Banking Technology & Allied Topics

Global Banking & Securities How transaction banks are reinventing treasury services As clients demand solutions to enhance their corporate treasury activities, banks are increasingly partnering with fintechs and software players. by Alessio Botta, Reet Chaudhuri, Nunzio Digiacomo, Matteo Mantoan, and Nikki Shah October 2021 © Baac3nes/Getty Images 22

Cash and liquidity have long been considered important route to market and therefore potential key indicators of corporate financial health, and partners. For their part, banks are clearly motivated the pandemic has confirmed the continued to provide broad-based state-of-the-art support relevance of this fundamental metric. During the for commercial banking functions that generate crisis, “cash excellence” proved crucial in enabling over $550 billion in annual revenue, according to continued operations for enterprises still early in McKinsey’s Global Payments Map. their development; and as a business matures, it becomes a key lever for releasing capital to invest Banks face several strategic decisions on this front. in growth. Recently, liquidity metrics have received They must first determine their desired role in this as much focus as more widely publicized measures evolving ecosystem: integrators and orchestrators like operating margins and EBIT. of a full suite of services, background service providers, or developers of proprietary front ends Meanwhile, underlying trends in digitization built in-house. Factors such as geographic footprint, and increased investor scrutiny are setting new client sector focus, and investment appetite will standards for corporate treasury professionals. inform the best path for a given bank. Cash forecasting is regularly cited among the most inefficient processes by small and large Although the classic build-buy-partner decision organizations alike. CFOs and CEOs are seeking remains relevant, recent years have seen a decided partners to help them navigate the shift from tilt toward the partnership model within the treasury reporting to predicting. Solution providers (whether space. Banks and third-party solutions usually banks or software and fintech firms) able to solve offer different functionality and strengths, with this problem will be well positioned to reinforce or all groups increasingly realizing they can exist in extend commercial relationships. harmony. With speed to market a unifying objective, bank distribution paired with software-firm agility Historically, bank-provided treasury platforms has proven to be a potent combination, whether have focused on core transaction execution central for the white labeling of third-party technology or to their corporate relationships. The advent of in scenarios where banks serve as a channel for software as a service and API connectivity has branded providers of these services. made robust, multifunctional workstations far more feasible; in response, software firms and other In this article we’ll explore the evolving needs of third-party providers have grasped this opportunity corporate treasury functions, and the complex and to create solutions that are gaining ground with fragmented provider landscape that has developed corporate clients of all sizes across an array of to address them. Based on direct input from sectors. practitioners we’ll also detail the factors that should inform each bank’s decision on how to proceed in Banks recognize the importance of being close the space, and offer examples of the components of to decisions around core underlying payments, successful bank-provider partnerships. investment, and financing flows that their corporate customers are making. Liquidity management Evolving needs of the treasurer tools—including treasury management, cash forecasting, supply-chain finance (SCF)—are Forward-thinking CFOs and treasurers have begun increasingly being embedded into the new to fundamentally rethink the treasury function, generation of corporate global transaction shifting its role from custodian of historical cash banking (GTB) portals. For fintechs and software activities to encompass a more strategic and players with a focus on customer acquisition and expansive approach of “owning” the full suite of retention, banks are increasingly viewed as an enterprise liquidity. In support of this mandate, 23 How transaction banks are reinventing treasury services

treasurers are looking for technology platforms These interviews further revealed that large offering predictive liquidity and cash-flow modeling. enterprises prioritize seamless integration with Specifically, they need robust forecast capabilities enterprise resource planning (ERP) systems and that incorporate cross-border positions and the ability to make swift decisions (for instance, exposure to various currencies. access to financing, short-term investments) based on underlying cash positions. CFOs and McKinsey recently conducted focus groups with treasurers of these businesses are exploring SCF CFOs and treasurers of large corporate and mid- programs—involving numerous internal and external cap European firms. These conversations revealed stakeholders—for an efficient and sustainable significant pain points in cash forecasting and approach to circumventing supply-chain failures currency risk, invoice processing, and payment resulting from financial disruption. Their priorities in reconciliation. Cash forecasting is considered the structuring a comprehensive SCF program include: least efficient financial workflow by both small and large organizations—in some cases requiring more — Internal systems integration. The typical than a week to gather and compile forecasting data organization supports several ERP systems from a variety of formats, causing further strain. across multiple entities, necessitating integration among platforms to allow treasury “What most interests me is the possibility to manage management systems (TMS) to work properly. my working-capital operations without manual A successful supply-chain finance program loading of data, specifically for invoice discounting requires full integration among all data sources and factoring, and to have the possibility, not only and reporting software, enabling the treasurer to have a reporting instrument, but also a predictive and other end users to make decisions based on tool for operations,” was a representative example of real-time data and analytics. such feedback. Another treasurer offered: “We are building a new digital platform, consolidating lots — Establishing multi-funder models. Price is no of data into an integrated system, to help us unlock longer the sole criterion for evaluating liquidity the potential daily processes, improve transparency financing alternatives; ease of satisfying know and access to real-time information, and enhance your customer (KYC) requirements, credit security standards.” capacity, and platform design play increasingly crucial roles for treasurers of large corporates. Overall, treasurers of large corporates highlighted Despite their typically higher nominal price, five primary needs: bank-independent technology solutions are becoming the preferred model given their added — Timely visibility into all global transactions flexibility, ability to support a multi-funder model, and often more rapid incorporation of new — Eliminating time-consuming and error-prone features addressing evolving treasury priorities. manual payment-generation workflows — Setting clear goals and objectives. Successful — Reducing exposure to nonstandardized bank programs require the clear identification of documentation and other compliance issues targets and KPIs to create a framework for causing significant delays or confusion execution. With various stakeholders involved (treasury, procurement, IT, legal, accounting) the — Protecting against fraud absence of common and measurable objectives can lead to cross-functional misalignment. — Keeping pace with industry changes to formats One treasurer suggested essential elements and technologies, particularly in the payment of a successful program include a negotiation process strategy for payment-term extensions, as well as How transaction banks are reinventing treasury services 24

a segmented messaging strategy for various be $3.5 billion annually on software addressing the suppliers. The latter point is particularly needs outlined in this article. instructive: within large SCF programs, it is important to coordinate the information coded The scope of these offerings includes (Exhibit 1): within a payment transaction based on the platforms employed by each party. — Next-generation approaches to cash and treasury management. Extending beyond basic The situation in the small and medium-size visibility and forecasting, these generate more enterprise (SME) space is quite different. accurate multicurrency forecasts, streamline Particularly at the smaller end of the spectrum, workflows, and enable more robust hedging, proprietors are less inclined to look to third-party financing, and investment decisions. providers for financing and treasury-management solutions, relying instead on bank offerings. — Order-to-cash/receivables solutions. These Keeping pace with daily operational realities streamline the accounts-receivable process, leaves little bandwidth for digitization efforts—in reducing days sales outstanding, increase fact, larger B2B buyers are often the drivers collection rates, and further enhance visibility behind modernization of smaller supplier partners. and accuracy of cash forecasts. Nonetheless, relations between SMEs and their banks are often complicated, with lending terms — Source-to-pay solutions. By simplifying frequently incompatible with client needs even accounts-payable and payments workflows, when products are available. As a result, owners they generate benefits including reduced fraud often elect to finance with personal funds or forgo losses, payments prioritization for identified debt altogether. McKinsey’s research identified suppliers, and increased visibility and accuracy the greatest SME need to be access to liquidity, of cash forecasting. access to broader B2B markets (with cross- border funding posing particular challenges), and — Integrated working-capital finance, trading, transaction complexity. While the threat of bank and investment activities. This suite provides disintermediation is not as imminent for the SME treasurers and CFOs with a wider range of market, the emergence of a compelling third-party options than previously available, including proposition certainly poses future risk. supply-chain finance, receivables financing, and short-term investment products. The liquidity management ecosystem: Players and approaches differ by geography: Solutions addressing these needs for instance, the US market is driven primarily by third-party software vendors, whereas in Asia In response to these priorities, corporate software the solutions tend to be bank-led. Cloud-based solutions are evolving to foster cash-excellence solutions have made these capabilities more capabilities throughout the organization. accessible to SMEs—even those without a formal These solutions span the full scope of CFO treasury department—thereby significantly responsibilities and offer different functionality, widening the potential addressable market. each contributing to improved cash and liquidity visibility and positioning. In recent years, a Key success factors for banks number of solutions have sought to address the partnering with fintechs on offerings evolving needs of businesses’ cash and liquidity management—including ERP providers, banks, Banks, which have historically not focused on the and third-party software including treasury cash-management software space, increasingly management systems—and a wider set of players realize that providing at least a portion of this across the liquidity management space. McKinsey functionality and embedding themselves more estimates annual global corporate spending to 25 How transaction banks are reinventing treasury services

Exhibit 1 Corporates are seeking automation and liquidity visibility across the transaction workflow. Cash event Cash event Accounts receivable automation Accounts Payments Collection Cash EIPP Credit payable manage- and application manage- automation ment disputes ment Automated Streamlined Cash and treasury Automated Automate Provide Run invoice data prioritization collections matching of customers improved capture and approval Bank account and disputes payments with credit workflow management information request to checking Puchase order to invoice pay and on both matching Regulatory Cash and liquidity electronic new and compliance management Report invoice existing Dispute and fraud relevant present- customers resolution prevention Treasury and risk taxes ment and management payments Automated (EIPP) supplier Working capital finance notification, reconciliation, Receivables financing and tax Supply-chain finance reporting fully into the corporate workflow reduces the Banks face the ever-present decision of whether risk of disintermediation from the underlying to build, partner, or acquire these capabilities. payments, investment, and financing flows of Recent years have seen a material increase in the corporate customers. Accordingly, corporate partnership model, for white labeling of third-party liquidity-management tools—including treasury technology as well as banks acting as a channel management, cash forecasting, and SCF—are or seller for such services. This model enables increasingly embedded into the next generation of quicker time to market and faster introduction of corporate GTB portals. new customer functionality. Fintechs and software players with a focus on customer acquisition and Some banks have developed vertically focused retention increasingly view banks as a priority solutions with functionality and integrations channel and an efficient path to market (Exhibit 2). designed to meet the unique needs of strategically important customer segments. The rise of open In McKinsey’s experience, the following key success banking, the ongoing search for new banking factors optimize the potential for bank-fintech revenue models, migration of services to the cloud, partnerships to accelerate their time to market as and client demand for integrated experiences are well as commercial impact. also informing these strategic decisions. DBS has been particularly active in this arena in Singapore; — Document a commercial approach determining for instance, using APIs and mobile apps to enable both ownership and roles with regard to real-time payments to online merchants and customer engagement. As an example, while delivery-service drivers (see sidebar, “Asia–Pacific initial contact might be conducted by the fintech focus”). How transaction banks are reinventing treasury services 26

