Banking

THE DEMOCRATISING FORCE OF THE API ON FINTECH AND BANKING

by: Ben Goldin is chief technology officer at Mambu

APIs are the rocket fuel for financial services innovation and value creation, being a cost-effective way to create nimble ecosystems in which – ultimately – fintech and banks will be equal partners, writes Ben Goldin

It’s almost exactly 20 years since Salesforce launched at the IDG Demo 2000 conference. What’s this got to do with fintech and banking? APIs.

While APIs have been around for almost as long as computers, it was arguably Salesforce that first appreciated how critical they were to building value. Salesforce worked out that by giving easy access to its technology, innovation would be stimulated, with the subsequent rewards benefiting all those involved. Its move was quickly followed by many in the tech industry, including eBay, Facebook and Amazon.

From Wall Street to Silicon Valley

Fast forward to 2020 and we’re seeing a similar epiphany in banking – one that will have consequences which are just as far reaching. It pivots financial services away from its home on Wall Street towards Silicon Valley, as banks increasingly use APIs to access enabling technology to truly transform the experience they can give customers and the rewards they can share with investors.

Banks have traditionally spent a fortune on armies of in-house developers to write bespoke software to solve the same problems as do their rivals, including meeting changing customer demands and complying with new regulations – duplicating efforts and wasting time and money. This has left them sometimes struggling to compete with nimble challenger banks and the platform companies that are increasingly encroaching on their space.

But the regulators who have pushed for open banking, and the customers whose fast-changing demands are being fuelled by the possibilities of our digital age, have between them forced traditional banks to innovate faster and collaborate with third parties. The banks’ embrace of APIs has given them access to the new technology offered by fintechs – such as artificial intelligence in fraud mitigation or credit card decision making technology that helps create value – all on a software-as-a-service (SaaS) basis. You might ask what has taken them so long.

Fears over security and banks being locked into their legacy IT systems are partly to blame. No one wants to change the engine while the plane is flying. But the unwieldy nature of old APIs was also a problem. Today’s APIs are different: secure, lightweight and easy to understand. Developers don’t need special training or lengthy instructions to access and implement them; portals allow them to conduct road tests and start working quickly. And the vast majority comply with the 3:30:3 rule: 3 seconds to understand what the API does; 30 seconds to identify the entry point and how it is used; and less than 3 minutes to create an account on the portal, gain access and start using the API.

Fintech rocket fuel

The rise of APIs that match this rule has helped the fintech industry to grow quickly and allowed challenger banks such as BUNQ, N26, Monzo and OakNorth to create business models and customer experiences light years away from those previously offered by incumbent banks.

Rather than working alone to provide a one-stop-shop for financial services, these challengers collaborate with a carefully selected group of dynamic fintechs that provide best-in-class operations so the bank itself can provide best-in-class services. Using APIs to connect the technology that delivers functionality such as reconciliation, credit checking and cyber security at the back and account opening, robo-advisers and regular savings at the front, these banks compose exactly the type of bank they want to be.

Incumbent banks can see how nimble APIs make their new competitors. They know they can no longer be monolithic financial-service providers because that business model is broken. What is more, it’s been proven that bolt-on technology doesn’t compromise customer security and fidelity. Traditional banks understand that APIs make it possible for them to leverage all their advantages – trust, security, customers, data, sector knowledge and brand – and work with fintechs to build effective and efficient ecosystems that cover customer onboarding, treasury, compliance, straight-through processing and offer bolt-on products such as insurance, forex, investor advice, just as the challengers do.

And APIs mean they can gradually replace their old technology and pursue an evolutionary rather than revolutionary digital transformation. The icing on the cake is that the SaaS approach is much cheaper – providing far superior returns on investment. Citi and Barclays see a return on equity of 13 per cent and 9 per cent respectively, while a challenger such as OneSavings Bank enjoys ROE of 25 per cent.

