Regulations around open banking, like PSD2, will soon prove to be a boon for technology giants like Google, Amazon, Facebook, Apple and other tech giants – providing wider access to customers’ financial data (currently held by banks) and allowing these firms to restructure their marketing strategy towards product/service expansions. With consumers in their 20s and early 30s becoming more and more receptive towards banking services offered by non-financial services companies, open APIs come at an opportune moment for these tech giants.
These players have already entered the financial industry with Google Pay, Apple Pay, WhatsApp Pay and Amazon Pay. Amazon is also reportedly in talks with JPMorgan Chase, Capital One, and other financial services firms to set up an Amazon-branded checking account for its customers. These new-age tech giants are characterized by their younger, more innovative approach to customer engagement; and experts think it’s time for banks to follow suit.
Though banks have managed to survive the threat from fintech startups till now, the threat from large tech companies continue to loom large for the banks to survive in the fast evolving financial sector.
Big Tech Encroachment Continues
Amazon Cash is a good example of the kind of innovation that has allowed tech companies to become a threat to established financial institutions. A simple online debit solution, Cash allows users to add money to their Amazon Balance and shop at a participating store by showing the cashier a barcode.
Novelties like Cash have allowed Amazon to intrude upon aspects of the finance sphere that were once regarded to be the exclusive territory of the old-guard banks. With Amazon Lending, Amazon has broken into the lending spheres, allowing registered small business owners in the Amazon marketplace to take out loans. To date, Amazon has made more than $3 billion in small business loans to more than 20,000 Amazon sellers in the U.S., United Kingdom and Japan, and a recent partnership with Bank of America has only further solidified Amazon as a legitimate entity in the financial sphere.
The growing alternatives have left traditional banks in a state of vulnerability; and the banks’ legacy and histories may not come as a rescue when it comes to win the next generation consumers. According to McKinsey report, 73% of US millennial would be more excited about a new financial service from Amazon, Google, Square or PayPal than from their traditional bank. Faced with this new wave of digital competition, banks are moving quickly to develop their digital platforms, and the Open API economy is a clear sign that banks are stepping out of their legacy set-ups and actively seeking to create value for their customers.
Open APIs and Open Banking
Open API is nothing but an infrastructure to build connections between the products and services of one entity with that of others. Open banking describes banks sharing customer accounts, transaction data, product data and other financial data with third party providers, forming a strong banking ecosystem. Banks possess customers’ data and trust in abundance, while the third party fintech developers with their technological innovations can raise the bar higher in improving customer services. An approach towards API enabled open banking will help banks change the game of rules and drive innovation on par with fintech giants.
Open API is only one of a myriad of innovations that are possible with the banks’ abundance of financial data and it is the kind of offering banks needs to continue to produce to serve their customers and stay competitive. To maintain their status in finance, banks must be proactive in enhancing and transforming their current offerings, increasing their appeal to existing and prospective customers alike.
Open Banking: Threat or Opportunity?
Third party service provider accessing banks’ financial data may pose threat for banks. For example, by using the customers’ data they can offer real-time finance management services, which traditional banks are little slow to embark upon.
However banks can turn this threat into opportunity through careful positioning, and should avoid turning their back to initiatives like Open Banking API. Rather than making room for fintech firms to innovate, banks should capitalize on this opportunity to infuse innovation with their existing range of products.
Open Banking APIs can enable banks to make efficient use of their customers’ data, churn out meaningful insights to offer tailored products to the customers. Traditional banks should develop their digital capabilities to minimize the pressure coming from new entrants who are now gaining the consumers’ mindset with advanced offerings and services. Most of the established financial firms are embracing open banking initiatives, though in Europe, open banking initiatives have become a norm in 2018. Banks have no other option but to provide access to account information through APIs with accord to the Revised Payment Services Directive (PSD2).
By deploying APIs, banks can improve product and services offerings, enhance customer engagement and add numbers to the revenue, driven by the multiple digital channels. Opening up the APIs will allow banks to seamlessly connect other APIs in the market and extend their services by introducing innovative solutions.
For example, banks can enter into partnerships with data aggregators and third party service providers to transmit the data. J.P. Morgan Chase and Wells Fargo last year announced data sharing agreement with Intuit, allowing banks to share customers’ personal financial data with Intuit’s financial management applications.
Unlike screen scraping, the model involves issuing a token to authorize Intuit to access data via an API. Citi Bank with the help of IBM cloud platform is powering major projects to improve the retail bank experience. It is estimated that banks can expect to witness a 20% increase in revenue by 2020 through open banking API.
Creating Value in the Open Banking Economy
Delivering customer-centric services should be on the top of the agenda for banks when it comes to fighting against the threat posed by non-bank competitors and respond to the evolving demands of their customers. For example, a Facebook messenger payment enables users transfer money by partnering with major players like Stripe, PayPal, Visa, MasterCard and American Express.
A handful of banks have recently launched chatbots which can interact with customers using natural language processing. Bank of America has recently launched Erica, a chatbot that can help users check balance, put reminder for the bills and get answers of all the bank-related queries. Mastercard has also launched AI enabled bot, Mastercard KAI through which users can transact, manage finances and shop through messaging platforms.
Open APIs enable seamless integration of services, customers and bank accounts on top of the existing banking infrastructure. Banks that are embracing open API can be better ready to address the requirements of new age customers with the help of innovative solutions. It has now become imperative for banks to give customers access to a wider range of complimentary products and services.
However, banks should understand how open APIs will align with their existing business strategies and how can execute the initiative strategically. This will help them to overcome the fear to be relegated to the role of utility and lose control over the customer interactions to the non-banking organizations that have the capability to efficiently utilize the customers’ data.
Banks developing an API strategy should consider few factors like how can open API technology add value in serving both existing and potential customer bases, what kind of partnerships will lead to developing new products in the market and what kind of role will API play in the overall digital transformation strategy.
Banks should leverage the internal APIs and customer data insights to create value added products and services for customers. To build, test and innovate products in an internal APIs environment, banks need to train the existing talent pool to drive innovation around open APIs. Taking an API-first approach will lead banks to take the customers’ satisfaction to the next level.
Banks also requires brainstorming on the future market and revenue streams for the API powered products and services. The business models of banks should be restructured as API first so that they can operate like Fintech rather than traditional banks.
The rise of the open API economy poses a great opportunity for banks to sustain their leadership and relevance in the market. Unlocking the value of customer data will be more conducive for banks to increase revenue and serve the customers in a better way. Banks should immediately respond and act to the changing market dynamics and execute new business models without waiting for regulations like PSD2 is being imposed on them.