Exhibit 2 Bank-fintech partnerships are ramping up in treasury services. Top bank/fintech partnership areas of focus (% of banks citing area of focus as “very important” to their fintech partnership strategies) Digital account opening 73 Payments 54 52 Lending and credit Fraud/risk management 38 New banking products 27 Personal financial management 19 Investment management 11 Insurance 6 International remittances 3 Source: Cornerstone Performance Report for Banks 2019, Cornerstone Advisors, 2019, crnrstone.com alone, subsequent meetings will be handled — Establish a dedicated IT-business governance together since customers—particularly large team with recurring meetings to address corporations—are seeking integrated product commercial challenges as well as technology offerings requiring expertise that extends enhancements, potential change requests, or beyond technology platforms. new deployments. — Develop a go-to-market strategy tailored — Develop internal expert capabilities in the to customer segments. For some segments, partnership products (likely in product specialist fintech tools may be offered as white-label and relationship manager roles) as well as new solutions via bank proprietary assets, thereby digital tools the fintech may bring to the table differentiating the commercial offer from other as key assets. When proposing client solutions, segments in which the fintech offers its platform these individuals will ask for interactive demo as a stand-alone suite backed by a bank acting sessions, during which the sales network must as a counterparty for execution of payment possess the capabilities to surf the new platform transactions. and manage the end-to-end digital process underlying the new product. — Identify and agree on an IT implementation and delivery road map to serve as the baseline — Identify KPIs by which the overall partnership from which the bank will develop its commercial will be valued and establish the proper time campaigns. frame for KPI monitoring and assessment. 27 How transaction banks are reinventing treasury services

Asia–Pacific focus While the Asia–Pacific payments sector has benefited from extensive fintech activity focused on digitizing small merchants and enhancing overall business efficiency, there has been relatively lighter emphasis on modernizing treasury solutions for large corporates. Such opportunities are limited in part by divergence in infrastructure and regulatory standards across countries (currency convertibility, real-time payment rails, and market access, for example) making it challenging for banks or software providers to create solutions capable of delivering sufficient scale and value for multinational clients operating across the region. Some banks in the region have taken the initiative to develop bespoke solutions addressing specific client needs, however—for example: — Singaporean multinational bank DBS implemented a fully automated real-time payment system for drivers at ride- hailing firm Gojek. This created a differentiating feature recognized by the client as a recruiting advantage. Rather than waiting until the end of the week for payment (as with other taxi firms), Gojek’s drivers can now transfer funds to their bank account after each trip. — ICICI Bank’s STACK offering provides customized digital banking services to companies in over 15 sectors, with the goal of facilitating operations across these clients’ entire ecosystem. The Indian bank also established eight “ecosystem branches” to support and expand the rollout of these capabilities across channel partners, employees, vendors, and other counterparties. Going forward, large Asia–Pacific corporate entities are likely to enjoy features such as dynamic cash-flow forecasting, source-to-pay solutions, and multi-funder models, similar to their counterparts in more developed markets. In preparation, banks in the region should stay ahead of the curve by rethinking their treasury-services strategies. This involves determin- ing which client groups to target (as not all capabilities will resonate equally across sectors), which features are likely to gain the most initial traction with that segment, and whether these solutions are best developed in-house or via partnership with a fintech firm. Partnership benefits — Citi’s Smart Match product, enabling corporate clients to enhance straight-through- The following examples give some insights into reconciliation rates in cash applications, is how established partnerships work to enhance the powered in part by AI and machine-learning offerings of both parties: capabilities from HighRadius. The parties formed a strategic partnership in 2018,¹ — Société Générale and Kyriba joined forces helping Citi and its clients to merge disparate to offer cloud management solutions to their pieces of payment data and reconcile corporate clients. These services include real- payments received against invoices issued time monitoring of treasury positions, payments more efficiently. automation, multibank connectivity, and ERP payment validation workflow management. 1 “Citi Partners with Fintech HighRadius to Launch Citi® Smart Match Powered by Artificial Intelligence and Machine Learning,” July 12, 2018, highradius.com. How transaction banks are reinventing treasury services 28

— DNB’s 2018 strategic channel sales partnership these clients going forward. Although buy and with Kyriba provided the bank with a new set build remain valid alternatives, in most cases a of updated financial management tools to partnership approach enables banks to introduce centralize payments, automate workflows, and new products and functionality more rapidly in an detect and prevent payments fraud in real time environment in which time to market is critical. for more than 220,000 corporate clients. These cloud-based services also address the need To successfully manage partnerships with for stronger compliance and data protection fintechs and capitalize on their opportunity to required by evolving government regulation. play a leading role in the redefinition of treasury services, banks need to enhance a variety Banks are motivated to provide broad-based of internal capabilities ranging from sales state-of-the-art support for commercial banking management and product evangelism, to robust functions that generate over half a trillion dollars commercial and IT governance, and effective globally in annual revenue. They remain in a go-to-market strategies. sound position to determine their role in serving Alessio Botta is a senior partner, Nunzio Digiacomo is a partner, and Matteo Mantoan is a specialist, all in McKinsey’s Milan office. Reet Chaudhuri is an associate partner in the Singapore office, and Nikki Shah is an associate partner in the London office. Copyright © 2021 McKinsey & Company. All rights reserved. 29 How transaction banks are reinventing treasury services

Global Banking & Securities Merchant acquiring and the $100 billion opportunity in small business What will it take to grow in the age of value-added services? Our work with payments practitioners suggests a few promising strategies for serving smaller companies. by Ashwin Alexander, Puneet Dikshit, Vik Iyer, and Julie Stefanich October 2021 © Paula Daniëlse/Getty Images 30

Over the past decade, core payments processing affiliate marketing platforms and buy now, pay has become commoditized, squeezing the margins later (BNPL) providers that position themselves as of merchant acquirers. Their future growth is likely partners to help close a sale or drive more traffic to come from providing merchants with value-added through the door. services and solutions for enabling e-commerce. Merchants are increasingly willing to pay for Meanwhile, as the payments business becomes commerce-enablement services, such as loyalty more integrated into software, merchant- programs, gift cards, and affiliate marketing, as services providers can address larger value pools. well as for payments performance improvements According to data from a McKinsey analysis of card such as enhanced authorization rates and charge- transactions at US merchant acquirers, payments back mitigation. What’s more, enterprises that performance and commerce enablement could have scaled globally or digitally are prepared to account for approximately 80 percent of revenue pay a premium for sophisticated multi-country growth in payments-related merchant services over processors, local support, enhanced reconciliation, the next five years (Exhibit 1). payments-adjacent services, and better payments performance in general.¹ This shift is even more Most of this expected revenue growth is likely to pronounced in merchant categories where come from SMBs and the platforms that serve digitization has recently accelerated, such as food them. Categories such as real estate, education, and beverages, grocery, and homeware. and professional services include significant numbers of small businesses that can be expected After a decade of consolidation among scale to drive substantial growth in integrated payments players, integration of payments and software, rapid solutions. This growth will be further fueled digitization of small and medium-size businesses by the continuing expansion of marketplaces (SMBs), and emergence of powerful disruptors— and social commerce, as small and even micro independent software vendors (ISVs), fintechs, businesses (such as content creators) start to use and innovative merchant acquirers—this arena is payments software and services. In total, SMBs strongly contested and set to become even more are expected to spend more than $100 billion on so in the coming years. In this chapter, we draw on payments services by 2025²—an opportunity that McKinsey research and interviews with payments merchant acquirers must address quickly, given the practitioners to assess the scale of the opportunity intensifying competitive pressures in the market. in serving smaller merchants, and we outline four strategies for acquirers pursuing growth. Four strategies for success The continuing rise of value-added Serving SMBs effectively will be critical for services merchant acquirers pursuing growth across a range of markets. To accomplish this, acquirers should As acquirers and other merchant-services providers investigate a mix of four strategies. begin to offer software and services focused on commerce enablement, they are also tapping Optimize the performance of ISV partners into merchants’ marketing budgets, where price In large, developed markets such as the United sensitivity is lower and the perceived value of States, ISVs derive a sizable portion of their services is higher. Brands that negotiate hard revenues from payments. The rise of ISVs is putting over each basis point of merchant discounts are pressure on acquirers’ margins and shrinking their prepared to pay several percentage points to share of the merchant wallet. As a result, most 1 Puneet Dikshit and Tobias Lundberg, “Merchant acquiring: The rise of merchant services,” 2020 McKinsey Global Payments Report, October 2020, McKinsey.com. 2 Based on McKinsey analysis of SMB expense wallets (spending by addressable SMBs on addressable categories). 31 Merchant acquiring and the $100 billion opportunity in small business

Exhibit 1 Most growth in merchant services in the US will come from performance solutions and commerce enablement. Revenue for payments-driven merchant services CAGR, % Core transaction processing and transaction in the United States, $ billion 8 10 12 13 enablement 606 1,202 Revenues linked to domestic and cross-border 61 150 18 20 transactions, including interchange, scheme, 379 14 16 processing, settlement, and authorization fees 170 589 Payments software, infrastructure, and services 333 Software and services for enabling payments (eg, 84 wallets) and enhancing payments performance 596 42 2025 (eg, gateways, fraud and charge-back mitigation, 89 analytics and advisory services, digital ID and trust, risk solutions) 209 Commerce enablement 256 Growth Solutions for enabling commerce (eg, affiliate 42 marketing, loyalty schemes, subscription commerce platforms) and managing a business 2020 (eg, e-invoicing platforms, B2B trade directories, expense management) Balance-sheet-based offerings Financing and deposit models subject to more regulation and greater risk (eg, BNPL, supply-chain financing, SMB financing) 1Includes revenues from all providers of merchant services that offer payments as a core part of their proposition. Small and medium-size business. Source: McKinsey Payments Commerce Cube leading acquirers are targeting ISVs as distribution in ISV sales and production journeys, and how to or product partners, as seen in First Data’s (now avoid them”). Fiserv) purchase of Clover in 2012 and U.S. Bank’s 2019 purchase of talech.³ Further, as acquirers Target a broader share of merchants’ expense increasingly serve merchants through ISVs, they wallets need to invest heavily in enhancing their partners’ Disruptive players in merchant services, recognizing performance across key channels. that payments represents only a small share of the SMB wallet, are targeting much bigger opportunities From our observations and conversations with in software and services. A typical SMB merchant industry participants, we have identified recurring spends less than 10 percent of its budget for issues with ISV sales and production journeys software and services on payments acceptance. that acquirers should avoid. For each set of issues, The remainder goes to a range of services from acquirers can apply a set of best practices that help point-of-sale (POS) and business-management prevent problems (see sidebar, “Common missteps software to loyalty advertising, logistics, and 3 U.S. Bank’s payments subsidiary is Elavon. Merchant acquiring and the $100 billion opportunity in small business 32

