Banking APIs – disruptive threat or innovative opportunity?
Highly popular as a means to create open environments and easy data sharing with consumers and businesses – APIs are now everywhere. Also in Banking, APIs are being rolled out at high speed, and in some regions even promoted through local regulations such as PSD2. However, open Banking APIs are also clearing the field for new entrants. How will banks cope with this potentially disruptive change? Will large social media networks, e-commerce platforms or online payment systems disintermediate banks? Or will banks be able to bring brand new services and increased convenience through this technology and new partnerships? In short, will APIs in Banking be a business-threat or a must-have in order to survive and grow?
Open banking APIs are a disruptive change for banks, which have evolved in a closed world, where every piece of information was protected. During the past five years, however, regulations such as PSD2, new technologies and innovations from start-up fintech companies are changing the banking culture and creating new services for customers and clients. The move towards open banking is inevitable – regulators, the market and customers are all demanding new services that will be delivered via APIs.
Within the evolving open banking environment there are threats and opportunities. Open banking APIs require a change in approach and will sweep away long-standing habits, which some banks may view as a threat. But even if they identify APIs and open banking as a threat, the market is heading in this direction and resisting such a change does not make sense in the long term.
Most banks support the idea of open APIs and realise that services can be opened to third parties in a secure way. In accelerating digital transformation, APIs are a significant opportunity for banks. They enable banks to cut through the complexity of the IT infrastructures that have been built up over decades and more quickly and easily reinvent services for customers. For example, APIs can leverage the data that resides in complex systems, presenting it to customers in a secure and customer-friendly way.
I am sceptical that the threat APIs pose of the disintermediation of banks will materialise significantly. On the contrary, banks will develop API based services, they may also buy the companies that are developing APIs or even better partner with them to share value. Whichever way banks choose to integrate the APIs will be good for banks, the market and customers.
Deputy Director - Products, Payments & Cash Management
As new entrants come into the banking market, traditional banks are well-placed to compete. They have a large customer base with which they have built trust, particularly on the issue of data privacy. One of the foundations of the trust banks have built with customers is regulation – banks are highly regulated and customers know this. Fintechs are less regulated, but there is a trend towards greater regulation, with PSD2 bringing any company that wants to offer account information or payment initiation services under the regulatory umbrella. Banks can leverage their customer base and trust to develop and offer new services, but they must ensure they invest enough. The development of new services also requires a change in who a bank recruits. New profiles are being taken on board to accelerate the shift in culture to open banking, among them millennials and data scientists.
In an open banking environment, banks must realise that they cannot do everything by themselves and will need to open their ecosystems to partnerships with fintechs and possibly with the big techs such as Google, Amazon and Apple. An open environment will enable banks to deliver more value to customers than a closed one. The required expertise and experience will be sourced differently, as banks not only hire the required skills but also work with many different types of companies, including small start-ups and incubator companies.
Because banks will be working with a wider variety of partner companies – some of them very small – testing will become a much more important factor than it is today and will also change in nature. The long-established habit of product delivery required a product or service to be 100% ready before it was rolled out – a time-consuming process. Digital technology enables banks to be more agile in how they test new products and services. In the open banking environment where competition is intensified, banks can speed up product testing by working with subgroups of customers who will be willing to test news services provide usage feedback and suggest development of new features before these producst are industrialised and rolled out to the entire customer base.
APIs will enable customers to use the services of third parties or other actors for different opportunities via the security of a banks web portal. This can be of advantage to the bank, widening the range of services it can offer and helping its customers to receive products and services in the way they want, with safety.
Senior Public Affairs Adviser for Payment Products & Cash Management Solutions
The threat of disintermediation of banks hasn’t materialised at a large scale, despite new fintech companies entering the market with aggregation services linked to payment facilities. Banks responded by developing similar services and the new entrants have been unable to attract large numbers of customers so far. Of course, if a bank doesn’t respond at all to such developments, then it would risk disintermediation. On the customer value chain, there always will be some companies that want to take a piece of the cake. There is more value in banks combining their customer base and know-how with the ideas and value-add that fintechs can bring.
APIs can deliver real value to customers across a wide range of areas. They can enable services to be bundled together to provide a single point of contact with the bank. No longer do payments facilities, analytics, reporting and wealth management, for example, have to be presented separately. APIs also can improve customer experience by enabling banks to think as the customer, rather than as a bank. Products and services can be developed to answer the needs of customers, rather than the way banks want customers to use services. APIs provide transparency on cost, services, quality and responsibility for various aspects and importantly, ensure high levels of security and data protection.
Societe Generale is developing APIs for wholesale banking clients, creating a new website that presents a single screen interface to the information that resides in a variety of systems that previously clients had to access separately. This was created without having to change the core systems. Increasingly, data protection rules will dictate how customer information is accessed and used. At present, many TPPs access banking systems to take customer data without gaining a clearly understood customer consent. This will change with upcoming regulations (e.g. PSD2 and GDPR). At the same time, customers are becoming more aware of the importance of their data and how it is accessed. This is a trend that is likely to continue.