The coming revolution in open banking, facilitated by open APIs, will present banks with huge opportunities to boost loyalty, engagement, and revenue. If they approach this half-heartedly, they will be undermined by more adventurous rivals.
In the UK and across Europe, regulatory and technological developments are forcing banks to open up access to their systems and data. The forthcoming EU-mandated PSD2 directive, together with the Open Banking Standard in the UK, mean that, whether they like it or not, banks will have to share customer data with third parties, most likely through open application programming interfaces (APIs).
Banks therefore have two choices: they can either treat this purely as a compliance issue and do the minimum necessary to satisfy the regulators, or take full advantage of the possibilities to improve service provision and re-engage with their customers. Although adopting the former approach may appear to be the safest option in the short term, in the longer term they will suffer from customer attrition and stagnating revenues.
There are three main open API strategies that banks can adopt:
- Bank as a marketplace – Banks will transform themselves into portals, using their open APIs to allow third-party services to be accessed from within their own platforms. N26, a Germany-based bank, has created a financial hub through which it offers access to external providers of cash payments, currency exchange, and robo-advice services.
- Bank as a facilitator – Banks will open up their APIs to promote the creation of new products and services from external developers. BBVA’s new API market offers companies access to four distinct APIs to help them develop their own services, thus creating new business opportunities and revenue streams for BBVA.
- Bank as a service – Banks will become fully fledged support services for fintech specialists and other third parties. Fidor Bank in Germany lets startups connect to its capabilities via its APIs and build their own services and user interface on top. They design their own apps using Fidor Bank’s APIs, while Fidor assumes responsibility for providing the underlying technology.
These strategies will allow banks to realize many opportunities. For example, they can create their own account aggregation services, become portals to the accounts that their customers hold elsewhere, and thus gain access to extra data that can be used for marketing and analytics purposes.
Additionally, by becoming integrated one-stop shops for the best-in-class products from across the market, providers can reduce the incentive for customers to defect to rivals. They can also offer a far wider range of niche products by subcontracting development costs to third parties.
Other opportunities for banks arise from being able to sell access to their own data and systems to other companies that are looking to create their own services.
Although there are risks associated with open access, mainly centered around the control and security of data, these are massively outweighed by the advantages, and in fact the biggest risk to banks will be incurred through not implementing an ambitious open API strategy.
For more on open banking, please read our new report Open API Banking: Defining the Potential and Opportunities.
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