Common missteps in ISV sales and production journeys, and how to avoid them Our experience suggests that at every stage in an acquirer’s relationship with ISVs, there are issues to avoid and best practices to observe. Before signing a deal In the period leading up to signing a deal, the following missteps lead to problems: — The acquirer’s business development teams fail to engage with the ISV’s management and technical teams, leading to misaligned expectations on core capabilities, growth goals, and timelines. — Business development teams rush the sales process and engage only one or two executives at the ISV, failing to secure the broader organizational buy-in needed to ensure the ISV is willing to invest and drive volumes to the acquirer. — The acquirer and ISV fail to articulate shared goals that the ISV’s engineering and other teams will co-own and track. Best practices: Shortly before the deal is signed, bring in implementation and partner management teams to agree on estimates, expectations, and integration plan, and begin building relationships. Align the incentives of business development teams with deal signing, volume sales, and achieving full-scale production within 15 percent of expectations. Deal closure and implementation The following mistakes are sources of problems during closure and implementation of a deal: — Multiple handoffs across business development, implementation, and partner management result in poor accountability and a subpar experience for merchants, which may then defect. — Incentives for business development teams are based on deals signed, not actual payments volumes processed. When this occurs, the teams have little involvement beyond implementation and provide only limited support for ISV onboarding. — The acquirer and ISV tech teams are not aligned on the resources needed to meet integration milestones and timelines, so they miss targets. — No clear plans exist for getting the ISV to scale through co-marketing, targeted campaigns, key performance indicators (KPIs) for the first 180 days, and so on. Consequently, growth goals are never reached. — Merchant onboarding lacks the speed and flexibility necessary to ensure a smooth experience. For instance, tasks are performed sequentially, rather than in parallel. Best practices: Before the deal is signed, ensure that goals are jointly owned with the ISV; plans are in place for tech integration and ramp-up; and key owners, check-ins, and KPIs are identified. Simplify, test, and refine onboarding and implementation to create a seamless hands-off process, with complete transparency on timelines, targets, and accountability. 33 Merchant acquiring and the $100 billion opportunity in small business

The first 180 days During the first 180 days following an acquisition, additional missteps are common: — The tracking of the highest-impact service-level agreements (SLAs) is not sufficiently disciplined to ensure the success of integration and ramp-up. — A linear (rather than parallel) approach to transaction processing slows down testing, discovery, and the tackling of issues. Best practices: Quickly get the first few percent of transactions live to identify and address issues. Track satisfaction of key client executives at deal signing, 45 days, 90 days, and 180 days to ascertain the trajectory and address emerging issues. Set up a small working team with two or three people from each organization; schedule monthly meetings for this team to track growth, volumes, and so on. With larger ISVs, commit a member of the sales team to spend time with the relationship manager to drive leads from the ISV. Ongoing partner management Over the longer term, additional problems can arise: — Poor responsiveness and inflexibility in changing SLAs results in attrition and/or an inability to ramp up processing volumes. — Unclear ownership between the acquirer and the ISV, the use of legacy processes for merchant servicing, and poor accountability and tracking lead to service issues and higher attrition rates. — A lack of clear metrics or processes to act as leading indicators of dormancy or poor merchant experience results in lower satisfaction and higher churn. Best practices: Set up quarterly meetings at senior executive level for the top 30 to 40 percent of ISVs. Hold joint meetings with ISV tech teams to ensure clear reporting and to understand the tech road map, new deployments, and expansions. Cross-cutting issues Some additional issues may arise at any point in this journey: — Implementation can stall if the acquirer sources multiple solutions from one ISV without planning how to align and prioritize them; neglects outreach, leading to limited buy-in at the ISV; and fails to develop internal champions. — A cultural and talent mismatch between slow-moving incumbent acquirers and small and nimble ISVs tends to impede responsiveness, damaging the merchant experience. We estimate that, as a result of these common issues, between 30 and 50 percent of ISVs become dormant or drop off during implementation or later. What’s more, among the ISVs that get as far as ramping up, 40 to 45 percent will either go dormant subsequently or fail to reach their expected production level for the first two years. Merchant acquiring and the $100 billion opportunity in small business 34

insurance (Exhibit 2). Delivering these broader sets serve merchants via ISVs could build solutions of services is becoming easier with the increasing that their ISVs can white-label and cross-sell. One integration of acquiring and software. ISVs are now example of how an acquirer with indirect access can able to integrate payments, financing, and a range of increase its share of merchants’ expense wallets other products into their platforms to increase their is Stripe, with its suite of services across Stripe revenues per merchant served. Treasury, Stripe Issuing, and Stripe Capital. For incumbent acquirers, the larger the share The opportunity to target a larger share of wallets of residuals they hand over to their ISV and is greatest in mature SMB acquiring markets such bank partners, the more critical it is to target a as the United States and the United Kingdom. bigger portion of merchants’ expense wallets by However, it is growing slowly in other markets broadening their range of offerings. How readily where merchants’ expectations are rising and local they can do so depends on whether they have solutions are evolving. direct-to-merchant access and a merchant-facing portal or interface, instead of relying on other Focus on specific industries platforms and ISVs to reach SMBs. Those with Over the past two years, payments providers direct-to-merchant access need to expand their serving SMBs have started to organize their product suite through proprietary or third-party products, services, and go-to-market approach products and adjust their economic and sales by industry. The convergence of payments and models to boost product penetration. Those that software, coupled with merchants’ desire to procure Exhibit 2 Acquirers can increase their share of merchants’ wallets by offering broader services beyond pure payments. Typical expense-wallet breakdown of a small and medium-size business (SMB) with >$100,000 in sales, % Addressable software and 100 services spend 15 Unaddressable Financial services 58 20 Nonfinancial services Software and platforms 20 45 3 11 3 11 7 7 11 2 4 5 3 3 21 21 10 10 Total Cost of Addressable Business Logistics Payments Insurance expense goods sold software and management and shipping acceptance services spend software wallet Facilities, Salaries Point-of-sale Loyalty, Payroll Financing Other equipment, software advertising, and services and rent marketing 1Includes software for accounting, ERP, inventory management, and expense management. Includes expenses incurred on marketplace platforms, SEO/SEM, social media, affiliate marketing, loyalty programs, and promotions. Includes payments to marketplaces and directly to services providers, including returns handling. Includes all costs related to payments acceptance, including fraud, charge-back, and point-of-sale financing. Includes interest payments on loans, merchant cash advances, net credit term payments, invoice discounting and receivables financing, and equipment financ- ing but not payments related to commercial mortgages. Includes group insurance and healthcare. Includes expenses related to banking and professional services such as cleaning, taxes, and utilities. Source: McKinsey analysis of the expenses of approximately 5,000 SMBs from retail, food and beverages, manufacturing, personal services, home and repair, B2B services, professional services, and healthcare 35 Merchant acquiring and the $100 billion opportunity in small business

solutions from a single provider, has paved the instance, large and developed economies have way for merchant acquirers and ISVs to deliver highly competitive markets for merchant services integrated industry-specific solutions. in general retail, consumer services, and food and beverages, while Asia–Pacific and Latin Whether acquirers reach merchants via America have yet to develop such markets at scale. proprietary channels, independent sales Moreover, industries differ in their economics, organizations, or banks, they need to focus on scale, and attractiveness, which will partly depend industries where they can build tailored solutions on the stage of digitization they have reached. that go beyond payments. The recently launched Exhibit 3 provides estimates of the size of some key Square for Restaurants offers services such verticals in the United States. as integration with delivery platforms, order modification, the merging of bar and table orders, It’s worth noting that a sector focus can limit and bill splitting, for example. Other providers scalability, given the steady investments that are following similar industry-focused strategies. in-house platforms and software solutions must Mindbody, Daxko, and ABC Fitness Solutions focus make to remain competitive. An alternative on health clubs and gyms, Transact on education, strategy—pursued by Adyen, among others—is to AffiniPay on professional services, and Pushpay and build horizontal cross-industry platform capabilities Vanco on charities and religious organizations. that ISVs can use in areas such as lending, issuing, and POS financing. As acquirers gear themselves Providers pursuing industry-focused strategies up for the next decade of competition, most have also need to tailor their offerings by region. For Exhibit 3 Merchant acquirers pursuing an industry-focused strategy must assess the attractiveness of each vertical. Current addressable market size in United States, $ billion CAGR1 % 2015–2020 General retail 57 <8 8 15 Restaurant focused 68 >15 Consumer services 57 (eg, spas, salons) 10 12 Healthcare B2B 5 7 Education 68 Government and nonprofit 8 10 Other (eg, legal) 11 12 Subscription 12 15 1Compound annual growth rate. Source: McKinsey Payments Commerce Cube Merchant acquiring and the $100 billion opportunity in small business 36

only a year or two to decide whether to adopt a acquirers with access to sellers will also be well vertical or horizontal focus. positioned to offer them increased platform reliability by providing enablement solutions such Develop solutions for platforms as continuity insurance and liability protection. Marketplaces such as Amazon Marketplace, eBay, Etsy, Walmart Marketplace, and Wayfair As social commerce grows, social platforms continue to capture a significant share of the SMBs and creator platforms will develop distinctive and microbusinesses that are shifting to e-commerce. needs that acquirers can target. Underserved Overall, we expect 50 to 70 percent of digital opportunities exist in areas such as enabling commerce will be conducted on these platforms micropayments (as Twitter has done with Tip by 2025, albeit with differences between markets. Jar, and YouTube with Super Thanks), enabling We can expect this shift to apply across multiple creator disbursements, and monetizing payments industries, including media (such as TikTok), retail more effectively, whether within platforms or for (such as Amazon and MercadoLibre), and travel and providers that serve creators, such as Later and hospitality (such as Airbnb). Ko-fi. To succeed in this segment, acquirers need to offer To keep growing, merchant acquirers will need to specific marketplaces tailored solutions, such as expand beyond core payments acceptance to offer cross-border disbursements and submerchant merchants solutions for enabling e-commerce. onboarding.⁴ Seller-enablement solutions such With disruptive players already investing heavily in as instant payouts and seller financing represent this arena, failure to move fast could come at a high a large and underserved value pool that acquirers cost in lost growth. can access via an increasingly consolidated set of marketplaces such as Amazon and eBay. Merchant Ashwin Alexander is an associate partner and Puneet Dikshit is a partner, both in McKinsey’s New York office; Vik Iyer is an associate partner in the San Francisco office, where Julie Stefanich is a consultant. The authors wish to thank Tobias Lundberg, Yaniv Lushinsky, and Bharath Sattanathan for their contributions to this chapter. Copyright © 2021 McKinsey & Company. All rights reserved. 4 A submerchant is a merchant that sells on a marketplace that handles purchases on its behalf. 37 Merchant acquiring and the $100 billion opportunity in small business

October 2021 Copyright © McKinsey & Company www.mckinsey.com @McKinsey @McKinsey

Global Banking & Securities Financial services unchained: The ongoing rise of open financial data If open finance continues to accelerate, it could reshape the global financial services ecosystem, change the very idea of banking, and increase pressure on incumbents. by Chandana Asif, Tunde Olanrewaju, Hiro Sayama, and Ahalya Vijayasrinivasan © Getty Images July 2021

