The most recent PSD2 open banking deadline came and went in January. The world didn’t end. EU banks (well, some of them at least) became compliant with the regulation.
And then the interest in open banking started to gain momentum at banks in all regions of the world – without the regulatory catalyst. Open banking - beyond PSD2 – features greatly in conversations I’m having with clients, and represents a good chunk of the agenda at this year’s SIBOS conference.
Last year, I wrote about the imminent regulation of Payments Services Directive 2 (PSD2) in the EU – and the impacts that could be expected. PSD2 became law in the EU on January 13, 2018. In a nutshell, PSD2 ended EU banks’ monopoly over client data and payment services. Banking customers have the ability to authorize third parties to retrieve their account data from their bank and initiate payments from their account. Banks are obligated to provide access to third parties through Open APIs.
The biggest fear about PSD2 was its impact on the banks’ traditional value chain, and the threat of disintermediation from their customers. Banks are no longer competing only with other banks, but with third party players who choose to offer financial services. And, as I discussed about Amazon last month, these third parties are emerging increasingly from big tech.
Why is this happening? Because, open banking is essentially the continuation of the digital transformation of financial services. It’s the next level of maturity on the journey from the physical world (with a focus on the product, branch-centric engagement and the bank’s product manufacturing ability) to the digital world (with a focus on the customer, mobile engagement, and the bank’s ability to deliver experiences).
The bleeding edge of banking has long understood that, as the lines between industries blur and big tech players like Amazon start grabbing more and more traditional financial services space – without a banking license - it is imperative to go beyond slapping a layer of APIs onto infrastructure in order to be compliant with an open banking regulation.
Open banking is the opportunity to fight for space in what McKinsey forecasts will be a $60 trillion digitally distributed consumer economy by 2025. Compare that to opportunity of trying to defend your slice of the current $4 trillion consumer banking market.
And it is all enabled by APIs. Of course, banks are old hands at using private APIs to integrate fragmented, siloed applications. They have also experience with partner APIs that are dedicated to individual third parties. However, for many banks, there is limited experience in the use of open APIs by which to share data outside of the bank and develop new value propositions. It is open APIs that are the tool by which banks collaborate with Fintechs in order to outsource a component of innovation and begin to build ecosystems.
The fear of collaboration with fintechs has largely evaporated as banks and fintechs have looked at each other and recognized mutual compatibility: Banks have large client bases, client data, resources, and experience with regulators – but are burdened with legacy systems and institutional conservatism. Fintechs are digital first, agile, institutional creative and comfortable with disruptive technologies – but lack the client base and resources of the banks.
According to the World Retail Banking Report 2017, more than 78% of banks seek to leverage APIs to improve the customer experience, and most said they believed APIs could significantly help to generate new revenue streams.
Fintechs have been screenscraping for a long time. By controlling the flow of data through open APIs, banks can mitigate competition risks and at the same time offer customers a wider and more easily customized set of services. Banks will drive value from the orchestration and personalization of a mix of internal and third-party products that are integrated into a seamless experience for the customer.
And while open banking is nominally about open APIs, it is really about what the banking value proposition is now, and will become in the future. It is the creativity of the business and IT working together that will define how APIs can be published in order to create new value and ensure the bank’s continuing relevance and competitiveness. What is critical is that the API platform that is developed is scalable, controlled, governed, enables fast, repeatable solutions, and provides the ability for the business to measure monetization.
I think open banking is the future, and I will be keenly listening to the presentations at SIBOS this year. What do you think? Let’s meet up at SIBOS to discuss – email me at email@example.com For more information on open banking, click below.