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How Financial Service Firms Can Benefit from Open Banking APIs

The financial services landscape is being redefined by disruptors in the FinTech industry. Financial service firms that want to thrive must consider embracing Open Banking APIs.

Financial services firms are waking up to the value of Open Banking initiatives and the fundamental role of APIs. Traditional banks understand that in order to better compete in the industry, they must develop their digital capabilities to avoid being dis-intermediated by new entrants with superior offerings and services. 

As a result, many financial services firms are embracing Open Banking initiatives, this includes PayPal, Wells Fargo, and Visa. And for financial service firms in Europe, Open Banking initiatives are gradually becoming the norm, especially because from 2018, banks will be legally obliged to facilitate access to account information through APIs, per the Revised Payment Services Directive (PSD2).

Around the world, the industry is starting to recognize that Open Banking is redefining the financial landscape in a number of ways, specifically by helping financial services firms enhance service offerings, improve overall customer engagement, and increase revenue from new channels.

Enhance Service Offerings with Open Banking APIs

One cannot underestimate the fundamental role of APIs in Open Banking initiatives. In the new ecosystem of Open Banking, APIs are a channel for doing business. A recent report by the European Banking Association (EBA) reveals that through adopting and deploying APIs, banks can extend and enhance their native services and offerings. However, these APIs can also create a threat for banks by opening doors to FinTech firms, who may leverage this data to extend their own offerings as well.

First, by opening up their APIs, banks are able to easily connect other APIs in the market in order to extend their service offerings by introducing native FinTech solutions in a plug-and-play manner. Examples of such APIs include the Experian Connect API, which provides customers the ability to see their credit score in real-time through their existing bank account, or the National Change of Address (NCOA) API, which notifies banks if a customer changed their address or whether an existing address is deliverable. Through embracing the Open Banking API economy, banks are able to further enhance and transform current offerings––increasing their appeal to existing and prospective customers alike. 

However, Open Banking APIs can also create a threat for banks, as they enable FinTech firms to tap into a bank’s financial data. For example, a FinTech startup may decide to use a bank’s “Customer Data API” in order to build one mobile application where customers budget their finances, manage their debt, and get real-time investment and financial advice through chat. The majority of traditional banks do not offer such debt and real-time finance management services. This means that by opening up their API, the bank has enabled the FinTech startup to fulfill this existing gap and drive a wedge between the bank and the customer.

On the one hand, a bank can view the above example as a threat and completely reject the concept of Open Banking initiatives. But on the other hand, a bank can also view this example as an opportunity. Open Banking is not going anywhere. In order to establish their position within the value chain, banks must not turn a blind eye to these initiatives. In fact, FinTech firms are already creating such services by leveraging existing APIs or without APIs, through insecure methods such as screen-scraping. In order to capitalize on this opportunity and improve security, banks must better address this threat by owning this existing relationship and enhancing their own products and offerings through innovative partnerships. 

Overall, banks can expect Open Banking APIs to provide them with the opportunity to improve, inform, and further the value of their analytics and data securely. This can be through introducing native solutions or partnering with other FinTech firms that offer innovative services. These benefits, in turn, can help enhance one aspect of the banking experience: customer engagement. 

Improve Overall Customer Engagement with Open Banking APIs

Open Banking APIs increase the appeal of a bank and enable them to meet the changing demands of existing customers as well as appeal to prospective customers. These APIs can also serve as a unique way to increase customer engagement and attend to customer needs in a secure, agile, and future-proof method. 

Such engagement is crucial, especially as upstarts and new entrants continue to disrupt the financial services industry and more services, offerings, and devices enter the market––leading to an increasingly competitive environment for traditional banks and changing customer expectations. This competitive landscape creates challenges for traditional banks, and forces them to further innovate in order to retain and attract customers. 

By opening their APIs to startups and financial services firms, traditional banks can appeal to existing customers, who see that their bank is providing innovative native services and moving beyond the traditional definition of what a bank is and what services it is expected to offer. In addition, the bank also appeals to prospective customers, especially those who are looking for alternatives because their current bank does not embrace Open Banking APIs and, as a result, they are unable to use the latest innovative technologies. Consequently, by launching Open Banking APIs, banks are able to better retain existing customers and attract prospective ones.

Second, embracing Open Banking APIs not only adds to the bank’s appeal, but also encourages their customers to engage with their financial data in innovative ways––whether it is through an internal credit score service, such as Experian or an external tax filing platform such as TurboTax. This can create additional stickiness and brand loyalty, which helps further customer engagement and improve customer satisfaction.

Integration and connectivity with the above inventive technologies is a feature that customers are demanding. In a survey of 5,000 EU banking customers, 69% of respondents stated that it is important for them to have a bank that is innovative; yet only 12% of respondents in the survey considered their own banks innovative. With Open APIs, however, traditional banks are able to attend to customer needs and provide innovative capabilities for them. 

Increase Digital Revenue with Open Banking APIs

In addition to enhancing the services that banks offer and increasing customer engagement, Open Banking APIs can also help banks increase digital revenue from new channels. Kristin Moyer, Vice President of Research and Distinguished Analyst at Gartner, notes: “Open Banking is about making everything for sale. It provides a new way to increase digital revenue for the banks that are willing to think differently about what it means to be a bank.”