Banks hold a record of much of what we spend, payments. (This paper focuses primarily on benefits save, and borrow—from electricity bills and for consumers; for more detail on benefits for all mortgage payments to our weekly spend on fuel participants, including financial institutions, see and coffee. Now, some of that customer data is our recent related report, “Financial data unbound: being shared with third parties in a global movement The value of open data for individuals and known as “open financial data” (sometimes referred institutions.”¹ ) Still in its infancy, the movement to as “open banking.”) Roughly half a decade in the has the potential to reshape everything from bank making, it’s unlocking a wave of digital financial accounts, credit cards, payments, mortgages, small innovation—and likely disruption. business loans, and even insurance policies. Brought on by a combination of government Around the world, this trend is evolving in different regulation and market forces, open financial data ways. In the European Union, the United Kingdom, allows an expanding universe of players—both South Korea, Australia, and India, governments have financial and non-financial—to access customer mandated large banks to open up their vast troves accounts and data in order to offer new products of customer accounts to other companies, in a bid and services (all contingent on customer consent) to stimulate competition (Exhibit 2). In the United (Exhibit 1). For customers, open financial data States and China, it is a market-led movement, with affords greater flexibility in how their money is companies establishing open-banking relationships managed, allowing, for instance, better visibility among themselves. Singapore is using a blend of of accounts and more convenient access to the two models. 1 Olivia White, Anu Madgavkar, Zac Townsend, James Manyika, Tunde Olanrewaju, Tawanda Sibanda, and Scott Kaufman, “Financial data unbound: The value of open data for individuals and institutions,” McKinsey.com, June 2021. Exhibit 1 Open banking provides flexibility to customers and creates a more complex competitive environment. Customer data Now Future Customer PSD2 /open banking Customer Parties other than the customer’s bank (eg, fintechs, other banks) Bank A Bank B Bank C Bank A Bank B Bank C Banks own the customer relationships because Banks open access to their core banking services their apps/e-bank and branches are the only ways through 3rd-party channels via APIs, enabling much greater transparency and letting nonbanks compete to access their services 1The EU’s second Payment Services Directive. Source: McKinsey analysis; UK Open Banking Implementation Entity 2 Financial services unchained: The ongoing rise of open financial data

Exhibit 2 The pace of adoption of open financial data varies by country with the EU, the UK, and a few other markets in the most advanced stage. Level of adoption in country for regulator-led countries Initial steps (eg, industry consul- Transpose to Grant licenses tations, draft regulations) national law Nigeria Indonesia Hong Kong Japan UK India Australia USA Saudi Arabia Brazil Malaysia Canada Mexico Turkey Germany Finland Sweden Colombia Singapore France Ireland Hungary Spain Czech Republic Denmark Italy Norway Belgium South Korea Netherlands 1The EU and UK adopted open banking in January 2018, South Korea launched open banking in December 2019, and Australia launched it in July 2020. Singapore launched SGFinDex in Dec 2020, a common public-private infrastructure to enable aggregated open financial data for consumers. While there is no official open banking regulation / licensing scheme in place, Singapore has published an API playbook to encourage banks to open up their data, systems, and services, and has awarded digital banking licenses to a range of third parties eg, Grab, Sea. Source: McKinsey analysis In 2016, European Union regulators first pushed to The adoption of new digital habits and a dramatic create open financial data, laying the foundation movement toward online channels during the for market development. This sweeping piece pandemic appears to have accelerated open of EU legislation (known as the second Payment banking. With so much more of their lives spent Services Directive, or PSD2) also spurred the online, both consumers and small and medium- UK’s Competition and Market Authority (CMA) to sized enterprises (SMEs) became much more open mandate the development of an “open-banking to fintech apps and other non-traditional financial standard” by the country’s nine biggest banks to products and services. They also habituated to share customer and transaction data with third greater levels of convenience, choice, and flexibility parties. As of December 2020, the UK had issued in their financial relationships. In just the first six some 200 third-party provider (TPP) licenses for months of 2020, the number of users of open open-banking APIs, or application programming banking–enabled apps or products in the UK interfaces—shortcuts that make it easier for doubled from one million to two million² and grew software developers to build new applications. EU to over three million as of February 2021. In the US, countries, which were initially less directive about almost one in two consumers now use a fintech API specifications for developers, have not issued solution, primarily peer-to-peer payment solutions licenses at the same pace (Exhibit 3). However, and non-bank money transfers.³ the Berlin Group, a consortium of 40 banks and other companies from across the EU, is creating a Open financial data could put powerful non-bank common API standard called NextGenPSD2. companies in a stronger position to become 2 “Real demand for open banking as user numbers grow to more than two million,” Open Banking, September 28, 2020, openbanking.org.uk. 3 3 “Global FinTech Adoption Index,” ey.com, 2018. Financial services unchained: The ongoing rise of open financial data

Exhibit 3 The UK continues to outpace EU countries in growth of the open-banking ecosystem, a trend further accelerated by COVID-19. UK France Germany Lithuania Netherlands Sweden Number of third-party 220 CAGR providers regulated by 200 47% individual countries 180 160 4% 140 Dec Mar Jun Sep Dec 30% 120 2019 2020 2020 2020 2020 54% 100 108% 123% 80 Mar 60 2021 40 20 0 Sep 2019 Source: Konsentus; Open Banking Europe; Open Banking.org.uk financial-services players. With digital adoption is offered in partnership with 11 banks and credit leaping ahead by years in just several months,⁴ unions and includes physical and virtual debit many ecommerce, tech, and social-media cards, peer-to-peer payments, and an associated companies have accumulated a massive lead in checking account. In Singapore, the government customer attention. This opens the possibility for recently issued banking licenses to five non- them to be the first port of call for new financial banking players, including the consumer ecosystem products and services to their user bases, similar Grab (200 million users in eight countries) and the to what Google now enables customers to do consumer internet company Sea. The surge in online with its “Plex” product, connected to the Google activity and digital behaviors has also opened up Pay app. According to the Google web site, Plex new avenues for companies to integrate financial 4 Between June and September 2020, online purchases in Europe grew by 10 to 25 percent and social media usage jumped by 80 percent. See Reinhold Barchet, Marie-Claire Genin, Mianne Ortega, Axelle Raffin, Peter Saffert, and Yvonne Staack, “Survey: European consumer sentiment during the coronavirus crisis,” March 31, 2021, McKinsey.com. 5UK Competition and Markets Authority, “Tackling the loyalty penalty,” September 28, 2018, www.gov.uk. 4 Financial services unchained: The ongoing rise of open financial data

services directly into customers’ daily activities, Emerging open-banking propositions such as online shopping and the management of payments related to cars. To understand the current state and future trajectory of open banking–enabled innovation, We believe that if open finance continues to we looked closely at 259 open-banking licensed accelerate it could reshape the global financial providers in the UK, about two-thirds of which services ecosystem, change the very idea of are products or services created by fintechs or banking, and increase pressure on incumbent non-bank players with the remaining one-third banks. According to the UK’s Financial Conduct offered by banks or building societies. Many bank- Authority, a significant share of customers who led propositions at this time focus largely on the are dissatisfied with their current accounts, earn aggregation of different accounts in one place, uncompetitive interest rates on savings accounts, or with non-banks often providing functional overlays pay higher mortgage rates do not change providers on top of aggregation. Such propositions fall into due to the hassle of switching or lack of visibility two main categories—infrastructure providers into better options.⁵ The ability for customers to and customer-facing propositions, with customer- better understand their full financial picture—one facing propositions further split into augmentations of open banking’s promises—could result in margin to existing products and entirely new customer compression, as pricing and charges become more experiences (see sidebar, “Examples of open- transparent. Banks may also have to contend with banking propositions in the UK,” page 9) (Exhibit 4). margin sharing, as payouts to digital platforms could play a far greater role in customer acquisition. — Infrastructure providers: In the last two years, many players in the UK have started providing At the moment, however, the open-finance the engine by which other companies, such as landscape remains in flux, with the real winners and fintechs and banks, can offer digital financial losers far from determined. In a number of countries, solutions without the need to build everything fintechs are actively pursuing this opportunity, vying themselves. In the UK, almost 30 percent of for the same customers and funding.⁶ Ultimately, open-banking license holders are infrastructure not all of them can win. At the same time, incumbent providers (the remaining 70 percent are banks are likely to continue to be a meaningful part customer-facing propositions). This has had a of the ecosystem, even without the direct customer multiplying effect on market innovation since relationship. It will be imperative to understand and these providers make it easy for others to launch respond to these changes, reimagine offerings, or offer new products and services more quickly. adjust business models, and forge successful Some providers, such as Truelayer, provide data partnerships with fintechs or tech companies, to access and transfer on the back-end via APIs ensure continued success and relevance. that power consumer-facing propositions (such as Portify and Creditladder). Others, such as In this article, we explore the state of open banking the pan-European player Tink, offer a complete around the world, with a particular focus on the UK, end-to-end solution for payments, transaction where these changes have had longer to play out. aggregation, risk analysis, and financial We also take a deep dive into the open-banking management that customer-facing apps and ecosystem, looking at the types of new products banks can white-label and use to boost their and services emerging, and share the results of services. McKinsey customer-sentiment surveys on attitudes toward these offerings. Finally, we lay out questions — Product augmenters: The biggest single banks, fintechs, and non-finance players need to category of open-banking solutions in the UK ask themselves in the changing landscape. comprises those that use access to banking 6 Chandana Asif, Max Flötotto, Tunde Olanrewaju, and Giuseppe Sofo, “Detour: An altered path to profit for European fintechs,” September 9, 2020, McKinsey.com. Financial services unchained: The ongoing rise of open financial data 5

Exhibit 4 Most customer-facing open-banking solutions in the UK center around personal or business financial management and payments. Number of propositions created by fintechs or non-bank players 2018 Current 165 Infrastructure 30% 30 26 providers 23 19 21 16 Customer- 13 12 9 10 facing 10 10 propositions 70% Payments Personal Credit Accounting/ Other Business tax financial financial decisions/ management management lending 1Includes propositions related to data access management, rewards, savings/investments, marketplace/comparison apps, and housing services. Source: openbanking.org.uk; McKinsey analysis data to improve their existing product or Funding Xchange reduce the loan origination service, particularly those used by small and timeline by automating and standardizing the medium-sized businesses. Small-business way loan applications are qualified, submitted, platform Xero, for instance, offers SMEs a cloud and processed. The company uses open- accounting solution that connects directly to banking transaction data to better evaluate their bank accounts, in order to streamline the an SME’s eligibility and affordability against reconciliation of transactions and better manage the appetite of lenders in its marketplace and cash flow. is accessible by banks, lenders, lessors, and brokers. Alphabet-backed GoCardless seeks to enhance the payment process. Its Instant Bank Pay — Customer experience providers: In addition to feature, launched in April, allows merchants to making existing banking services easier and take instant one-off payments directly from faster (Exhibit 5), another promise of open customers’ bank accounts, thus increasing the banking is the creation of highly reliable and speed of payment and lowering the transaction secure options that simply would not exist costs compared to a one-off card payment that otherwise. In the UK, many of these have taken would have been the typical solution. the form of personal finance solutions for Other companies have set their targets on consumers. For instance, account-aggregation improving lending. London-based iwoca uses apps, which allow customers to see all their customer income and spending history to accounts from different institutions on one improve credit decisioning and offer flexible screen, were among the first open-banking and customised loan payback schedules. propositions to hit the market. ING-backed Yolt Technology-focused lending aggregators like currently counts over one million customers and 6 Financial services unchained: The ongoing rise of open financial data