The democratising force within fintech and banking

A trend towards specialisation seems likely to gather pace. This means that rather than being all things to their customers, many banks – new and old – will increasingly focus on a handful of technologies that allow them to do fewer things, but each one well. That might be providing services such as cashflow analysis and short-term instant loans to SMEs or life insurance and robo-advice to high earners, or small loans for consumer purchases. The fintechs with which they work will be partners and each bank will eventually become just one of the participants within an ecosystem of payments, insurance, biometric identity checking, credit-score providers and more. As the banks work with many fintechs, so the fintechs will work with many banks. Ultimately, APIs will be the democratising force within fintech and banking.

Before the decade is out, ecosystems of partners will be the norm and banks will no longer be the lynchpin, just one part of the set-up. The result will be lifestyle banking where financial services are embedded into customers’ lives exactly where they are needed – such as point-of-sale loans or instant overdrafts. Banks will essentially have become technology companies. A bank that offers SME services, for example, could be embedded into the customer’s accounting system – more like a widget than a bank – so it can analyse exactly what is needed when.

But perhaps more importantly, these ecosystems will be nimble and ready for change. By 2030, banks with their ecosystem partners will be able to adapt in minutes or hours – think Facebook or Amazon. They will address the new efficiently and effectively. And it’s all thanks to the API.

Banking

SEIZING THE OPEN BANKING OPPORTUNITY

Nick Maynard is a Lead Analyst at Juniper Research

Open Banking has made significant progress in 2020, having recently launched across much of Europe and now starting to emerge in other markets too. And there are two primary reasons why Open Banking is disrupting the banking industry so much:

Banks have begun to discover the real competitive advantage of a more open approach to banking. Offering a superior Open Banking experience to customers can be a compelling differentiator from other competitors as part of a wider digital app experience. Open Banking also creates a level playing field in markets where regulatory intervention has led to Open Banking deployment. As all banks are required to deploy APIs in this scenario, the situation is the same and does not put any one particular bank at a disadvantage.
Legislation – for example, in October 2015, the European Parliament adopted PSD2 (the revised Payment Services Directive). By early 2020, major banks in the EU had adopted Open APIs. There have however been many cases of late deployments of APIs and problems with the availability of APIs.

Nick Maynard

The Disruption Factor

Open Banking is a major disruptive factor for banks. The reason for this being that it opens up account data to both AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers), which can attempt to carve out a role in the banking area.

AISPs: These new vendors are able to access transaction data and balance information, as well as related information. This has, in particular, led to the rise of vendors such as Emma, Yolt and Connected Money. These vendors combine information from multiple sources, adding value to the user.
PISPs: In this case, the vendors are able to leverage Open Banking API connections to initiate payments directly from the bank accounts in question. This means that these players are able to bypass traditional payment methods, such as cards. Vendors such as American Express and PayPal have already launched solutions that have taken full advantage of this action.

PSD2 Changes

Generally, the implementation of the new PSD2 European regulation for electronic payment services effectively reduces the entry barriers for new digital players. It also opens up banks to the potential for competition, enabled by their own APIs. This allows these players to compete with existing services in fields currently offered by the banks. In the case of AISPs, it is possible that third-party applications could displace the role of the apps from incumbent players, which would dilute the bank’s relationship with their users.

As with any fundamental change to markets in the banking area, there is the potential to bring a number of both opportunities and challenges to consider with Open Banking.

Open Banking Opportunities & Challenges to Consider

Source: Juniper Research

Banks and other parties that are looking to become involved in the Open Banking ecosystem must weigh these opportunities and challenges carefully. Open Banking certainly needs a more collaborative approach than traditional banking models, which will require significant effort to make them successful.

The Forecast for Open Banking

The total number of Open Banking users is set to double between 2019 and 2021, reaching 40 million in 2021 from 18 million in 2019. The ongoing Coronavirus pandemic is increasing the need for consumers to have the clarity of combining their accounts and gaining insight on their financial health, and also boosting momentum in the adoption of Open Banking.

This extraordinary growth is being driven by Europe, where the regulator-led approach to Open Banking has created a standardised market, with low barriers to entry. This contrasts with markets like the US, where a lack of central regulatory intervention is limiting growth potential.

