The banking landscape is ripe for disruption. Once the gatekeepers of financial services, financial institutions now find themselves as critical players in the game of innovation in banking. Partnerships between banks and fintechs will be critical to meet consumer expectations moving forward.
We are at a crossroads when it comes to financial services, technology, and banking. Traditional banking systems are undergoing massive changes as new technology disrupts old thinking and behaviors. This trifecta of shifting consumer behavior, murky regulatory waters, and a drive for new business models that can upend the massive digital ecosystems of Google, Apple,a nd Amazon are proliferating open banking.
In Europe, this shift is being driven by the European Payment Services Directive (PSD2), which requires banks to utilize open APIs to provide third-party providers with access to their data and infrastructure. Posiitioned for massive disruption, the PSD2 will fundamentally change the payments value chain and drive the creation of new, more profitable business models that are aligned with consumer expectations.
The State of Fintech
In 2017 alone, global fintech continued on its steep upward trend with investors deploying $16.6 billion in 1,128 deals to fintech companies. In truth, this is just a tip of the iceberg. Until recently, traditional financial services have stood as gatekeepers. However, as disintermediation via open banking and other methods becomes a reality, financial institutions (FIs) will be displaced as sentries to financial management.
Instead, what we see is the payments experience beginning to disappear. Embedded payments are becoming ubiquitous, adding value to the consumer experience by improving security and eliminating friction. Uber is an excellent example of such an experience, offering on-demand delivery with the click of a mobile button. Customers don’t want to pay for a ride—they just want a ride. Uber delivers this seamlessly, allowing users to summon a driver with their mobile phone and arrive at Point B without any hassle. At the end of the ride, the customer simply exits. The payments experience is invisible, allowing customers to enjoy the value without the hassle. What’s more, it facilitates easier payments for its drivers, allowing drivers to sign up for bank accounts or prepaid cards when they elect to work for Uber. As a result, drivers can be paid on the day they work, rather than waiting for weekly or monthly payments. This structure makes Uber the fastest growing U.S. acquirer of business accounts.
We will continue to see innovation like this, driven by PSD2 and other initiatives geared at opening up payments infrastructure to enable fast innovation. The alternative finance industry increased 212% YoY in 2015 to $36.49 billion in 2015. Europe followed suite, with the alternative finance market there growing 92% to €5.43 billion in 2015. It’s a trend that will continue to unfold as more third-party providers gain access to the inner workings of the financial services marketplace.
APIs: The Guts of Open Banking
APIs are the nucleus of open banking, quickening the pace to innovation, enabling collaboration, and driving down costs. Legacy systems hinder innovation in an era where emerging technology is lightening-fast. The use of APIs, on the other hand, enable third-party developers to harness emerging technology and layer it on top of banks’ existing infrastructure to produce greater value in services for consumers.
If you look at FI’s incumbent role as gatekeepers, it may seem disconcerting that they must relegate control by opening the kimono. The idea of allowing APIs to plug in and grab FI’s essential data—on the surface—may appear as a threat to commodotize banks. However, if we look at it in terms of how to best serve customers and spark innovation, it makes FIs an essential partner playing a critical role within the fintech ecosystem.
APIs are not new; it’s estimated that there are close to 15,000 APIs in existence, from firms like Salesforce.com, Facebook, eBay, and more. These APIs (which may be web-based, databases, hardware, software, or operating systems) enable computer programs to communicate, facilitating software development in the modern era. Organizations can use a public API to provide access to data and services to third parties in a controlled environment. This allows the controlling organization to only provide the desired aspects of functionality while protecting the remaining elements of the application.
In the case of open banking, enabling APIs to drive innovation is a forward-thinking business strategy. For banks to remain as key players in the ecosystem, they should not look at open banking and APIs as an IT issue, but rather as a way to partner with fintechs on exploring new channels, building increased brand loyalty, and thriving under new business models.
As consumer preferences become more sophisticated and emerging technology spurs greater service expectations, open banking holds the power to deliver more value to customers and greater ROI for FIs and fintechs. We live in a time beyond one-size-fits-all banking, and open banking addresses the need to become more personalized, more secure, and more seamless in the execution of financial services.
Banks and fintechs must work together to adapt to changing consumer preferences—and the evolving banking landscape—to secure payments, strengthen customer relationships, and embrace innovation.