Exhibit 5 Modern financial-management value propositions address many of the pain points of traditional banking apps. Key value proposition All in one place Spend smart Budget made easy Grow savings Description Track each trans- Move funds between Break down trans- Encourage saving action with instant connected banks actions by categories streak with money-pot notifications to help users features Split the bill with understand spending Remind users for friends securely and Prompt to stash extra upcoming payments frictionlessly Set and track against cash and allow auto- and due dates budgeting goals matic, regular savings Set up fund requests and payments with View budgeting history Provide cashback offers ease to see progress has amassed a wealth of consumer data that it Today’s open banking-enabled offerings in the has used to diversify rapidly. The company can UK (and elsewhere) may only be the tip of the now show consumers their utility, insurance, iceberg. So far, fintechs have nibbled away at investment, and pension accounts, with products that generate a low share of the banking mortgages coming this year. industry’s revenues, such as payments and current and savings accounts. Higher-margin products Although most new customer-experience such as mortgages and investments have been solutions target consumers, approximately out of current scope of open-banking regulations. one-third are geared toward SMEs. Fintechs Beyond product scope, an additional barrier for like FriendlyScore and BudgetBakers offer fintechs is the UK and EU requirement of a 90-day businesses the ability to monitor their financial window for third-party access to customer data. health and plan for the future from one portal; The reauthentication of customer consent typically others, like Cake, arm SMEs with consumer requires users to go through at least eight steps insights and a loyalty rewards program to power for each bank account, redirecting them to each improved digital marketing. bank’s website or mobile app. The hassle can often lead to significant friction and drop-off in customer Some of these players are diversifying their revenue journeys. streams and making money in non-traditional ways (Exhibit 6). For instance, Yolt is monetizing its However, this situation is unlikely to persist. The customer-facing account aggregation proposition UK’s Financial Conduct Authority is pursuing with commissions from third parties that pay regulation that would bring higher-margin financial to appear on its portal. It has also expanded products such as investments and mortgages into into infrastructure with its B2B subsidiary Yolt the scope of open banking (referred to as “open Technology Services. finance” when more products are included). It is also Financial services unchained: The ongoing rise of open financial data 7

Exhibit 6 A range of new commercial models are emerging, with more established players tapping into multiple revenue streams. Total registered UK third-party providers, % Highest prevalence Second highest prevalence Commercial model Infrastructure Product Customer- provider augmenter experience layer Total Subscription/ Steady fees charged regularly (eg, 33 34 37 34 license fee monthly) to enable access Volume-based data- Variable fees charged per data 31 11 13 20 access fee (via APIs) API call Implementation/ Fees to deploy, customize, and 24 10 6 15 onboarding fee integrate solution; could include outsourcing fees Transaction fees Variable fees charged per 6 23 8 13 transaction Referral/ Fee earned for each successful 3rd- 4 17 21 13 commission party sale made using platform Interest income/ “Typical” banking revenue streams 0 4 13 5 deposit margin Data/insights Fees from selling anonymized 21 22 monetization customer data to 3rd parties Source: openbanking.org.uk; McKinsey analysis considering removing the 90-day access limit in use them. In this research, conducted with 3,000 favor of a simpler consent reconfirmation, potentially UK consumers and SMEs, we found customer within the third party’s interface. Such moves sentiment to be highly positive. Unsurprisingly, tech- would unlock a much more complete financial view savvy young professionals expressed the highest for each customer, open the door for additional overall interest in open banking. A few other key use cases, and strengthen fintechs’ ability to both findings: acquire and retain customers. — While consumers showed innate conservatism What customers are saying about open toward data sharing, their willingness to share financial data data doubled when they found a particular feature or service appealing or when they In our research, we found that asking customers understood the value it might bring to their lives— general questions about data sharing doesn’t reveal as compared to a general willingness to share a true account of their willingness to use open data. This held true across all segments, even banking. Rather, to get a more complete picture, for those most conservative in their views about we created mock-ups of multiple open-banking open banking–enabled propositions. propositions, asked customers to rate which ones they liked, and then asked them whether they would — Financially stressed consumers, although not a be willing to grant access to their data in order to typical target for financial services, are likely to 8 Financial services unchained: The ongoing rise of open financial data

Examples of open-banking propositions in the UK (based on the sample of companies that informed the writing of this article)1 Infrastructure providers — Bud Financial works primarily with large institutions to enhance digital experiences for end customers and provides clients with real-time analytics capabilities that are used to improve credit-decisioning models, streamline collections, build a holistic picture of a customer’s finances, and reduce disputed transactions. — Plaid connects financial institutions with third-party solutions and was valued at $13 billion, as of April 7, 2021. In the UK, and soon Europe, Plaid’s API also offers payments capabilities and the recently launched Plaid Exchange offers US financial institutions an API solution to support connectivity with other financial services. — Tink works with large retail banks, payment processors and payments service providers, and other fintech developers to provide payment-initiation services, access to financial data to verify income and identify risk, and tools to build personal- finance management solutions. — Yolt Technology Services builds, manages, and maintains an open-banking API network connecting multiple European banks with third parties and offering account services, payment initiation, and data enrichment and know-your-customer services. Product augmenters — Boost was recently launched in the US and UK by credit-reporting company Experian. It uses a consumer’s recurring payments to inform credit scores. — Credit Kudos is a challenger credit-reference agency building intelligent solutions using open banking and loan-outcome data to enhance affordability and risk assessments for both consumer and commercial lenders. Customer experience providers — Credit Data Research gives SMEs a real-time credit passport to allow them to understand their credit score and display their rating on their websites to get loan approval from lenders. The company uses real-time transaction data and analyzes credit scores integrating the methodology that its shareholder and partner Moody’s Analytics employs for corporate clients. — Money Dashboard aggregates customer accounts and runs their budgeting for free; the company makes money by providing aggregated and anonymized consumer-spending insights to third parties. — Moneybox, an automated investment and saving platform, gives customers a comprehensive overview of their wealth and automates spare-change transactions into savings at selected partner banks. — OpenWrks is a provider of open-banking applications. Its MyBudget solution is used by financial-services firms, government agencies, and utilities to help people understand what they can afford to borrow, repay, save, and invest by using and sharing open and first-party data. OpenWrks’ consumer-facing solution Tully provides regulated debt advice and helps consumers build a budget and understand their financial situation. — Snoop combines personalized content along with money-saving and money-management capabilities, and compiles and scans bank-account and credit-card data to spot savings opportunities across a range of spend categories, letting customers switch to a better deal within the app. 1 Company descriptions based on public company website information, unless otherwise indicated. Financial services unchained: The ongoing rise of open financial data 9

be a key segment for open-banking solutions. In our research, we identified the top three ways in Consumers with limited resources, little time to which consumers and SMEs think open banking will manage financial matters, or both, expressed improve their banking experience: interest in solutions that would help them save and manage their money. Additionally, nearly 1. Everything in one place. It’s not uncommon for 40 percent of UK consumers who are worried customers to have multiple types of financial about their job security said they found apps accounts with multiple institutions. The ability that help people automatically save money to bring all of this together into one, easy-to- and do better tracking of their spending to be manage place is extremely appealing. In our appealing. research, people told us they wanted to be able to make better sense of their complete financial — Affluent seniors are also an attractive market, picture, for instance tallying up the money with 15 percent willing to share data for spent on expenses and seeing how much is concepts they like. These customers were allocated to current accounts versus savings and typically tech savvy and saw how technology investments. In a survey conducted last year by could simplify their financial lives, and were Bud Financial, 81 percent of young people said more confident testing new tools. they wanted more visibility into how much money they had left to spend every month.⁹ Other Beyond the UK, consumers express similar respondents in our survey mentioned the need sentiments. A majority of Brazilian consumers to check transactions across multiple accounts (we surveyed 60 percent), for instance, found after spotting fraudulent activity. open-banking propositions appealing, and this figure increases to 80 percent when people are SMEs are equally enthusiastic about solutions presented with a proposition they specifically like. that integrate payments and other financial services into their existing systems and The record use of digital financial products and processes, for instance bringing together bank services during the COVID-19 pandemic has accounts, accounting, tax, and reconciliation helped boost comfort levels among a broad set of activities into one place. Despite this interest, customer segments.⁷ For instance, many fintechs there are fewer open-banking solutions for now have a greater share of customers over 30 SMEs in the UK than for consumers. Only 35 than they did in 2019, a demographic generally percent of solutions cater to SMEs, with even less digital-first than younger consumers and fewer in the categories businesses identify as more likely to have a mortgage, children, and more their biggest needs (that is, lending solutions complex financial needs. In a recent UK survey, and finance management).¹0 Given that UK half of SMEs said they began using open banking– SMEs are just as open to new third-party enabled products such as cloud accounting solutions as consumers, if not more so, this is a software or cashflow-forecasting tools over the clear area of opportunity. last six months, mostly due to heightened concerns about their finances or increased digital-channel 2. Expansion of distribution points for financial usage during COVID-19 lockdowns.⁸ services. Instead of going through their bank 7 John Euart, Nuno Ferreira, Jonathan Gordon, Ajay Gupta, Atakan Hilal , and Olivia White, “Financial life during the COVID-19 pandemic—an update,” July 23, 2020, McKinsey.com; Tamara Charm, Harrison Gillis, Anne Grimmelt, Grace Hua, Kelsey Robinson, Ramiro Sanchez Caballero, “Survey: US consumer sentiment during the coronavirus crisis,” May 13, 2021, McKinsey.com. 8 “Adapting to survive: UK’s small businesses leverage open banking as part of their COVID-19 crisis recovery,” Open Banking, December 7, 2020, openbanking.org.uk. 9 Beyond Open Banking: 2020 and the road to Open Finance, Bud Financial, thisisbud.com. ¹0 As of Dec 2020. 10 Financial services unchained: The ongoing rise of open financial data

for services like payments, consumers want the such as insurance and utility providers. SMEs convenience of financial activities embedded are equally eager to shop around for new into their day-to-day life, such as during online offerings. Nearly a third said they found our shopping. Shopify, the Ottawa-based company, open-banking propositions appealing and and Klarna, the Swedish online payments and would be likely to switch their main bank in the shopping company, let shoppers buy items next 12 months, the main reason being that online by paying directly from their bank account. open-banking APIs made the process easy. Both companies now process millions of purchases a day, with Klarna offering shoppers Capturing the opportunity the option of delaying payment or paying in installments—functioning essentially as an Innovation enabled by open financial data interest-free credit card. Last year, monthly appears to have ramped up considerably in the active users of Klarna’s app increased 1.6 times past year. For competitors in financial services, and the volume of consumer loans grew by this raises the importance of taking stock of their over 40 percent.¹¹ In 2020, Shopify grew its position in the evolving financial ecosystem and gross merchandise volume by 96 percent and understanding where the attractive areas are doubled its valuation.¹² In the EU, Amazon is likely to be. We believe there are a few critical offering similar financing options to shoppers strategic questions every player, whether a through partnerships with banks like Barclays fintech, incumbent bank, or tech giant, should ask and ING. Caura, another fintech, is applying the themselves about the changing landscape. embedded finance model to cars. A platform to manage everything for your car, the company How quickly and deeply will open financial data lets users pay parking tolls, congestion charges, take hold? and vehicle taxes from an app. We believe two factors could determine the size 3. Better value for money. Consumers are and depth of open financial data’s impact—the already conditioned to shop around for types of products included in scope and whether financial-services products. Some 50 percent the regulations for APIs allow customers to take consistently use comparison websites, a share action with their data as opposed to just viewing that goes up to 70 percent in certain segments, it. As noted earlier, the UK’s FCA is currently such as tech-savvy professionals. Our research considering bringing further products (such shows that customers crave even more as mortgages and investments) into the scope information about whether they are making the of legislation, while many national regulators best use of their money, and they want tools to around the world are still undecided. The type be able to act on that information. Among the of API allowed by regulators also varies around six open banking–enabled propositions we the world. UK open-banking rules include both tested with consumers, an app that enables the ability to view data (read) and the ability to the seamless switching of savings accounts interact with it (write) in ways that unlock use scored the highest, with around 40 percent of cases such as the seamless movement of money consumers expressing their intent to download or switching to a different product or provider. In it. Consumers are also drawn to solutions that Australia, by contrast, third parties can only view help them find the best deal among loans, credit customer data. cards, investments, and non-banking products ¹¹ “Klarna Business Update, January – December, 2020,” Klarna.com. 11 ¹² “Shopify Announces Fourth-Quarter and Full-Year 2020 Financial Results,” February 17, 2021, news.shopify.com. Financial services unchained: The ongoing rise of open financial data

