Banks need 'open tech' to stay relevant in the post-PSD2 world
With Europe’s PSD2, U.K.’s open banking standard and like-minded regulators in other countries instructing banks to share customer data with third-party providers, the application programming interface not only presents itself as a simple tool for facilitating this exchange, but also brings a measure of standardization and governability to these relationships.
The open API is in fact, the foundation on which open banking and the attendant platform businesses and banking ecosystems will stand.
The API has been quietly doing its thing for years: As the code that enabled two software programs to communicate or exchange data with each other, it remained in the background when we cut and paste stuff between applications, when eBay recruited partners to build out its ecosystem, or when PayPal customers directed Siri to send money to friends. But now, a combination of factors has put the spotlight on API as a major lever of banking transformation.
Worldwide, interest incomes have been under stress for some years now. In between stray pockets of improvement in net interest income, banks are now looking toward fee income to keep profits afloat. API, which offers unlimited options to monetize data and services within open banking ecosystems is crucial for banks to catapult the growth in their fee income.
According to a leading consulting and advisory firm, fee income also offers much higher rates of return than "conventional" business. The firm notes that the core business in a bank’s "balance sheet," financing and lending accounted for 53% of revenue, 35% of profit with a 4.4% return on equity, while the off-balance-sheet (API-enabled) distribution business brings in 47% of the revenues, but 65% of the profit, at an ROE of 20%.
The third reason why banks are pursuing the API is that it opens the floodgates to innovation. It has played a huge role in the creative disruption of payments currently. With even the likes of WhatsApp and Google Chrome looking to integrate payment APIs into their offerings, this space is poised up for a lot of disruption. The scope is not limited to payments alone, and banks are already experimenting with APIs to innovate in core banking business areas, across corporate and retail segments.
To quote some recent examples, Bank of America has installed a chatbot, Erica, which accesses data via APIs to help customers resolve common problems without seeking human help. Germany’s Fidor Bank has invited mobile operator Telefonica Deutschland to build a mobile only bank account on its platform. The service offers small instant loans and mobile data plans to users. Banks are also deploying APIs in corporate banking to make it easier for their business clients to pay vendors in real time, log receivables, manage billing, etc.
With PSD2, a major piece of open banking legislation, taking root in 2018, the coming months will see the focus on APIs intensify. Thus far, banks’ API stores offer five to 50 options — the RBL Developer Portal in India owns 40 APIs, some of which are publicly available, and the Citibank Developer Community has around 50.
More banks will set up API stores this year and existing stores will expand their offerings. Collaborations with nonbanking partners will flourish, as banks seek to not only provide, but also consume external APIs from the ecosystem to improve both offerings and reach.
More importantly, the rubber will soon hit the road when banking APIs, which are currently operating in a sandbox environment using dummy data, will make the leap into production. Following this, monetization will be on everyone’s agenda. An annual global survey of retail banking trends found that banks preferred revenue sharing (47.8%) the most, followed by a fee-per-API transaction model (43.5%). 21.7% of respondents said they would charge a fee for providing data and insights. Some large U.S. banks, such as Wells Fargo and JPMorgan Chase, have struck data-sharing deals with Xero and Finicity and Intuit, respectively.
But while there is momentum in favor of open banking and open APIs, there are also significant challenges to implementation. The biggest is a lack of clarity about open banking regulations among users, especially small businesses, which will definitely hinder adoption unless it is addressed quickly.
Even banks have their doubts about compliance. In the U.K., many banks have requested the Competition and Markets Authority for a deadline to ensure compliance with open banking standards. The majority have only taken token steps toward open banking and APIs, just so they comply with the law. Given that open banking, APIs and platform business models are the future, they need to step up the pace very soon.