On 13 January 2018, both the European Union and the United Kingdom adopted a legislation to usher in a quiet revolution, namely Open Banking. The key principle of Open Banking – which is also gaining traction in other countries – is that banks must share transaction and customer data with authorized third party providers. Most banks are choosing to do this using an Application Programming Interface, or API, which facilitates data exchange and makes their development environment and properties (products, services, distribution, applications, operations, data, licenses etc.) accessible to a larger ecosystem for the purpose of sharing, distribution and innovation. So it is not surprising that the API topped the list of technologies with the greatest potential to impact banking in the 2018 Infosys Efma Innovation in Retail Banking Study.
A very visible impact of API-led Open Banking is the emergence of the platform business. Geoffrey G. Parker, Marshall Van Alstyne and Sangeet Paul Choudar, in their book Platform Revolution, define a platform business as “… a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participatory infrastructure for these interactions and sets governance conditions for them. The platform’s overarching purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.”
Banks are building platform businesses either as manufacturers who specialize in a few products that they own or as distributors who gather the best financial and non-financial products and services from the market and deliver them to customers on the channel of their choice. When the Infosys Efma survey respondents were asked to comment on how banks would likely be structured two years hence, the maximum number of responses favored a cost efficient organization distributing other banks’ offerings, or a marketplace selling own and third party financial and non-financial products. Banks which still run a full-stack setup – manufacturing, distribution and service – expected a significant rollback of this structure by 2020.
This shift towards platform business model in banking is not the only crucial change buoyed by Open Banking APIs. Open Banking APIs will impact and drive new customer experience, revenue models and innovation possibilities in banking. As banks scale back on manufacturing and owning products and services and source them from specialist suppliers instead, monetization opportunities for ‘supplier’ organizations emerge. They can either charge for the use of their APIs or demand a share in the revenues that the consuming organization makes from those APIs.
Thirdly, the variety of consumer banking touch points has exploded with the inclusion of smart interfaces such as virtual assistants, voice assistants and wearables. Transactions, especially in modern retail banking, routinely originate in one channel, are consummated in another, and potentially influenced on a third and fourth channel. With the emergence of new connected devices, transactions will span a multitude of bank-owned and third-party channels. And at every stage, on every channel, the transaction will stay relevant to the customer’s immediate context. This is possible only because of APIs, which work behind the scenes to exchange data and facilitate communication seamlessly.
Next, APIs are helping banks drive more meaningful engagement with their retail and corporate clients by allowing them to share data within their ecosystems. Banks are tapping APIs for information, tools and other resources to engage in more contextual conversations.
APIs are the key enablers of the shift from a touch-point driven approach to one of customer journeys. Banks can tap into the freely flowing data within their ecosystem of financial and non-financial providers to enter the purchasing cycle of customers early. For example, in the age of ecosystem-driven banking, they can aggregate the best options in real estate and automobiles and present them to customers, way before the financing stage of offering a home or car loan.
Especially in the context of corporate banking, Open Banking can potentially push price-wars into oblivion. Beyond giving customers of one bank access to the products of another, APIs are instrumental in alienating a primary bank from its customers if a rival bank offering a product such as a virtual account, exploits its visibility into all of a clients’ banking relationships to make further inroads into the customer organization.
Lastly, APIs have helped take innovation out into the open – to an ecosystem where partners and third party developers build on existing assets to create new innovations. An example of this is the alliance between a fintech called Moneytap and RBL Bank in India, where the former layers its quick, short term, small loans atop RBL’s banking services that it consumes via APIs.
In an ecosystem driven market, banks cannot survive on the basis of competitive prices alone. They need to have the best products and services on their menu, regardless of which banks own them. In the API, they have the perfect mechanism to access both – external data and best-of-breed third party offerings. In this year’s retail banking survey, banks rated APIs highly on their readiness to deliver business outcomes.
How successfully they actually deliver, only time will tell.
- Sajit Vijayakumar, Chief Operating Officer, Infosys Finacle