Financial Services Ireland


Building digital ecosystems and driving the future of banking

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In brief

  • Digital ecosystems including embedded finance are the future of banking. Increasingly they are moving from being an opportunistic approach to becoming a revenue generating strategic competitive imperative for banks.
  • In markets like Singapore, China, Australia and the US, banks are becoming the orchestrators of digital ecosystems and are collaborating with players outside of the financial services sector.
  • To succeed in an ecosystem environment Irish banks must:
    • Have a clear ecosystem strategy;
    • Identify cross-sector propositions based on future customer needs;
    • Explore their existing partnerships and relationships to see how they can unlock value by viewing them in an ecosystem context.

The opportunity inherent in digital ecosystems

Digital ecosystems present an immense opportunity for Irish banks. This global transformation sees financial services integrating with every sector of the world economy. Banks need to decide how to leverage digital ecosystems for their strategic competitive advantage now.

Through material levels of technology investment, Irish banks have been laying the foundations for this new wave of transformation but have yet to unlock the true potential on the back of this. By identifying ways to embed themselves into the value chains of other sectors, they have a real opportunity to generate new revenue streams and develop a larger addressable wallet by unlocking value streams outside of the financial services sector.

To do this, they must leverage their technology foundations, build digital ecosystems and create strategic opportunities to enable innovation.

What are digital ecosystems?

Digital ecosystems are collaborations through partnerships which leverage technology to create new propositions and innovative experiences for consumers. Developing an ecosystem offering and bundling services beyond banking can help traditional banks respond to increasing market competition and profitability challenges.

Digital ecosystems, underpinned by open application programming interfaces (APIs), will be integral to the future of the financial services sector. For banks, participating in these ecosystems is not an option, but a strategic competitive imperative, particularly when they consider how challengers and new entrants are now dominating the payments and embedded finance markets, as evidenced by the significant rise of the Buy-Now-Pay-Later proposition.

How do we measure the maturity of digital ecosystems?

The waves of maturity of digital ecosystems can be measured by assessing the types and scale of partnerships being formed.

There are currently two maturity waves at play.

Wave 1: Vertical, sector-based collaboration

  • Collaboration between players is constrained vertically within the financial services sector. Examples include:
    • Account aggregators, where customers can see account information from multiple banking providers through a single app.
    • Personal finance management apps, which help customers manage their finances to build better financial wellbeing.

Wave 2: Horizontal, cross-sector collaboration

  • Collaboration between players occurs horizontally across sectors, with financial services products and services participating in, for example, one-stop-shop ecosystems fulfilling end-to-end customer needs. The ecosystem orchestrator in this example could be bank or non-bank led.

Ireland, like the UK and most European markets, is currently in Wave 1. However, given cross-sector ecosystems have already started to form between travel, hospitality and retail sectors, the trajectory is going in one direction only, particularly when you consider the capabilities of some of the challengers and new entrants in the financial services sector.

In markets like Singapore, China, Australia and the US, Wave 2 has already started and in some instances, Banks are taking the lead and becoming the orchestrators of cross-sector ecosystems.

  1. DBS Bank, Singapore

    DBS is collaborating in several ecosystems including travel, property, automotive and education. The automotive ecosystem, for example, is a one-stop solution to assist consumers along their car purchase journey. It offers classified adverts, financing, car evaluation, insurance, loan and extra equipment purchase. Their travel marketplace is a partnership with Singapore Airlines, Expedia and Chubb.

  2. Ping An, China

    Ping An has created a marketplace which caters to over 300 million online customers. It has collaborations and offerings across five ecosystems – finance, health, motor, real estate and smart city. A key enabler for their strategic transformation was establishing a separate technology arm, Ping An Technology. The bank also invests in digital technologies such as AI, blockchain, and cloud.

  3. Westpac, Australia

    Westpac is collaborating with Buy-Now-Pay-Later leader Afterpay – their first partner for its banking-as-a-service (BaaS) offering. The partnership will see Afterpay’s Retail platform offer Westpack products and services, such as transaction, saving accounts and other cashflow management offerings to its 3.3 million customers. Westpac will manage the direct banking relationships, while Afterpay will look after customer experience.

  4. BBVA

    BVAA has launched a BaaS platform. Its cross-sector partnerships have been primarily US and Mexico based. The latter saw them launch a partnership with Uber to provide drivers without a traditional bank account access to a digital bank account and lending services through the Uber app.