If customers can easily interact with their data Incumbent banks have to ask themselves how across a broader range of products and seamlessly they can maintain their front-end connection with switch, it is likely to result in greater churn and the customer, and where they have a realistic shot margin compression—posing a threat to incumbent at keeping it. This is particularly true in a context banks and creating an opportunity for new entrants where customers increasingly want financial such as fintechs and tech giants. It will be important products and services embedded into their daily for banks to calibrate their current actions on open activities and to see all their data in one place— banking against their views on the likelihood of this often from what they consider an “independent” outcome materializing. party. Many fintechs and tech giants are vying to occupy this space and steadily making gains Who is going to own the infrastructure layer in your in building material customer bases for financial market and how much power will they wield? products and services, an area where banks have historically had a stronger position. Given the scale economies inherent in such businesses, it might be that a few large Some banks are adopting a partnership-led infrastructure providers will provide the lion’s approach to reach customers in new ways and take share of open-finance API access in any given advantage of the relative strengths of different market. These scale providers are likely to provide participants. The Australian bank Westpac, for “scaffolding” for a range of players to enter financial instance, is set to enable pay-later provider services with lower effort or investment, driving Afterpay to offer its customers transaction and up competitive intensity. In addition, given the savings account services via Westpac. Stripe has large amounts of customer data they could partnered with banks including Goldman Sachs, be intermediating, they are well positioned to Barclays, and Citibank to launch Stripe Treasury, diversify beyond data access into end-to-end an API that enables Stripe customers (Shopify white-label solutions and/or the provision of data- is one example) to offer banking as a service to backed insights to third parties and merchants their own end customers. These approaches for marketing purposes. As such, the scale, could signal a new model for certain segments proposition evolution, partnering approach and that combines tech/fintech distribution with the customer base of these infrastructure players will at-scale banking capabilities of incumbents. send important signals about how the landscape may evolve. How will the definition of a financial services provider evolve? How much will financial distribution move away from banks? Today, credit-card companies provide customers with a physical card, an online/mobile app to In our view, the question is not whether the monitor transactions, and often rewards like travel customer interface will shift away from incumbent points or cash back (typically for a fee). Fintechs financial institutions, but by how much and in what like Klarna are redefining this model, transforming areas or segments. Some markets are already it into a rich checkout experience, which includes seeing a marked shift toward fintechs. Some 20 seamless access to flexible no-fee installments, percent of the UK population has an account with extended checkout periods, and the ability to find a digital-only neobank¹³ and 55 percent of US deals and promotions for purchases customers consumers use fintech solutions, with many (44 are planning. Instead of charging customers percent) having at least two accounts.¹⁴ traditional credit-related fees and interest, Klarna ¹³McKinsey Panorama UK benchmarks. ¹⁴Alexis Krivkovich, Olivia White, Zac Townsend, and John Euart, “How US customers’ attitudes to fintech are shifting during the pandemic,” December 17, 2020, McKinsey.com. 12 Financial services unchained: The ongoing rise of open financial data

also generates value by providing intelligent products offered by telecom operators such as customer insights to retailers and merchants, broadband, voice, and pay TV.¹⁶ and monetizing those insights through increased traffic or sales for merchant partners. In another Banking could be in the throes of such a shift. example, Amazon, through its partnership with Customer engagement could move to new banks, is providing point-of-sale loans to eligible distribution points as non-banking, tech, and sellers, enabling them to increase sales and fintech players embed financial products into reduce buying/selling friction. their propositions. For players with a franchise beyond banking, they may take a broader In essence, API-enabled embedded finance perspective on customer value, cross-subsidizing solutions allow fintechs, tech giants, and other financial services with revenues from other parts non-bank players (for examples, retailers) to of their business (potentially commoditizing essentially create a “financial-services-plus some financial products, or at the very least model.” This ongoing blurring of industry compressing margins). In addition, new revenue boundaries could reshape how customers think sources could emerge, such as API-usage fees about what a bank does and when to turn to it. and monetization of customer and market data insights. It will be important in this context to pay Where might value in the industry shift and what attention to the shifting profit pools and to adjust impact will this have on margins? pricing and monetization approaches to reflect those changes. Banks have historically controlled the end-to-end value chain (from manufacturing to distribution) The answers to these questions will ultimately and monetized their customer relationships shape strategy and inform the role of various through interest and fee charges. As we have market participants in the changing ecosystem. described, financial services innovation has the If the changes to distribution fueled by open potential to alter market structure: It enables financial data are dramatic, and happen rapidly new actors to participate in the value chain and across many segments, a bank’s role may “overlay products” to be built on top of the banks transition into that of a utility, manufacturing that broaden the customer proposition and the infrastructure upon which fintechs and tech expand monetization options. Such shifts have giants run customer-facing propositions. If the had material impact in other industries, such as changes to the landscape are more modest telecommunications. We tracked the combined and less wide-ranging, banks are still likely to total market capitalization of the top 25 global have to invest to improve their digital customer telcos and top 8 listed technology companies that experiences, and consider strongly how to use telecom infrastructure to distribute services integrate new actors into their propositions. over the internet; while the overall market cap of the full set of companies increased by over 90 What is clear is that no matter which scenario percent between 2013 and 2018, the 25 telecom unfolds, customer expectations will be elevated. operators captured roughly 40 percent less share As such, there is likely to be a greater and growing of value in 2018 than they did in 2013.¹⁵ More performance differential between leading and recently, revenue from digital content products laggard institutions versus the somewhat stable offered by new distribution-focused players such balance observed in many markets today. as Netflix and Spotify were estimated to grow by over 15 percent between 2019 and 2020 versus growth of roughly 5 percent or less in typical ¹⁵ Capital IQ and McKinsey Corporate Performance Analytics. 13 ¹⁶ “2020 Trends to Watch: The Digital Consumer Landscape,” Omdia, January 2020. Financial services unchained: The ongoing rise of open financial data terature

Open financial data should be watched carefully. Market participants, and particularly incumbent Consumers and small businesses want more banks, need to grasp the magnitude of the change choice, ease, and flexibility in how they manage that is currently underway. It will be important to their money. Open financial data provides new develop the agility to partner with a wide set of and distinct solutions that people find appealing. players and build innovative offerings that can Much in the way that Google’s release of its map serve customer needs in the context of their APIs data paved the way for ride-sharing and other everyday lives. They must be prepared for a world location-based apps to build new propositions at in which the future of banking is truly “open.” pace, open finance has the potential to usher in a wave of innovative financial products and services few have yet to even consider. Chandana Asif is a partner, Tunde Olanrewaju is a senior partner, Hiro Sayama is an associate partner, and Ahalya Vijayasrinivasan is an associate partner, all in McKinsey’s London office. The authors would like to thank Giuseppe Sofo and Himanshu Kalia for their contributions to this article. To inform the writing this article, the authors undertook interviews with executives from a number of companies (in alphabetical order): Bud Financial, Credit Data Research, Credit Kudos, Funding Xchange, GoCardless, Money Dashboard, moneybox, OpenWrks, Plaid, Snoop, Tink, Xero, Yolt. The authors thank these firms for their insights. Copyright © 2021 McKinsey & Company. All rights reserved. 14 Financial services unchained: The ongoing rise of open financial data

Global Banking & Securities Platform operating model for the AI bank of the future Technology alone cannot define a successful AI bank; the AI bank of the future also needs an operating model that brings together the right talent, culture, and organizational design. by Brant Carson, Abhishek Chakravarty, Kristy Koh, and Renny Thomas © Getty Images May 2021

As we noted at the beginning of this series on the business with the bank by visiting a branch once or AI bank of the future, disruptive AI technologies can twice a month; more recently, they would conduct dramatically improve banks’ performance in four key transactions several times each week through the areas: higher profits, at-scale personalization, smart bank website; now many customers interact with omnichannel experiences, and rapid innovation their bank daily through their mobile banking app, cycles. The stakes could not be higher, and success and often several times a day through wearable requires a holistic transformation spanning all layers devices. In short, banks and their customers now of the organization’s capability stack. have an interconnected, always-on relationship. Our previous articles have focused on the capability Circumstances within the bank are changing as stack’s technology layers: reimagined engagement,¹ well—albeit at a slower pace, due largely to the AI-powered decision making,² and modern core complexity of legacy technology and operating technology and data infrastructure.³ Leveraging models coupled with the steadily rising cost of these capabilities to create value requires an maintaining and upgrading IT infrastructure. Siloed operating model combining structure, talent, culture, structures also hamper organizations’ ability and ways of working to synchronize all layers of the to transform themselves. Decision making at stack. Synchronizing these layers is not easy. Any traditional banks is typically slow and cumbersome, organization undertaking an AI-bank transformation and ineffective prioritization (done at too high a must determine how to structure the organization level without understanding underlying resource so that its people interact and leverage tools and contentions) results in frequent project delays capabilities to deliver value for each customer at and cost overruns. Insufficient domain expertise scale. In this article, we take a closer look at the and blurred accountability—particularly between need for a platform operating model, the categories business units and technology teams—too often and scope of operating models, and the building cause new solutions to fall short of customer blocks of effective models. expectations. What is more, multiple systems perform similar functions, and the increasing The heart of an AI bank is always-on complexity of IT architecture with a proliferation of customer interaction applications weakens system resilience and stability and increases risk when changes are made. The need to change a bank’s operating model arises from a combination of external and internal The widening divide between fast-evolving circumstances. Externally, as consumers and customer expectations and inertia within the bank businesses increasingly rely on AI technologies in reinforces silos and weakens the bank’s ability to daily life, banks are shifting the foundation of their respond to the demands of the new machine age. business models from products to experiences. The challenge for leaders is to shift the organization In other words, as many traditional banking from this siloed structure to a radically flattened products become embedded—or even “invisible”— network of platforms. within beyond-the-bank journeys, experiences become the more salient element of a customer’s Platforms focus on delivering business relationship with the bank. This shift involves a rapid solutions increase in the number of customer interactions, and at the same time, the revenue associated with Today, banks that recognize the value of AI and each interaction is declining. This is a fundamental technology enabling better customer and business change: just a few years ago, customers conducted experience are moving steadily toward a platform 1 Violet Chung, Malcolm Gomes, Sailee Rane, Shwaitang Singh, and Renny Thomas, “Reimagining customer engagement for the AI bank of the future,” October 2020, McKinsey.com. 2Akshat Agarwal, Charu Singhal, and Renny Thomas, “AI-powered decision making for the bank of the future,” March 2021, McKinsey.com. 3Sven Blumberg, Rich Isenberg, Dave Kerr, Milan Mitra, and Renny Thomas, “Beyond digital transformations: Modernizing core technology for the AI bank of the future,” April 2021, McKinsey.com. 2 Platform operating model for the AI bank of the future

