addition to their own. For instance,many providers are using open banking to extend private banking to the mass affluent andultimately mass retail segments and extend corporate banking to the underserved SMEsegment. In the UK, open banking is progressing beyond accounts to other areas of financesuch as savings, mortgages and even pensions and insurance which is being referred to asOpen Finance or Open X.The benefits to theend customer and/or rolChoiceBanks are starting to leverage open banking for retail, SME and corporate customers with richuse cases emerging in all segments. 13

RetailBankingRetail consumers were the first target for open banking and compelling use cases for end-consumers are emerging rapidly, ranging from aggregationand personal financial management to beyond banking.Retail Banking use cases12Aggregation& financialmanagement3Credit riskdecisioningOrigination g “The Temenos MarketPlace has a strong retail banking hub across Europe that we are excited to become a part of.By adding our open banking platform with deep bank connectivity, we can help banks in the Temenos communityseamlessly access real-time, enriched financial data, enabling them to get a better understanding of theircustomers’ finances, and to build new digital services that help people better manage their money.”Daniel Kjellén,Co-founder and CEO of Tink 14

1. Aggregation and financial management:Already, open banking is helping retail customersmanage all of their personal finances in oneplace, giving them a holistic view of their financialfootprint plus access to faster, cheaper credit, andpersonalized advice on managing debt or the bestmortgages to buy. HSBC, KBC, OP Bank haveall launched aggregator apps in recent years.Aggregator and personal financial managementapps have now extended their scope to includenew services such as targeting recommendationsfor restaurants, attractions and activities basedon previous financial behaviour. Natwest andSwedish fintech Tink3 have partnered on aspending feature on Natwest’s mobile bankingapp used by 4.6 million customers to controlfinances. In July 2020, a personalized andactionable newsfeed was added to this app whichhas helped 1.6 million customers save money.ABN Amro has also collaborated with Tink todevelop Grip, a PFM application that allowscustomers to view their consolidated financesfrom other banks. Within 3 months of launch, theyhad attracted 670,000 customers, 50% of whomreported improved perception of the bank.2. Credit risk decisioning: Credit risk decisioningfor loans and mortgages is being transformedby automating and incorporating open bankingdata like shopping history in addition to staticcredit reference agency data, allowing customersto receive bespoke, fairer offers faster andmore cheaply, while the providers benefit fromoperational cost savings, reduced fraud, andbetter lending decisions. Platforms like DirectIDcategorize open banking data such as salary,debts and affordability to provide visual insightson the creditworthiness of the applicant. This canallow people with no credit history like youngpeople, new immigrants or the self-employedaccess to credit they would not otherwise receive.The not-for-profit lender, Fair for You, uses openbanking to enable low income families toaccess credit.3. Tink has built its business model on open banking in Europe, offering account aggregation, personal financial managementand payment initiation services to banks in 13 European markets. It is connected to 3400 banks and FIs.3. Origination and onboarding: Disruptivetechnologies like AI and machine learningand Robotic Process Automation (RPA) canbe applied to open banking data to simplifyand dramatically improve the originationexperience. Fintechs like Habito and Trussleare already doing this for mortgages. Even foraccount originations, access to open bankingdata can reduce exceptions and hence reducedropout rates in the application process throughautomated verification. The same principles applyto tenant applications for rentals. 15

4. Payments: Payments are being revolutionizednot just by open banking but by new formats andmethods such as QR Codes, P2P payments andcryptocurrencies to reduce friction and improvethe consumer experience. New firms such asAdyen are complementing existing technologyfirms such as Stripe and PayPal in this space.5. Charitable giving: Charitable giving is anarea adjacent to banking that is seeing thepositive effects of open banking. Sustainablyis a fintech that allows users to roundup theirdigital spare change from shopping and debitcard use towards charitable giving. MoneyhubEnterprise and Streeva are powering charitydonations by scanning QR codes with a phoneto allow direct payment with automated Giftaid.Santander’s Openbank recently launched acharity marketplace. “Customers can go to thewebsite, select a charity, set up an automatictransfer every month or year, and receive a taxreceipt”, said their CEO, Ezequiel Szafir, recently.6. Beyond banking: Open banking could beextended into completely new areas outsidebanking and finance like managing all of acustomer’s passwords from the bank’s portal.Imran Gulamhuseinwala, implementationtrustee at the OBIE, uses the example of an appleveraging open banking data to help peoplebetter understand their carbon footprint and makebetter environmental decisions. 16

Corporate/SME BankingOpen Banking can also help small and medium enterprises (SMEs) and corporates all the way from corporate treasury to payments, credit access,account opening and operations to beyond banking. It helps in reducing costs, enables better decision making and improves compliance.Corporate/ SME Banking use cases12CorporatetreasuryFinancialmanagementfor SMEs rvices6Beyondbanking 17

1. Corporate treasury: Open bankingoffers significant benefits to the corporatetreasury function. It enables real-timeintegration between the corporate’sERP and treasury systems and the bank,greatly enhancing visibility for boththe bank and the corporate treasury.Corporates meanwhile can use openbanking to access real-time transactionsand balances from their multiple bankingrelationships to have enhanced andtimely visibility on their cash and FXpositions globally, rather than end-of-dayMT940 or MT92 statements, for instance.This helps corporate treasurers managetheir liquidity more effectively.2. Financial management for SMEs and Wealth: Openbanking is especially useful to SMEs as it allows themaccess to the same technology benefits that were previouslyonly available to larger, well-resourced corporateorganizations. For example, a single open banking APIcan enable smaller treasury teams to access the onlineportals of multiple banks with their own specific ways ofdownloading information, which can be much more costeffective than SWIFT. This offers greater choice and easycomparison of different products and services availablespecific to the SME’s sector and market. Open bankingdata can enable account aggregation or book-keepingand financial management as well as the ability to improvecredit checking of customers and integrate accounting andlending. Improved visibility and analytics into cashflowagainst forecasts helps manage late payments. In theUK, Barclays, HSBC, Lloyds, and RBS all offer SMEsand middle-market clients products for aggregated cashmanagement. In Central Europe, OTP bank recentlylaunched eBiz , a financial management tool for SMEs.New players like Tide, Holvi, Plaid and Coconut also offeraggregation solutions, mostly focused on accounting andbookkeeping, with payment tracking, tax calculation, andinvoice preparation to SMEs and freelancers. Others likeVisibleCapital provide improved insights on private clientsfinancial advisors, wealth managers and pension providers.3. Credit decisioning: Banks can useopen banking APIs to access accountspayable and receivable transaction datain real-time as well as invoice historyfrom their corporate clients in addition tobalance sheet and credit registry data,allowing them to make better-informedcredi

Open Banking Working Group UKI comprising 9 major banks set up by Competition & Markets Authority; became the Open Banking Implementation Entity (OBIE) in 2018 EU/EEA - Revised Payments Services Directive for account aggregation and payment initiation in 2018 - Berlin Group and other country initiatives HONG KONG Open API framework paper