PSD2 – the tip of an Open Banking API iceberg?
It’s been over a year since I first blogged on the subject of open banking and it is fair to say, mainly driven through the regulatory pressures of PSD2 and the UK Competition and Markets Authority (CMA) led UK Open Banking initiative, that across Europe, much progress has been made in moving the banking industry to adopt APIs.
Though initially the driver will be compliance, for most organisations to meet payment initiation and account data services, many have taken the lead to create wider open banking service offerings via API. This isn’t just the newer fintech based banks such as Fidor and N26 in Germany, or Monzo and Starling in the UK, but larger more established banks such as BBVA are now offering a wide range of banking services via its API Marketplace.
It is clear this is a fledgling area for the established banks and financial institutions but the evidence from other industries is that platform API based business economics have quickly evolved and are here to stay. Public API repositories flourish (e.g. the recently Oracle acquired apiary.io since 2011 have published over 350,000 APIs) and providers such as Amazon, Apple and Google have leveraged the use of APIs on their platforms brilliantly to enable the monetisation of the data they provide to third-party solution developers.
On the back of the regulatory changes being forced upon them, the question remains, can banks seize the moment by offering banking platform API access to their product offerings to third-party developers to help build new and differentiated products specifically targeted to customers?
Perhaps even more importantly, through the use of better use of data analytics, can the banks truly realise the enormous value in their customer data, for example by the study of consumer spending patterns, improved consumer lending risk analysis, or better scrutiny of cash flow patterns for SME and large corporate clients? Working with specialised third-party API developer partners, the banks can utilise this rich reference data to build on their own distinct offerings to create broader complementary offerings to new customers they may never have considered targeting through prior traditional product distribution mechanisms.
Though banks will have to reconsider much of the way they are currently organised to run their business, operationally (breaking down siloed lines of business), culturally (creating an organisational structure more suited to agile and rapid API development) and more broadly considering its wider strategic perspective, fundamentally, the success of the banking API ecosystem that a bank may wish to build is dependent on the data it can define, aggregate and then safely expose via APIs.
When viewed from the perspective of the many banking service domains a particular bank may have (as excellently analysed by Paul Rohan in his recently published book “Open Banking Strategy Formation”), careful modelling of the service domain processes and the data that is processed within and between the domains, a bank can start to identify discrete functions that could be exposed via APIs.
Initially these APIs may just be used internally, but when information via these APIs is carefully aggregated and enriched with specifically identified banking reference information, and then published to external partner API developers, then the true value can be seen. Third parties utilising this information coupled with external data such as consumer location, and or, data pulled from other accounts consumers may hold, could lead to wholly new banking products.
Identifying suitable partners with particular domain specific expertise (perhaps in a particular target market) and proven analytics capabilities (e.g. SME lending risk profile analysis), the bank may be able to identify new and highly nuanced financial products for niche business areas it would never had identified in its current model of distribution. In this new fast moving digital economy banks will need to ensure they operate a highly agile development process (incorporating the application of specialist data aggregation and integration capability) that can quickly react to new business opportunities and publish new APIs to their developer community.
With a careful analysis and approach to monetising the data being consumed by 3rd parties (again remembering all of this is with customer approval and considering new regulations such as GDPR in Europe), established banks could start to see new methods of revenue generation quickly exceeding their traditional mechanisms (loans and deposits etc).
It clearly won’t be easy. There are many challenges to delivering open banking capability even just for the limited scope of PSD2, but this new shift towards banking services provided via platform APIs would appear most definitely to be the thin end of the wedge of possibility for participating banks.
By Neil Clarke, market engagement and account director, Volante Technologies