Open banking adoption in the Irish market

Open banking technology is one of the primary enablers of digital ecosystems. The adoption of open banking varies widely around the world. The EY Open Banking Opportunity Index explores how the pace of change differs across markets. It assesses how four high-level pillars are playing a key role for open banking to thrive. The index shows that the UK and mainland China are market leaders. But they have taken completely different journeys to get there: regulatory vs. market driven forces.

Compared to the UK, the perception is that Ireland is further behind in terms of both open banking and digital ecosystem maturity. There is also a more active, government backed FinTech and innovation environment in the UK market. The EBA’s open banking license registry shows that there are 228 active licenses in the UK compared with 40 in Ireland. However, considering the number of licenses relative to the total banked population, Ireland leads both the UK and most other European markets.


The five key drivers of digital ecosystems

1. Regulation

In Ireland and across Europe, the EBA’s Payment Services Directive 2 (open banking) legislation has levelled the playing field. Banks are now mandated to allow, with explicit consent, access to customer data and online payment capabilities through open API technology. According to the UK’s Open Banking Implementation Entity (OBIE), more than 2.5 million UK consumers and businesses are using open banking-enabled products, with hundreds of thousands of new customers being added to the ecosystem each month. Note: A similar body measuring open banking transactions does not exist in Ireland today.

2. Increased competition

With a lower barrier of access to the financial services market, FinTechs, BigTechs and challenger banks are leveraging their technological agility and superior digital customer experience to capture customers and investors. While digital banks like Revolut and N26 have signed up approximately 1.7 million Irish customers between them, few customers have fully migrated away from their pillar bank due to the limited services currently offered by these challengers – though that is not likely to remain true as such players are beginning to extend their offerings outside of payments products.

3. Increased digital and technology investment

Banks are investing heavily in their technology systems and data. This drives down the cost to serve and creates a platform for new revenue streams. We estimate that large banks will need to achieve at least a 20-25% reduction in operating costs to maintain a sufficient level of profitability.

Globally and locally, banks are making major investor commitments to reduce costs, citing technology as the primary lever to achieve this. While regulatory change and legacy system renewal continue to consume the majority of spend, digital transformation and innovation budgets are increasing as the competitive threat resonates with shareholders.

4. Changing consumer behaviours and expectations

A change in paradigm is redefining the way consumers are serviced by breaking the silos of offerings and creating one-stop-shop ecosystems to fulfil customers wants and needs. In this new paradigm, Banks will succeed where they can embed their products and services at the point of need, e.g. embedded finance.

Based on the customer experience delivered by BigTechs such as Netflix and Spotify, consumers expect more personalisation, proactive services and connected omni-channel experiences from their bank. According to the EY Future Consumer Index, COVID-19 has accelerated digital adoption levels with 43% of global respondents saying the way they bank has changed during the crisis and 57% saying they had reduced their cash usage.

5. Partnership and acquisition appetite

According to the latest EY Global Capital Confidence Barometer (pdf), banks are increasingly focused on M&A and partnerships to accelerate inorganic transformation. 66% say they plan to actively pursue this over the next 12 months.

In Ireland, we see examples of this activity among some retail banks. How they will leverage these partnerships and acquisitions to build new digital products and services has yet to be seen, however. EY’s FinTech Adoption Index also shows Irish consumers embracing FinTech services at an unprecedented scale, with an adoption rate of 71% indicating that partnership-based services are likely to be well received.

The digital ecosystem opportunity for Irish banks

If Irish banks can find ways to embed their financial products in unique life moments along the customer journey – health, housing, education, employment – it will put them at the heart of this global transformation.

In this new future for banking, Irish banks must seize the opportunity to create a strategic advantage and unlock a larger addressable wallet by orchestrating cross-sector ecosystems. Banks that don’t do this – because of lack of investment or the right talent – will be made obsolete by other sectors and players.

To succeed in an ecosystem environment Irish banks should ask themselves better questions, for example:

  1. Is our overall business strategy and technology roadmap informed by a digital ecosystem strategy?
  2. What team in our organisation is accountable for understanding future customer needs and identifying cross-sector propositions?
  3. What traditional partnerships and relationships do we have today that could unlock value when viewed in an ecosystem context?

For inspiration, banks should look to their peers in other markets and adopt a transformative mindset. For Ping An this meant setting up their own technology company. For DBS, this meant thinking of themselves as technology company offering financial services. What this will mean for the first Irish bank to seize this opportunity has yet to be seen.

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Contact us today to discuss the digital ecosystem opportunities for your organisation.

Oliver Pugh, FS Partner, Consulting

Niall Corrigan, FS Partner, Head of Digital & CX

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