Increasing digital revenue is crucial for banks, especially in an age where Open Banking initiatives are becoming more prevalent. This is already a reality in Europe, where member states will be obliged to abide by PSD2 regulatory standards by 2018. This regulation aims to increase competition in the financial industry by requiring European banks to release Open Banking APIs in order to provide Account Information Service Providers (AISPs) and Payment Service Providers (PSPs) access to customer information (e.g. account balance). This regulation will increase the number of APIs available, thereby encouraging new entities to enter customer-bank relationships and challenge traditional payment models. 

This means that the customer of the future may, for example, pay back their friend through Facebook or use the latest FinTech startup application to pay their phone bills. Although PSD2 does not apply to the U.S, similar disruption can still be observed through the impact of a number of technologies––from Mint and Paypal to Venmo and TurboTax. If banks resort to being defensive against Open Banking, they will fail to capitalize on the revenue opportunities that Open Banking APIs can offer. 

For example, Paypal and Venmo – peer-to-peer (P2P) payment service platforms – processed $41 billion in payments in 2015. Venmo, alone, is on track to process $20 billion in payments annually. In comparison, JP Morgan’s QuickPay application processed $20 billion in payments in 2015. These examples demonstrate how Open Banking APIs will disrupt revenue channels for P2P payment services. Such disruption, however, will reverberate throughout other aspects of financial services industry, especially as more third-party developers and outside organizations start building financial services on top of banks’ data and infrastructure.

More often than not, these services are built without APIs and through the use of insecure methods of data exchange, such as screen scraping. When this happens, banks are not only compromising their security, but are also losing an opportunity to capitalize on digital revenue from APIs.  Those that want to better compete in this new ecosystem must be able to increase digital revenue from new channels by mitigating screen scraping and releasing Open APIs and profiting from through referral or usage fees. 

Open Banking APIs are extremely profitable. In fact, banks that embrace Open Banking APIs can expect to witness a 20% increase in revenue; meanwhile, those that reject the initiative may lose 30% of their revenue to “disruptive industry players” by 2020. FinTech startups are already tapping into traditional bank-customer relationship. Financial services firms must begin addressing this threat. This starts with building an Open Banking strategy and profiting from the APIs that result from it. Financial services firms that successfully do this will be able to better thrive – not just survive – in this new ecosystem. 

Banking-as-a-service: Open Banking Strategies with API-led Connectivity

Open Banking APIs are valuable assets for financial services firms, as they enable them to enhance their service offerings, improve customer engagement, and build new digital revenue channels. To build an effective Open Banking API strategy, financial services firms must be able to future-proof their technologies to ensure agility and speed, create lucrative APIs that are productized and marketed as a source of competitive advantage, and ensure that these APIs are supported through strong security measures.

To achieve the above, financial services firms will need to adopt a new approach to integration: API-led connectivity. This approach to integration defines methods for connecting and exposing assets in a seamless manner by packaging them as modern, managed, productized APIs. This integration is based on a plug-and-play method that promotes agility and speed. Further, the assets – or APIs – can then be easily discovered through self-service and controlled through customized security and governance. 

The above features enable financial services firms to expose these APIs to the wider network in order to facilitate building useful applications, services, and experiences. This approach shifts the way that IT teams at financial services firms operate by promoting decentralized access to data and capabilities, while ensuring compliance, governance, and security. This not only prepares financial services firms for the Open Banking API revolution, but also enables them to create an IT architecture that emphasizes speed, agility, and innovation. 

Take, for example, the experience of one of our customers––a major bank. This bank felt increasing pressure from upstarts, especially those in the developing world. The bank faced a number of challenges, including data siloes and IT bottlenecks that hindered innovation and frustrated their business. They wanted to find a solution that allowed them to leverage APIs in order to unlock siloed data that developers can reuse and self-serve without compromising visibility or governance.

This bank turned to API-led connectivity in order to build, expose, and manage APIs. Through this approach to integration, they were able to speed the delivery of various initiatives, including an initiative to deliver mobile-first experiences in order to capture the market share in the developing world. The bank now has a global repository for developers and architects to design, create, share, and deploy APIs internally. 

As a result, they are not only able to deliver on their initiatives and projects faster, but are also prepared to handle pressure from upstarts in the developing world. Moving forward, the bank aims go beyond sharing APIs internally and create Open APIs in order to expose data to outside networks and participate in the Open Banking economy. With API-led connectivity this bank is well-positioned to start its journey towards Open Banking. 

Through building this effective Open Banking API strategy, banks can begin transforming themselves from an infrastructure that offers individual services to a platform that offers full capabilities. By continuing to view themselves as infrastructures and rejecting Open Banking API strategies, banks are simply enabling FinTech startups and third-party-developers to build innovative services and connect with customers––thereby threatening their market share and disrupting the traditional customer-bank relationship.

On the other hand, by embracing Open Banking through API-led connectivity, banks can begin to view themselves as platforms that offer banking-as-a-service. In order to do this, banks must look at their individual services as full capabilities that can be realized and exposed with APIs. Through transforming banking into a platform business model, banks can expose existing and new functionalities to participate in the market, partner with FinTech firms to enhance services and monetize APIs, and, most importantly, embed their position within the value chain to build upon the traditional customer-bank relationship and maintain their share in the market.

Learn more about how APIs will shape the Open Banking value chain and explore the role of API-led connectivity in addressing PSD2 and Open Banking disruptions.