Open and embedded insurance – learning from open banking

Open finance is transforming financial services. Open insurance is set to follow a similar path to open banking, with standardised APIs opening up opportunities to innovate and add value. As the insurance industry faces up to the coming open insurance challenge, the experience of the banking sector holds valuable lessons.

1.????Resistance is futile

Incumbent banks have not always been the most enthusiastic supporters of open banking. Being forced to share ‘their data’ threatens a key competitive advantage, while the technical challenges (and costs) of upgrading legacy tech stacks is pretty formidable.

Even now, some four years after the introduction of Europe’s PSD2 and the UK’s Open Banking regime, many banks continue to drag their heels. You can see a similar pattern playing out around the world – and not just in open banking. Brazil’s pioneering open insurance movement faces concerted criticism, using many of the same arguments: implementation is too rushed, data security is at risk …

But despite this – and despite the financial sector’s formidable lobbying power in many markets – open finance continues to move forward. Perhaps not as quickly as some would like, but relentlessly.

Incidentally, there’s a widespread misperception that banks in the US have been successful in holding back the tide. While it is true that regulation has only recently started to inch forwards, consumer demand and the pressures of a competitive market have pushed the US financial services sector to innovate. A much-quoted survey from open finance infrastructure provider Plaid claims that 88% of American consumers use fintech services.

That doesn’t mean that banks (and now insurers) might not want to lobby against opening up too much, too quickly. But it does mean that burying your head in the sand is not an option. Open banking has become a global movement. Open insurance is coming.

2.????Success is a state of mind

In a heavily-regulated industry, compliance is always a priority. Many banks responded to the introduction of open banking with a compliance mindset. In some cases, this meant not just understanding what open banking requires but understanding what the minimum is that a bank can get away with.

In Europe, some banks seem to have gone out of their way to make life difficult for third party providers trying to access accounts for open banking services – to the extent that the European Banking Authority (EBA) has now called on national regulators to take more vigorous action against banks that create unnecessary obstacles.

From a bank’s perspective, this sort of compliance-focused, semi-obstructive behaviour may well have seemed like a winning approach: keeping costs down while at the same time reducing the competitive threat from new services. But while some banks resisted, other banks – and a whole new breed of challengers and fintechs – have been awake to the opportunities.

Open banking – and open insurance when it comes – isn’t about compliance. It’s about creating new value. Providers who look to capitalise on the opportunities will be the winners.

3.????It’s all about the customer

The open banking movement in the UK and Europe was largely driven by industry considerations – boosting competition, creating a pan-European payments market. But some other countries have taken a slightly different approach. In Australia, for example, open banking is part of a broader Consumer Data Right , while Canada went through a phase of talking about Consumer-Directed Finance.

As conversations around open banking have moved away from compliance, the need to focus on the consumer has become increasingly evident.

On the positive side, open banking is creating new opportunities for personalisation (or, for those who are really excited about it, hyper-personalisation). Rather than offering a range of off-the-peg products, financial services providers can tailor what they offer to the individual customer.

At the same time, greater transparency is making it far more obvious when customers are being treated unfairly. ?While consumers are notoriously slow to switch bank account provider, it’s becoming ever easier to see which savings accounts offer the best rates – and new services make it ever easier to automatically move funds in search of return.

‘Bundled’ products face challenges too. Banks that have relied on overdraft fees to help cover the costs of current accounts, for example, now face competition from new fintechs. Using open banking, they can help customers predict potential cash flow shortfalls and find alternative, cheaper funding. Open banking makes it easier to break down the value chain and offer new competition for any over-priced elements.

The implications for insurance are evident. Some ‘black box’ insurance providers already offer lower premiums to drivers who are prepared to share in-car telematics data. Increased transparency will make loyalty penalties indefensible (in markets where they are not already banned).?

It’s an old truism, but customer-focused businesses will be the winners.

4.????... but it’s about you too

Depending on your definition, open banking isn’t as new as you might think. Financial data has been being shared digitally since online access to bank accounts first became widespread. Germany’s SOFORT and iDEAL ( Currence ) in the Netherlands have been offering third party payment initiation since 2005, and are still in widespread use today.

The big difference has been the move to sharing data using APIs (application programming interfaces). APIs offer more secure data-sharing. To the extent that APIs become standardised (and that’s still something of a work in progress), they also promise to make it easier to build new connections across the financial services ecosystem.

But APIs aren’t just about external connections. Banks are using APIs internally as they move away from monolithic legacy technology and reduce integration costs. This more flexible approach is helping to break down data silos. An API-first, ‘composable’ business strategy helps institutions improve their own, in-house processes and services as well as working with external partners.

It’s worth remembering, too, that data doesn’t have to flow in just one direction – organisations can be data recipients as well as data providers, and that again opens up new opportunities. An early example of this is business interruption insurance that uses client data to verify and assess the extent of the loss – potentially providing faster, more transparent and lower cost claims processing.

5.????The odd couple

Partnerships have proven to be an essential – but challenging – part of capitalising on the open banking opportunity. As a rule, working with partners allows organisations to deliver new propositions significantly more quickly than trying to go it alone.

Partnerships between incumbents and fintechs have tended to be particularly challenging, as cultures clash and expectations are disappointed. There’s no silver bullet, but open communication helps. Difficult as it may be, each side needs to appreciate the other partner’s point of view.