operating model, leveling command-and-control over time and focuses not only on one project, structures to speed decision making and bring but continually improves the platform. people together in teams relentlessly focused on delivering solutions that customers value. In this — Technology. Each platform owns its technology agile approach, each platform can be thought of landscape and standardized interaction as a collection of software and hardware assets, mechanisms with other platforms (for example, funding, and talent that together provide a specific leveraging APIs). It also has an inherent capability. While some platforms, such as those objective to modernize its technology. for retail mortgages, deliver business-technology solutions to serve internal or external clients, others Platform categories enable other platforms with shared services and In most cases, a platform can be thought of support functions (for example, payments and core as a nimble fintech group in one of three main banking). Each platform is largely self-contained in categories: business platforms, enterprise producing business and technology outcomes and platforms, or enabling platforms (Exhibit 1). autonomous in prioritizing its work to meet strategic goals within clearly defined guardrails, such as Business platforms are aligned to business common standards, finance, and risk control. units and deliver joint business-and-technology outcomes. As an example, a business platform for Platform elements consumer lending would include several cross- As banks think about setting up a platform operating functional teams, each of which owns front-end model, they should bear in mind that each platform technology assets and includes business teams for comprises three main elements. When structured a specific function or service area. correctly, these elements will help a platform team set its North Star and carry out its mission in a way One team might focus on preapproval and new- that creates value for customers and the enterprise. customer acquisition, with responsibility for next- generation credit-scoring models using traditional — Strategy and road map. The joint vision data sources (such as credit bureau reports and combines business and technology outcomes internal transaction histories) and nontraditional to deliver end-to-end value. Close alignment sources (including, upon the customer’s permission, between the business unit and the technology tax returns, online presence, partner ecosystem group on performance objectives and agenda transactions, and more). Another team often takes unites all members of the platform around a responsibility for loan underwriting, determining shared strategic vision, with a road map for credit limits for individual accounts in accordance executing priorities that balance change and with enterprise risk policy. A third team might resiliency. focus on consumer insights and personalized messaging, including machine-learning decision — Organization and governance. Organization models and marketing technology (“martech”) of business-facing platforms (e.g., retail tools to deliver intelligent credit offers to new and mortgages) should be based on a “two in a existing customers. The customization team owns box” engagement model, meaning business the design, development, and management of and technology leaders own joint performance product configurations to ensure that each solution metrics that track both commercial and addresses the customer’s precise needs. technological outcomes. Each platform manages its business and technological Other teams focus on services and capabilities to priorities through a shared backlog of work and support external developers and other technology delivers through persistent cross-functional partners, including, for example, partner agile teams, each of which builds its platform Platform operating model for the AI bank of the future 3

Exhibit 1 The platforms crucial to a bank’s success can be grouped into three categories. Business Platforms directly aligned to a business unit to deliver business and technology Example platforms platforms outcomes (eg, revenue growth, profitability) Consumer lending Cards Wealth management Enterprise Platforms aligned to multiple Enterprise Act as service providers Core banking platforms business units to deliver shared largely enabling other Payments services platforms Analytics and data outcomes across units Enterprise Act as business owners Finance Tech assets providing similar support delivering services Risk services aggregated to create units across the enterprise HR a center of excellence Enabling Platforms not aligned to a business unit Enterprise architecture platforms • Provide scale benefits through consolidation IT infrastructure • Safeguard the bank by defining guardrails Cybersecurity • Enable business and enterprise platforms to deliver business outcomes Source: McKinsey & Company onboarding and sandbox management and APIs core technology infrastructure, DevOps tools and supporting customer journeys and experiences capabilities, and cybersecurity. (managing standards and documentation through development hubs or platforms). Still other Implementing a platform operating teams support the consumer lending platform by model requires five main building managing technology—for example, provisioning of blocks cloud infrastructure. The distinct advantage of a platform operating Enterprise platforms enable diverse business model is the foundation it provides for business- platforms by providing shared services such and-technology partnerships focused on delivering as vendor management and procurement, leading-edge AI-enabled solutions (Exhibit 2). As standardization of cloud and DevSecOps tooling,⁴ they begin planning the transition from hierarchical build-to-stock process APIs and reusable silos to a network of horizontally interconnected microservices, and standardized data access and platforms, bank leaders should focus on five main governance. Other enterprise platforms aggregate building blocks: agile ways of working, remote support functions such as finance, risk, and human collaboration, modern talent strategy, culture and resources within a center of excellence. capabilities, and architectural guardrails. The value and efficiency that can be derived from platform Enabling platforms support other platforms by operating models are possible only if organizations ensuring that technical functionality is delivered design their operating model to enable these five quickly and securely at scale. This approach has elements. Once they have established their vision of proven effective at maximizing scale benefits the new management approach, they should develop while protecting the enterprise with standardized a road map for implementing the platform model. processes. Examples of enabling platforms include 4DevSecOps tools integrate security measures with DevOps processes. 4 Platform operating model for the AI bank of the future

Exhibit 2 The platform operating model for consumer lending captures the agility of a fintech and scale of a large enterprise. fintech and scale of a large enterprise. Illustrative future state of consumer lending platform Key shifts Standalone micro-services Consumer lending platform Wealth Cards Business platforms completely own • External partnerships front-end technology assets and a • Credit underwriting cross-functional team for • Consumer lending policies • Product definition — Onboarding and sandbox for partners — Experience APIs controlled via contracts Business Experience APIs for digital commerce — Consumer-lending specific platforms ecosystems microservices for bureau, credit scoring Lending (new build) Credit limit — Provisioning of cloud infrastructure — Consumer-lending specific AA models Bureau check (from IT) — Product configuration Credit model Loan cross-sell model — Credit underwriting adjustments (in line with overarching risk policy) Enterprise Core banking services Enterprise platforms provide core shared platforms services for business platforms, including: Payments — Standardization of cloud/DevSecOps Analytics and data (data lake, standards, analytical tools, tooling governance) — Standardized data access and governance Enabling Enterprise architecture Only few core technology foundations like platforms Delivery enablement (DevOps) enterprise infrastructure and DevOps Cybersecurity and technology risk would be common across the bank Infrastructure/site reliability engineering Cloud infrastructure and applications 1. Agile ways of working scaling.⁶ This methodology, when deployed across By extending the platform structure to all groups, the organization, underpins a new corporate an organization gains the ability to quickly redirect culture that enables fast communication and their people and priorities toward value-creating collaboration within and among platforms. It gives opportunities.⁵ For this model to work, however, the organization a strong and stable backbone for banks need to develop agile mindsets within each developing and scaling dynamic capabilities. team and equip team members with agile ways of working, such as rapid decision and learning The starting point depends on where the bank is cycles, breaking initiatives into small units of in its technology transformation. Some may set up work, piloting new products to get user input, and an agile pilot within a platform and gradually train rapidly testing operational effectiveness before other groups in the new practices. For banks where 5Wouter Aghina, Christopher Handscomb, Jesper Ludolph, Daniel Rona, and Dave West, “Enterprise agility: Buzz or business impact?,” March 2020, McKinsey.com. 6Anusha Dhasarathy, Isha Gill, Naufal Khan, Sriram Sekar, and Steve Van Kuiken, “How to become tech-forward: A technology-transformation approach that works,” November 2020, McKinsey.com. Platform operating model for the AI bank of the future 5

diverse groups have already achieved a degree of Indeed, banks need to revisit agile teams after organizational and operational flexibility, the time an abrupt shift to remote models⁸ and consider may be right for an end-to-end transformation the types of work to be done remotely according program that “flips” the organization to agile. to how well interaction models and system readiness can be adapted. Two criteria are key for Each platform consists of one or multiple squads or determining which roles can function effectively pods combining IT, design, and customer-journey in remote work arrangements. First is the required experts, among others (up to nine people). Banks level of human interaction, such as the degree of should also create “chapters” as cross-squad real-time collaboration and creative work among groups of employees with similar functional groups of people and the degree to which work competencies to ensure growth of expertise and can be segmented and individualized. Second is cross-training of colleagues across technologies. bank systems’ readiness—particularly in terms In some cases, a bank will need to create new roles, of data accessibility, software accessibility, and such as tribe leaders and agile coaches. It is also tooling—to support secure and efficient remote crucial to adopt a performance-management model work. that aligns all individuals with team goals. For example, setting clear decision-making The agile way of working is a means to an end, not and escalation paths is essential to maintain an end in it itself. As banks begin to implement a a fast cadence. Shared workflows, roles, and platform operating model, it is crucial that they responsibilities help move work through the set a North Star, not only to unite people around pipeline for even the most complex and highly business goals but also to offer them a sense of interactive jobs. meaning and purpose within society. Shared values reinforce team spirit and—when combined with Setting up a single source of truth or single opportunities to learn, experiment, and make a backlog of work also helps keep different difference for customers—strengthen employee platforms aware of interdependencies. What is engagement. This stronger employee engagement more, banks can and should ensure the security can be measured in, for example, productivity and of remote working arrangements by leveraging loyalty and can indicate how well an organization specialized technology for managing remote has embraced the agile transformation. access. Areas subject to management may include data retrieval (role-based access to 2. Remote collaboration data, restrictions in downloading sensitive data, For a variety of reasons, including geographic restriction of all data copying even on encrypted distribution, work-from-home policies, travel removable hard drives), sophisticated detection restrictions, and other disruptions due to COVID- (tracking and monitoring mechanisms to detect 19, banks have moved to a fully or partially data breach), and governance procedures to remote model. The sharp decline in co-location review breaches and enforce corrective actions. has put pressure on organizations to improve collaboration and consistency in ways of working. Banks should also set up mechanisms to address Given the expectation that a significant share of both interaction and security criteria. These bank employees may not return to shared work mechanisms are particularly crucial for remote- environments,⁷ banks need to develop mechanisms working arrangements, which are increasingly to support effective collaboration—and thus reduce important to top talent in technology-intensive errors—in distributed environments. industries, including financial services. 7Susan Lund, Anu Madgavkar, James Manyika, and Sven Smit, “What’s next for remote work: An analysis of 2,000 tasks, 800 jobs, and nine countries,” McKinsey Global Institute, November 2020. 8Santiago Comella-Dorda, Lavkesh Garg, Suman Thareja, and Belkis Vasquez-McCall, “Revisiting agile teams after an abrupt shift to remote,” April 2020, McKinsey.com. 6 Platform operating model for the AI bank of the future

