As regulations like PSD2 sweep the financial services industry, open APIs are becoming a front-and-center issue for banks. Learn why open banking may be a boon for financial institutions and how a changing mindset could be the answer to new revenue streams.
Open APIs are not a new thing; however, they present a very real and perceived challenge to financial institutions (FIs) that are having to lift the kimono to fintechs by mandate of new regulations. As the EU’s revised Payment Services Directive (PSD2) requires European banks to grant secure access to customers’ transaction accounts to third-party providers, many FIs are feeling the pressure of disruption.
This access is granted through application programming interfaces (APIs), which is not a new concept. APIs allow for the sharing of data across different business applications, and have been utilized by countless platforms over the years, including the notable Salesforce.com, Facebook, Twitter, and more.
The difference is that many APIs have been made available by these popular platforms by choice, allowing customers to improve upon and customize how the platform is used. With open banking APIs, FIs are seemingly having their hand forced by competition-focused regulations.
We believe that FIs should look at open banking and open APIs as a critical opportunity rather than a critical loss. By shifting the perception of regulations like PSD2 and others that are likely to follow, FIs have an opportunity to capture new payments revenue, provide an improved and innovative customer experience, and participate in the new competitive dynamics of finance, banking, and payments.
This shift in perception begins with a reimagining of roles. The traditional banking and payments system is in flux. Banking products and services have become highly commoditized. Even the opportunity presented by mobile was unable to knock new perspective into FIs. As mobile banking gained steam, banks jumped on board with mobile banking apps; however, like other products and services, there were no real differentiators that made one more appealing over another. As of June 2016, more than 80% of banks between $50 million and $15 billion in assets had a mobile banking app in the App Store.
Rather than fighting to maintain pace with the changing technology and consumer preferences, banks should leverage emerging technology—and the developers and third party vendors that understand it best—to do the heavy lifting. APIs are already extensively used within banking infrastructure to move data between systems and platforms. Banks should instead focus on how third-party companies can help them monetize existing services by improving upon these systems. These external parties have the ability to make enterprise IT systems and other services easier to consume for customers. In other words, open APIs should be viewed as a strategy rather than a hindrance or matter of compliance.
This is especially true as banking goes digital and consumers expect an end-to-end digital experience. Not only does that mean less focus on bank branches, but it means truly understanding the preferences of Millennials and Gen Z’ers and evolving to meet those needs. A McKinsey report notes that 73% of US millennial would be more excited about new financial services from tech giants like Amazon, Google, Square or PayPal than from their own traditional bank. Banks need to focus on making banking payments more agile and innovative—and fintechs are the key to achieving this.
Banks need to reposition themselves from the “gatekeepers” of modern banking to the conductors of improved digital banking and payments experiences for merchants and consumers.
The mandates of regulations like PSD2 are clear; however, there is nothing that says banks must stop there. By being strategic about how they offer access that goes beyond the basic regulatory requirements, banks can offer value-added product and services that benefit all parties in the ecosystem. One possibility is to offer seamless, fee-based API’s to third parties for payment services. Better yet, banks can create offerings where they manage customers’ digital identities across merchants.
The first step is looking at existing business capabilities that can be monetized. As mentioned earlier, banks are already using APIs across a number of business processes internally. This means they already have streamlined processes that can be dressed up, standardized and sold to third parties to support the secondary market. Rather than develop and maintain the APIs themselves, third parties can leverage the banks access—for a fee—to incorporate the functionality into their own applications easily.
Banks have a rocky road ahead. The landscape is changing quickly and whether they choose to be strategic or not, banks have a lot of required change on the horizon. Working with a trusted technology partner that can help ideate strategy, create roadmaps, develop and design winning solutions, and guide implementation of those solutions may mean the difference between thriving FIs and those that die off.
Opus has two decades of experience working with fintechs and banks alike in producing revenue-driving solutions in the payments space. We have ample experience in delivering solutions that cater to banks and their end-users and account for the diverse nature of payment initiation & delivery channels. We want to help financial institutions embrace the coming changes with open APIs while also exploring new revenue channels and staying ahead of the competition.