Technology has disrupted and brought changes to almost any industry. It has changed the way services are offered, business models and most importantly, it has fundamentally improved the customer experience. It has sometimes, also created completely new propositions and business models. The banking industry is no exeption of course and it has been impacted by two major forces.
The first one is the emergence of financial technology companies. These companies has brought a new and fresh way of doing business, a more cost efficient and agile way. They have created completely new propositions like peer-to-peer lending and dramatically improved existing experiences like digital banking. The growth and innovation that these companies are bringing is making banks take notice. And customers have noticed as well. Recent research show that 1 in 3 banking customers has a relationship with an alternative banking provider. When it comes to experience, fintech firms are more likely than traditional banks to provide consumers with positive banking experiences.
The second force is the shift of control to the consumer. Banks have enjoyed for years a certain control of the market, deciding on the products, channels and how customers would engage and transact with the bank. But the emergence and ease of access to digital technology raised customer expectations and the number of alternatives not only for banking, but for services in general.
Being in this position, banks have now turned to fintechs to look for collaborations, having once considered them a threat. Fintech companies are also open and looking to collaborate with banks. While many of them still maintain a “fighting” position, others have understood that they have much to gain from partnering with banks, like their regulatory expertise and large customer base.
This has led to the open banking trend, which has now gained a common acceptance as the main way for banks to stay relevant in the digital technology era. One of the main technologies behind open banking is a technology called Application Program Interfaces (APIs) which has been used by technology giants and almost every startup to enable their business models and rapid growth.
What is open API and how does it work?
APIs have been used by the most successful technology companies like Google, Apple and Amazon and also from new startups which has enabled them to create huge ecosystems and use the power of thousands of developers around the world to build new products and reach new markets. It’s what has powered the Apple App Store which has created a whole new economy and billions of dollars in revenue for Apple and the developers that build on top of its technology.
These APIs are freely available interfaces for developers which enable them to immediately access the backend data to improve their applications and in many cases build new ones. Besides data, APIs allow developers to access core technologies and processing power they wouldn’t be able to use otherwise.
When it comes to banking, APIs are also not new. Banks have been using APIs to connect their systems with those of their partners. For sure a lot of banks are still behind and have yet to develop APIs. Instead they use old messaging protocols and file exchange technology to communicate with their partners. This allows them to offer some basic services, but they are far from what the customer expects today.
While APIs are not new to banks, open APIs are. The truth is that the existing APIs that most banks have developed are either private APIs or partner APIs. Private APIs are used internally in the bank to improve some of their operations. Partner APIs are how most banks that have developed APIs are communicating today with specific third party companies to enable some of the bank’s products and channels. With open APIs banks give access to their data and accounts to third parties that they might not have a formal relationship with. Besides investment in enabling this technology, open APIs bring also some new security challenges, which can be some of the main reasons that not every bank has started developing open APIs.
Most banks will probably be cautious with open APIs, building first private APIs and then moving to open ones.
Example of open API in Banking
Under the market and regulatory pressure many banks have already started or are preparing to offer open APIs.
In Europe Credit Agricole has opened its interface to developers and Fidor Bank Germany has built its model around open API technology.
Startup banks or digital only banks are also using open APIs right out of the box. In fact it is considered as one of their most important strengths and competitive advantages. Because they have built new technology from scratch it has enabled them to have an open approach from the beginning and make it the core of their business model. So banks like Monzo, Atom and N26 are all making use of open API technology. For example N26, which is also the most advanced of the bunch, is building their proposition block by block. It recently offered international transfers through Transferwise and now N26 clients can buy insurance packages which is also enabled by a third party, all powered by APIs.
In southeast Asia, OCBC is one of the best examples of open API implementation. Through their API they allow developers to get access to basic data like ATM and branch locations but also access to more advanced products like cards.
An interesting use case comes from US based banks Wells Fargo and Capital One, which made possible access to business accounts through popular accounting software used by small businesses.
Besides banks, card networks have also built open APIs. Both VISA and Master Card have built their developers portal with proper documentation and easy access to many API methods for developers to start building products. They are also working with banks like JP Morgan and other partners in building an open ecosystem.
Benefits and the future of banking with open API
While there are many benefits of embracing open APIs, it’s important to understand that there are 3 major reasons why banks start venturing into open API technology.
The first is related to the legacy software banks use for their core banking operations. Because the way these systems are built, it is very expensive and slow for banks to integrate to third party systems. One of the ways to overcome this disadvantage is to create an API layer which will facilitate communication with third party companies.
The second reason is driven by regulatory requirements. The most prominent one is the Payment System Directive 2 in Europe which requires every bank to open their systems by 2018. Although it is not explicitly mentioned that banks should build open APIs, they will most probably use open API technology to be compliant with this regulation as it is the most efficient way to do it. Similar regulation are also being discussed in other continents.
The third reason is driven by market requirements. As mentioned above, customer expectations has changed and now customers want to do banking on the go through their smartphone and expect things to be done fast and without to much hustle. On top of this, the emergence of fintech which are already addressing some of these needs has pushed banks to act and embrace open APIs.
Open APIs make it easier for banks to innovate in new products and channels by enabling third parties to develop on top of their platforms. Working with fintechs will accelerate this process for banks and fintechs as well by leveraging their respective strength and expertise, helping both of them to stay relevant by retaining and growing their customer base.
In fact one of the biggest benefits it’s increasing go to market speed for new products. Through open APIs the product development process can become much faster, helping banks to respond to quick market changes driven by technology innovation.
Banks giving access to customer data and accounts to third party providers will become the norm as it becomes a necessity for banks to respond to the requirements of their customers in the digital age.
By embracing APIs, banks will gain again their leading position in the financial industry and be the ones to encourage innovation, embrace future technologies like Internet of Things and Virtual Reality.
They will also be able to finally use their customer insights in innovative ways which will improve customer experience while also bringing new revenue streams. In order to achieve this, banks need to apply Machine Learning, Artificial Technology and computing power which is currently held, and most probably will continue to be, by tech giants like Google and Amazon. They will need to integrate with these companies and use their technology to build actionable data and deliver proactive and contextual solutions to their customers.
Through open APIs banks will be able to build a developers community which will enable them not only to improve their existing propositions but also build solutions that go beyond traditional banking. In an open API model the number of developers and partners that can be connected to the banking ecosystem is virtually unlimited.
While there are a lot of things to be figured out, starting from security and the risk of banks being disintermediated from their customers, open APIs remains a reality that every bank that wants to stay relevant in the new digital world should embrace.
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