While the incumbent may well see itself as the customer in the relationship, it’s healthier to approach the relationship in a spirit of collaboration. Longer term, banks increasingly see fintechs as the customers for their APIs. By investing in its developer portal, a bank can make itself a more attractive partner to work with.

6.????Inclusion is exciting (and profitable)

Open banking is helping to democratise access to financial services. Better data makes it easier to offer affordable credit to ‘thin file’ consumers. More efficient, lower cost (and fully digital) processes have transformed the economics of offering microloans. Financial management tools help customers understand their financial position and what their options are.

This is an area where fintechs and technology platforms excel. For example, gig workers such as Uber drivers can now access financial services through those platforms (made available, in part, because of the driver data that the platform has).

With an open, partnership approach, micro- and pay-as-you-go insurances become much easier to deliver. In developed countries, these are useful new services for customers and could significantly expand the market. ?In less developed markets, helping the previously uninsured manage risk better can be transformative.

7.????Embedded just makes sense

It’s far from clear what is the best business model for the future. For the empire-building banker, building the bank into a platform certainly has an emotional appeal. At the other end of the spectrum, Banking-as-a-Service offers the potential to rapidly expand product distribution.

Different variations of these depend on other factors, such as the extent to which the bank works with fintech partners and whether services are ‘white-labelled’ or retain bank branding. No one solution is right, and no doubt different banks will pursue different models (or indeed more than one).

But of all the different options, embedded finance – taking the financial service to where the customer is – just seems to make sense. The move to digital has seen a sharp decline in the role of the bank branch. Customers want seamless, low friction services that fit in with what they are trying to do in their lives.

And what’s true for banking is even more true for insurance. As the world of warranties has long demonstrated, product insurance offered alongside the product purchase isn’t just convenient – it enables sales which simply will not take place otherwise. Embedded insurance takes this a step further: fire alarms with built-in fire insurance, trade tools offered as a package with security and insurance.

8.????Who are you and what do you really offer?

The great unbundling and rebundling of financial services leaves management teams looking at new business models and strategies. Sooner or later, they ask themselves the question: just what is it that we are good at? What is this business about?

Different organisations answer this in different ways. Some banks shy away from Banking-as-a-Service, worried by the idea that their business may be commoditised, ending up as ‘dumb pipes’. Others take the opposite view, recognising that being able to navigate the world of regulated banking is no mean feat – and there’s a good living to be made from ‘renting out’ the banking licence.

Across the industry as a whole, a common theme has emerged: the idea of trust. The reason banks exist is because people trust them to look after their money. That idea of the bank as a trusted custodian has evolved over time – from the safety deposit box to an organisation that customers trust to look after their financial affairs. That theme of trust is helping banks to see a possible new role for themselves in the digital age – as custodians of the customer’s digital identity.

What is the equivalent for insurers – something to do with the concept of risk/protection?

9.????Communicating value

With hindsight, the terminology ‘open banking’ may not have been ideal. For consumers continually being warned of the risk of fraud and the importance of protecting banking data, it can create the wrong impression.

Discussions continue to swirl around this topic. Some suggest that alternative terms – for example, ‘smart banking’ – might be better. No doubt similar concerns will be raised around ‘open insurance’ (does that mean you don’t have to lock up your premises?).

But in either case, it’s probably not the most significant issue. As many have pointed out, consumers don’t care about open banking, in much the same way as they don’t care about which payment rails and technologies lie behind the payments they make from day to day.

What matters to customers is the value they get. Create new propositions that customers value, and the rest will follow.

10.?The bigger picture – ecosystems beyond the industry

We’re on a journey to a broader open future. Not just open banking, and open insurance, but open finance more generally. And not just open finance but open data across the economy. Initiatives like Australia’s Consumer Data Right explicitly look to a cross-sectoral approach, and are already taking steps towards opening up telecoms and energy data. The US (and other markets) are looking towards the potential of ‘open health’, while the UK government is evolving a Smart Data strategy .

Banks are already building ecosystems of partnerships, and consumers (and small businesses) are already responding to new models of platform banking and embedded finance. But how much more powerful this becomes when ecosystems break out beyond financial services.

It’s early days, but ecosystems are starting to be built around key customer needs. In housing, for example, the ecosystem can include everything from both finding and financing a home, to occupying and maintaining it. In health, services that protect health fit naturally with those that treat illnesses and injuries. Insurers have a natural role in these ecosystems.

11.?Open minds

As open banking and open finance spreads around the world, it’s notable how different markets are coming up with new approaches and learning from other countries’ experiences. No one country has a monopoly on good ideas or success.

Brazil looks set to be a leader in open insurance and Switzerland in open wealth. China was an early leader in platform development, while the US continues to be a hotbed of all-round innovation. Individual banks and fintechs are leading innovation in different areas – for example, 法国兴业银行 in lifestyle ecosystems and fintech Railsbank in the idea of embedded experiences – not to mention the array of tech vendors and consultants.

We can all learn from one another –through forums like Open & Embedded Insurance Observatory and The Data Economy , but most of all by having open minds. We’re on a journey, and it’s not entirely clear where we’re going to end up. But open is the future, and it’s very exciting.

By Marie Walker co-founder The Data Economy writing for the Open & Embedded Insurance Observatory 's 2022 annual report

Also published on Open Future World

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