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Should Banks Become TPPs?

Zoran Šljivić, Senior Software Developer

Should banks consider becoming Third Party Providers?

Throughout this post, we will be referring to them by their abbreviation, TPP. To immediately shorten the long dilemmas, the short answer is YES, they should.

The main reason why a bank should become a TPP is that this helps it become more competitive in the market. If a bank decides to become a TPP, it can create its own application through which it will be able to access other banks through their APIs. But access will not only be gained to other banks, but also to other TPPs on the market, as well.

Banks with TPP applications scheme
Banks with TPP applications scheme

In this example, a bank named ABC has its own TPP application. The bank is connected to its application as well as to many other TPP applications via an open banking platform in the same way it’s connected to other banks.

One of the advantages that a bank gains in case it becomes a TPP is to use transaction data from other banks to calculate credit scoring. In this way, the bank can offer better conditions to existing, as well as new clients. Moreover, it can attract new customers with better offers.

It’s easier for banks to become TPPs than for new fintech companies. And why is that?

We could say:

  • Easy integration
  • Customer trust
  • Customer base

Easy Integration

We mean that they have better knowledge of the requirements prescribed by the regulator. New TPPs find it challenging to integrate with open banking APIs in the initial stages. Technical issues that they were unaware of will be revealed in these stages. If both the TPP application and open banking solutions are developed simultaneously, it will be easier for both of the components to identify these technical issues very early. Additionally, if there are security vulnerabilities or such issues exist in the system, the bank-owned TPP will be the first party to notice them.

Customer Base

Attracting bank users and convincing them to grant consent to perform banking activities on behalf of them is the hardest part for many TPPs. In this situation, financial institutions have a competitive advantage within their existing customer base. And it’s easier for other consumers to give consent to an application developed by a bank than to one developed by a new fintech company that they have never heard of or that has no experience in the banking sector so far.

Customer Trust

People usually find it hard to trust someone when it comes to finances. Especially when an application asks you to give it consent to gain access to your bank account to which you receive your salary and from which you make payments. And that’s exactly where many TPPs could encounter problems. On the other hand, banks would have an advantage here because they already have the trust of many clients.

Think Beyond Compliance

The open banking platform opens new opportunities for banks that become TPPs. Banks can offer added value to customers, especially smaller banks. By acting as a TPP, they can consume value-added services provided by other financial institutions (bigger banks), bundle them with their own services and provide innovative products to consumers. This will be a huge opportunity for smaller banks (Tier 2 banks) as this will allow them to access massive amounts of data from much bigger players (Tier 1 banks). In most of countries, these Tier 1 banks control most consumer assets. By taking the TPP role, smaller banks can compete much better in the new market by providing useful consumer services with this new dataset (e.g. a personal finance management/recommendation application can be developed by analyzing the credit scores, deposits and expenditure patterns).

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