Starling Bank and Mondo, the latest two challenger banks to win their UK banking licenses, have placed open APIs at the forefront of their strategies to maximize their competitive advantage over their incumbent rivals.
Application programming interfaces (APIs) are the pieces of software that allow two separate IT systems to communicate and interact with each other. Although the concept doesn’t sound very exciting, APIs have enabled the creation of companies such as Uber, which used this technology to integrate the geolocation capabilities of Google Maps with the payment capabilities of Braintree.
In the banking industry, open APIs enable banks’ systems to interact with third-party services. Banks can use this facility to integrate services developed by third parties, such as payments and personal financial management tools, in their digital banking platforms, or alternatively to allow other companies to access their own capabilities.
Open APIs will allow both Starling Bank and Mondo to crowdsource the development of new products and services far more quickly and cheaply than they could manage on their own. This is a vital consideration for new entrants that have limited resources of their own and need to deploy a full service proposition sooner rather than later, in order to attract customers and start generating revenue.
Starling Bank has decided to concentrate its efforts on creating a best-in-class current account. Alongside this it is building an API-enabled Marketplace Platform through which it will offer products and services from a range of other providers, blending them into Starling Bank’s interface to deliver a consistent and unified user experience to its customers.
Mondo also sees great potential in open APIs, and since 2015 has run several hackathons where developers have accessed data through its API in order to create new services. As well as creating standalone products, many developers have designed solutions that integrate Mondo data with third-party services, such as Uber, Snapchat, and Apple Watch, thus fully exploiting the possibilities of open APIs.
These efforts dovetail neatly with initiatives by the Treasury and the Competition and Markets Authority to compel banks to adopt open platforms to facilitate data sharing and promote a more competitive market. The banking industry as a whole will therefore have to follow the lead set by the new challengers.
However, the experience gained by these new entrants will give them a first-mover advantage in this new environment. Furthermore, given that they have willingly adopted this strategy rather than been forced into it by the regulators, they are more likely to make maximum use of the possibilities that are opening up to develop market-leading customer propositions.
Consequently, they will distinguish themselves in the marketplace to a degree sufficient to partially offset the consumer inertia that will be their biggest enemy as they seek to gain traction.
By Daoud Fakhri, Prinicipal Retail Banking Analyst