Open Banking – Delivering Opportunities and Threats

It is worth noting that Open Banking can be both a threat and an opportunity for traditional banks. While Open Banking exposes user information and access to potential competitors, this threat has the potential to affect all players in the market equally. Consequently, established banks must create innovative Open Banking services that will provide benefits for the user, while also attracting customers from less innovative competitors.

Payments will be critical to the emerging Open Banking ecosystem; accounting for over $9 billion in transaction value in 2024. However, payments in this ecosystem are at a particularly early stage. While eCommerce is dominated by card networks, there is the potential that this role will be eroded over time by ‘direct from account’ payments. Consequently, card networks should look to offer Open Banking-enabled payment services, in order to offset the risk of future disruption.

Open Banking Users in 2021 (m), Split by 8 Key Regions: 40 Million

Source: Juniper Research

Banking

2021: THE NEW-NORMAL LIFECYCLE FOR BANKING

Laura Crozier, Global Director of Industry Solutions, Financial Services at Software AG

It would be impossible to talk about predictions for the banking industry in 2021 without mentioning the cataclysmic impact that 2020 and the pandemic has had on people, businesses and countries.

Unlike with the global financial crisis, banks have been able to step up as “good guys” this time around, rebuilding their reputations as well as accelerating digital transformation. One of the main outcomes is increasingly smart, efficient online payments.

In 2020, the banking industry innovated like never before. This is the new normal. Overall, customers and society will be the beneficiaries from the changing industry. Here are my predictions:

Reputations are reborn

Banks across the globe pulled out the stops to integrate and adapt systems and processes to help customers during the pandemic. They offered accommodations in loans, assisted governments with the distribution of financial relief, and supported consumers by upping contactless spending limits and virtual deposits.

In 2021, banks will risk losing that rosy glow as economic circumstances drive them to deal with non-performing loans, mortgage foreclosures, layoffs etc. But, beyond their role in society as providers of capital and liquidity, banks will invest to sustain their reputations as trusted and good corporate citizens and use their power to persuade their customers and providers to adopt higher environmental and ethical standards. This will be in the areas of bank carbon-neutrality, sustainable financing, serving the unbanked, diversity and gender equality (as the number of women running a major global bank will double from one (Jane Fraser at Citi) to two). It’s a start.

Coming of age in the way of working

Back in Q1, when bank employees cranked up their laptops on their dining room tables, banks that were strategically undertaking business transformation accelerated their efforts. Those that were tactical, or on the fence, now understand with painful clarity that this work must be undertaken strategically.

Cracks in process and the way of working and their resulting risks can be crippling. Especially from a back-office perspective, it is not enough to rely on “organisational memory” and collegial proximity for work to get done right. Advanced banks pushed the boundaries of remote work, and the proof of concept was successful. So, they’re doubling down on developing digital twins and moving to the cloud. They’re adopting the hybrid office/WFH approach to reduce health risks and reduce cost permanently. The watercooler will never be the same.

The death of cash

Ok, maybe the rumours of the death of cash are a bit exaggerated since there will always be the need for cash (and, to some extent checks; the USA, for example, cannot seem to live without them). But the pandemic has permanently changed the way that consumers and small businesses bank, and the demotion of cash has been accelerated by a decade by the pandemic. For example, the Norwegian central bank said that cash payments in that country have plummeted to just 4% of transactions since March.

Implications? It will be critical to continue evolving payments to be smart, safe and flexible to compete in new world, in both retail and commercial banking. Also, the permanent change in the mix of channels will see banks’ face-to-face engagement with customers fade. Branches aren’t going to go away entirely, but they will be reserved for high value activities – by appointment only. To compensate, the personal touch has to be delivered digitally and intelligently.

The role of the bank as a “financial wellness partner” is being born. Banks will use customers’ data, not just to personalise and differentiate banking experiences, but to make recommendations for products and services beyond traditional banking from across their ecosystem to serve their customers well. Just as customers own their cash (physical or digital), in the future they will demand that they own their data (and can share it with whom they choose). Then retail and commercial clients will share their data in return for value.