3. Modern talent strategy growth, including both existing and future initiatives. A modern talent strategy for an AI bank is not only Next, it is important to create a set of talent about the commitment and capability to hire the interventions that can tap into existing talent within best engineering talent or the best business talent. the organization, developing an “ecosystem” of The AI-bank operating model also requires leaders partners (vendors, developers, gig workers, remote to rethink their strategy for hiring and retaining talent, and others) and using hiring mechanisms, top talent in a world with blurring lines between including the acquisition of smaller companies business, IT, and digital expertise. Leaders must and start-ups, to establish platforms requiring form a detailed picture of the diverse skills and skills beyond the traditional scope of the bank’s expertise required to deliver business-technology roles and capabilities. Finally, banks have to make solutions. Reskilling is equally critical to building themselves externally appealing to fresh tech talent teams with the right mix of talent. and internally exciting for their people. This means transforming themselves so top technical talent This strategy focuses on attracting digital talent want to stay and grow within the organization and and requires that leaders understand the unique so all employees see and embrace the change and needs of digital talent. It employs a diversified invest in upgrading their skills. In short, banks need approach to recruiting: engaging with technologist to become great engineering organizations.⁹ communities, sponsoring hackathons to scout talent, and ensuring that recruiters have experience 4. Culture and capabilities in technology. The best technical talent has a As banks build sophisticated technical solutions, disproportionately higher impact, so the ability to they also need to develop a culture suited to the attract and develop superior candidates is crucial. In experts building these solutions. Organizations a similar vein, leading tech organizations enlist their need to manage culture and capabilities to create top performers in the recruiting effort. a virtuous circle that attracts talent, sparks innovation, and creates impact. This underscores Furthermore, banks need to improve retention the importance of talent and culture in tech- and reskilling. Reskilling may involve charting a enabled transformations,¹0 including AI-bank clear career development path for digital talent, transformations. creating an environment that prioritizes and rewards learning, and rewarding deep expertise over For the platform operating model to work, leaders fungible skill sets. There is also opportunity to build need to steer their organizations to focus on capability-development programs that help reskill the end user, collaborate across silos, and nontechnical colleagues as technologists. Finally, foster experimentation. Establishing this digital so that attracting and developing digital talent can culture across the bank involves addressing four produce the desired results, banks need a clear dimensions of culture: understanding/conviction, strategy for retaining this talent, such as providing reinforcement, reskilling, and interaction. flexible and collaborative ways of working and empowering digital talent to implement change. First, understanding and conviction follow largely from the bank’s leadership, expressed through To develop a comprehensive talent strategy, an role modeling and encouraging desired behaviors, AI bank would first review existing initiatives, the including continuous learning, knowledge-sharing, structure and makeup of each platform, and the and interdisciplinary collaboration. For example, if technical talent required to execute the strategy. a top team visibly takes part in upskilling programs The second step is to build from the ground up for AI and machine learning, this demonstrates to a model of talent required for the next stage of all in the organization the importance of automation 9 Abhishek Chakravarty, Dave Kerr, and Nina Magoc, “10 Principles That Build Great Engineering Organizations,” March 26, 2021, medium.com. 10Reed Doucette and John Parsons, “The importance of talent and culture in tech-enabled transformations,” February 2020, McKinsey.com. Platform operating model for the AI bank of the future 7

and evidence-based decision making to all parts As each platform is free to build the of the business. Another approach is to support technology elements required to deliver on its technology start-ups by giving them access to mandated business goals, there is potential nonsensitive code and shareable data to build their for miscommunication among platforms. For own “open solutions” related to AI banking. example, instead of developing its own interest rate calculation, a consumer lending platform The second is to reinforce new practices with formal would leverage a single, standard calculation via mechanisms, so that the structures, processes, and an API. With no guardrails in place, there would systems of the AI bank become embedded within be significant inefficiency, because efforts would the culture. For example, banks might consider be duplicated in some areas and tasks would organizing institution-wide innovation challenges be unfinished in others. By contrast, guardrails or inviting managers to daily huddles where they support efficient management and operation of the actively work with the centers of excellence to solve overall IT landscape, with responsibility for various problems and own outcomes. elements of the enterprise architecture delegated to individual platforms. These various responsibilities Third, leaders need to ensure that every individual are formally documented and communicated widely. has access to the skills they require to be effective. Without such guardrails, inefficiencies would One way to do this is by developing entirely new multiply. tools and technology using in-house open-source systems. Another is to ensure transparency by These architectural guidelines should focus on setting up digital wikis that anyone can use to strategic activities rather than operational tasks, access knowledge. Organizations can also learn which are subject to the discretion of the platform. from others by sending employees on “innovation This requires significant time upfront for strategic tours” or actively encouraging and sponsoring planning, and each platform must stay alert to new attendance at high-quality conferences. value-creation opportunities related to its mandated strategic objectives. Finally, leaders should model various approaches to interaction. Banks can visibly change the Further, platform owners can evaluate the ways managers interact with teams, such as by effectiveness of these guardrails by tracking the moving from meetings to offline asynchronous number of business capabilities in accordance with communications using highly collaborative tooling. these guardrails, rather than simply counting the Leaders can also use symbols in remote and various technology applications found within the in-person meetings to emphasize enterprise values organization. such as customer centricity. At a leading bank, for example, every meeting has an empty chair to Mapping the operating model of a remind participants of the customer for whom they financial-services organization are building solutions. A large global or regional AI bank implementing a 5. Architectural guardrails platform-based operating model would typically Each platform is responsible for its own technology have 20 to 40 platforms, each focused on a specific landscape, but standardized mechanisms for type or set of services, such as payments, lending, interaction among platforms should be jointly infrastructure, or cybersecurity (Exhibit 3). As noted designed across all platforms. It is important, above, these platforms are often grouped into one therefore, to ensure that architectural guardrails of three areas. are observed so that each platform can easily interact with others. These guardrails should not be — Business platforms typically include a consumer perceived as restricting platforms from developing platform, which is linked to channels (digital, and improving their own technology and technical branch) and products (wealth, consumer) as decisions. well as customer relationship management 8 Platform operating model for the AI bank of the future

Exhibit 3 If implemented across the bank, the platform operating model can enable each group to optimize performance. Business Consumer platforms Corporate platforms Global Markets platforms Digital and assisted digital channels Digital and assisted digital channels Digital channels Branches and self-service banking Trading Wealth products Transaction banking (securities and Product control Consumer products fiduciary services, trade finance and Global markets operations Consumer banking operations cash management) Market risk Customer marketing and analytics Lending and other products Credit risk Corporate servicing and operations Sales and analytics Customer marketing and analytics Enterprise Payments utility (fulfilment and settlement, Finance and HR (recruiting, talent management, platforms payment interfaces, remittances) HR policies, accounting) Customer servicing (reconciliation, digital servicing) Risk (credit, market, operational, and liquidity risk) Analytics and data (data lake, standards, analytical Compliance tools, governance) Group services (eg, strategic vendor management, Employee services (intranet, facilities booking, real estate, project management office) video conferencing, end-user computing) Core banking Enabling Enterprise architecture (application/data/infrastructure architecture, API standards) platforms Delivery enablement/ITSS (DevOps, agile, test automation, service monitoring) Access management (eg, single sign-on, authentication, token management) Cybersecurity and technology risk Infrastructure/site reliability engineering API management (tech and operations for all APIs) Cloud infrastructure and applications and analytics; a corporate platform, which customer servicing; employee services; finance; spans channels and products (transaction HR; risk, legal, and compliance; and technology banking, lending) and relationship management platforms usable by business platforms such (corporate servicing); and a global-markets as payment infrastructure, cloud infrastructure, platform, which covers channels, products, and data, and API management. global market operations, as well as market and credit risks. — Enabling platforms support business and enterprise platforms to deliver technical — Enterprise platforms provide shared services functionality quickly. These platforms include across different business platforms across the enterprise architecture, delivery enablement, enterprise on administrative elements such as access and authentication management, Platform operating model for the AI bank of the future 9

cybersecurity, and infrastructure/site reliability for approvals from finance and allocations from engineering (SRE). IT and human resources. This autonomy speeds up decision making, innovation, and solution The platform model can help delivery. The use of automated tools, enterprise organizations seize new opportunities standards, and agile patterns of communication and collaboration increases efficiency in two ways. First, Executing on a platform operating model is arduous. this approach minimizes duplication of effort by However, when done correctly, it has the potential documenting repeatable processes and cataloging to deliver four main benefits to all stakeholders: technology tools and analytical models available for value-oriented business-technology partnerships, deployment in diverse contexts. Second, it allows stronger performance (speed, efficiency, and individuals to access data (according to clearly productivity), transparency, and a future-ready defined need-to-know criteria) and advanced business model. analytical tools to extract insights to augment their impact. Over time, persistent agile teams build their The collaborative framework of the platform model domain expertise and agile skills for collaboration brings business and technology leaders together and timely delivery. as co-owners in creating value for the enterprise. Joint owners of business-facing platforms share In addition to the emphasis on interdisciplinary accountability for outcomes, merging business collaboration, the platform model is designed knowledge of market opportunities with expert to increase transparency, accountability, and insight into how technological advances can knowledge sharing to the fullest extent possible. enhance customer experiences. The leader of the Transparency should be high not only so employees platform facilitates the interaction of business can clearly identify the services available from and technology owners in determining the right each platform but also to support independent balance between run-the-bank and change-the- benchmarking of team performance and bank initiatives. All members of a particular team identification of best practices. Each platform are unified in delivering a solution (just as those should also be clear about how it prioritizes work, of the entire “tribe” of a platform are focused on a tracks initiatives in the pipeline, and manages the service line) in order to create value in alignment backlog. with enterprise strategic objectives. This unity is reinforced by the fact that all team members share Finally, shifting to a platform model can help in performance metrics for both business and an organization future-proof its business technology outcomes, including impact on users model because each platform is incentivized to (internal and external), on-time delivery of solutions, continuously improve on its technology landscape. customer and employee satisfaction ratings, Within a culture of continuous learning, team and more. members are accustomed to change and adept at finding the best response to fast-evolving The platform approach can strengthen an circumstances. Interdisciplinary initiatives led by organization’s performance in terms of speed, business-technology co-owners strengthen a efficiency, and productivity when each platform is team’s capacity to anticipate and consider potential large enough to address a set of use cases crucial challenges and opportunities before they appear to realizing the business model of the enterprise on the horizon. Enterprise-wide standards, rigorous but small enough to keep the team agile. Each documentation of processes, and consistent team enjoys a degree of autonomy, with a budget cataloging of technology assets enable teams to and mandate to experiment and discover the best apply best practices as they develop and implement way to maximize value within a discrete domain in new solutions. alignment with predefined guardrails (for instance, finance, risk, compliance) without having to wait 10 Platform operating model for the AI bank of the future

By underpinning business-technology collaboration, developing an IT operating model co-ownership of solutions delivery and value that generates immediate and tangible business creation, the platform operating model offers value and moves the full organization, not just banks an opportunity to maximize the impact of technology, to an agile way of working. However, their technology capabilities in ways that count for to derive maximum value from platforms and the customers. The implementation of the platform people who make up these platforms requires new model begins logically with the formation of joint skills, mindsets, and ways of working. Bringing all business-and-technology teams focused on the these elements together is a powerful mechanism design, development, and implementation at scale to optimize the full capability stack, from core of new AI-bank innovations, always striving toward technology and data infrastructure to AI-powered a more intelligent value proposition and smarter decision making and reimagined customer experiences and servicing. Further, the creation engagement. The platform operating model of cross-functional platforms is also an excellent ensures that these layers run in sync to spur the approach to increase business–technology growth of an AI bank of the future. Brant Carson is a partner in McKinsey’s Sydney office; Abhishek Chakravarty is an associate partner in the Singapore office, where Kristy Koh is an associate partner; and Renny Thomas is a senior partner in the Mumbai office. Copyright © 2021 McKinsey & Company. All rights reserved. Platform operating model for the AI bank of the future 11