OBSERVATIONS FROM THE FINTECH SNARK TANK
A Wall Street Journal article titled Goldman's Trading Floor Is Going Open-Source--Kind Of reported that:
Goldman Sachs plans to release on GitHub some of the code that its traders and engineers use to price securities and analyze and manage risk. The bank is also offering engineers $100,000 to build new applications using the bank's code. It's Goldman's latest move to shed some of its trademark secrecy and share its once closely guarded technology. By letting outsiders tinker with its code, Goldman hopes to earn the loyalty of computer-driven quant traders."
My take: Goldman isn't "shedding its trademark secrecy" and it couldn't care less about the loyalty of computer-driven quant traders.
There are three drivers behind Goldman's move:
- Resource availability. According to CB Insights, "As of 9/14/2017, 46% of all of Goldman's 2,000+ job openings were in its technology division. The highest percentage of technology jobs were for platform roles, followed by operations engineering and equities technology positions." That might have been 18 months ago, but do you think those positions have been filled? Doubtful.
- The need for speed. Not only can Goldman not hire people fast enough, it can't risk being slow to bring new services to market. Opening its code to outside developers enables Goldman to offer new capabilities to its client base faster than it could if it continued to try to hire developers internally.
- The new economics of service delivery. This is really the crux of the move to open up the source code: It enables Goldman to have new things to charge clients for. As the Goldman employee who oversees the trading platform said in the WSJ article, "there's real value there, and we want to make sure that we're monetizing it."
The Model for Open Banking in the Retail Space?
Goldman's move to open its trading platform could be a model for how open banking unfolds in the retail banking space: Banks enabling developers (read: fintech startups) to build new features, capabilities, and services on their digital banking platforms.
Instead, the discussion about open banking in the US typically revolves around "we need to enable consumers to move their data where ever they want." Consulting firm EY defined open banking as:
"Online banking and financial services enabled through consumers' ability to offer third-party providers access to their personal bank account data and payment initiation."
And apparently, we (in the US) are really behind on things. According to an American Banker article titled US way behind the curve on open banking:
[P]olicymakers, fintech companies, and financial services firms are finally beginning an earnest dialogue about open banking. It's good because the US has a lot of catching up to do. In the US, there's no legal requirement stipulating a financial institution must make a consumer's financial data available to a third party in the event that a consumer provides affirmative consent. "
The rationale for that view is often supported with meaningless consumer survey statistics like this one from the American Banker article:
Consumers have demonstrated their desire for open banking. 87% of individuals preferred to adopt a fintech application rather than use a product or service offered by a traditional financial services provider."
How does that data point demonstrate a desire for "open banking"? If consumers prefer a fintech app to a traditional providers; products and services, then why would traditional firms need to share data?
And anyway, fewer than 87% of consumers do their banking on a mobile device today, so it's hard to believe that that many consumers would prefer a fintech app to their traditional bank account.
How is the Data Going to Get Shared?
Much of the talk about open banking ignores the reality that sharing data requires common definitions and standards to make it usable. How is that going to happen?
Well, it could happen one of three ways:
1) Government regulations. Regulatory approaches to open banking (i.e., data sharing) are fraught with problems. While the original intentions of the CFPB may have been honorable, thousands of lawyers descending on the industry demanding information to satisfy compliance regulations was a nightmare for many banks. Forcing banks to share data doesn't fix the problem of how to share it.
2) Industry consortia. If a regulatory approach won't work, maybe financial institutions can all get together and figure it out for themselves. The Financial Data Exchange, formed by big banks including JPMorgan Chase, Bank of America and Wells Fargo along with data aggregators and fintechs, launched late last year with a goal to "create a standard that provides interoperability within the financial ecosystem in a way that maintains consumer control, security and choice."
If my memory serves me correctly, the last time these big banks got together they formed ClearXchange to enable digital P2P payments. That floundered for years until Early Warning stepped in to provide the management and marketing horsepower needed to create Zelle.
Sure, I guess we can wait another seven years before this consortia produces something. Cumbaya, my lord.
All joking aside, the other challenge here is that there are thousands of smaller community banks and credit unions in the US who have significant market share and strong relationships. Where are they in these Financial Data Exchange efforts?
3) Platforms. A platform--in the business model sense of the word--attracts consumers and providers, and enables those two parties to interact and transact (which includes taking care of the back end data integration needs). This is what Goldman is doing--facilitating the integration between developers and Goldman clients. In some cases, those developers will get paid directly by Goldman (via engineering grants). How others will get paid wasn't made clear by the WSJ article.
Platforms and Open Banking
To date, talk of open banking in the US has been nothing but pipe dreams.
Many people like to say that data is the new oil. Is oil a resource easily--and freely--shared between those who have it and those who want it? Of course not. So why should and would data be easily and freely shared? It won't.
Easy data movement isn't really what both consumers want, anyway. What they want is easier access to a wider range of financial-related services (think: they don't want a nail, they want a hole in the wall).
And banks would like to provide that wider range of services, which is why partnering between banks and fintech companies is the strategy du jour.
Problem is, partnering doesn't scale. Achieving scale requires a platform (like an Amazon or Goldman) who can integrate many providers.
While Amazon could certainly enter the retail banking space to facilitate "open banking," there are opportunities for existing banks and credit unions to do this. Being able to create a technology platform to do this has been beyond the reach of most banks and credit unions. The good news is that help is on its way in the form of platform service providers like Constellation Digital Partners, Sherpa Technologies, and Sandbox Banking.
Consumers might go for it.
In a study recently conducted by Q2 and Cornerstone Advisors, three-quarters of older Millennials and seven in 10 Gen Xers expressed interest in using a capability from their existing bank or credit union that integrated fintech offerings with their existing accounts.