Open banking is the key to traditional financial institutions holding on to the distribution of financial products, and by extension remaining relevant and profitable in a digital age.
In a study by Temenos, 52% of respondents said they see opening up their platform to third parties as more of an opportunity than a threat, and 60% said doing so is essential to deal with new non-bank competition.
On the other hand, 53% said they can’t exploit a wide enough range of user interfaces due to technology or cost constraints, and only 30% saw open banking as a high priority, grappling as they are with other challenges such as low interest rates and regulation.
Regulators, however, might be one of the biggest drivers of change in open banking, particularly in Europe.
Europe’s Payment Services Directive 2 (PSD2) includes provisions to force banks to open up access to customer data to third parties via APIs by 2018. Already, more APIs are come to market, addressing the demands of PSD2.
For most banks, it makes commercial sense to buy an API solution or tooling to implement faster, rather than invest in building a one-off bespoke solution. To address PSD2 demands with a bespoke solution not only harms the overall ecosystem, but also creates additional risk and expense.
Once the decision to buy an API has been made, there are essentially three models to choose from: the proprietary, such as that offered by Apigee; the bolt-on software-as-a-service, such as Teller.io; and the open-source approach, such as Open Bank Project.
Each has pros and cons, but overall you can look at it as a sliding scale of ownership. The more technology-savvy bank may prefer the open-source API – the other extreme may prefer to buy as much as a service as possible.
Further regulation demanding open banking and data sharing seems likely to follow. Although still in the draft, the UK Open Banking Working Group already claims to go further than PSD2 in terms of shared data. So adopting a simple and consistent approach seems to make most sense and could cut by a few hundred thousand pounds the costs of compliance.
While this might not be a significant saving in terms of banks’ overall IT budgets, if it were replicated across the different projects banks need to implement, the savings would quickly add up.
More importantly, if the implementation times can be reduced or essentially removed, that time saved can be used to allow other innovations to flow.
The Programmable Web group tracks API opportunities across all industries. And while APIs have focused on retail solutions, every other aspect of banking is also ripe – from back office to compliance, treasury and transaction.
APIs are about adding functionality at scale without any concurrent additions of spend. Take Currency Cloud, an API lead business that claims to manage its transaction processing with a small number of people compared with the hundreds needed by the average bank to achieve the same outcome.
But that’s not all. APIs can improve service, which can either be used as a differentiator or as a new revenue stream. For example, DocuSign has been incorporated into Salesforce, allowing the software firm to offer slicker and better products and services.
Banks can do the same at a time when they need to reconnect with customers and prove their relevance – APIs are a great way to burnish the brand.
The opportunity is particularly startling if banks want to become part of a broader ecosystem of financial service and advice; the natural next step down the open banking road.
Indeed, banks can become marketplaces for banking and non-banking products and services by opening up their platforms to third parties. This will help to keep them relevant in the digital age.
Often APIs are doing great work in areas that don’t add revenue to banks – but they do make life much easier for their customers.
Take, for example, the API that allows mortgage applicants to decide who sees their statements. Today, getting a mortgage demands pay slips, statements and all kinds of other documents. APIs are eliminating this and providing a superior solution to the walled garden approach to banking. It is great for transparency, but not for profits.
It’s all about moving fast and getting ideas working as soon as possible – it’s about automating repetitive jobs and using analytics and protocols to bring down costs.
This is great news for banks facing stiff competition from the big IT companies such as Google and Apple, TransferWise and PayPal. And it couldn’t come at a better time. Those adopting APIs now will quickly steal a march on the more laggardly banks.
While Temenos’s survey found that 70% didn’t consider open banking to be a high priority right now, nearly two thirds were upping their investment in technology.
Sourced from Ben Robinson, head of strategy and marketing, and Aaron Phethean, head of the MarketPlace, Temenos