2020 is now reaching its final stretch, in what has, without doubt, been the most bizarre and life-changing year for almost everyone on the planet. The ramifications of this year will ripple out over the coming decade and even the potential roll-out of a vaccine won’t mean things return to pre-COVID times. Instead many of the societal and economic shifts that occurred this year will continue to play out and fundamentally alter how we work, interact, and manage our societies and economies.
As we look over the data, the importance of open banking has become even clearer, as branches and in-person banking have been closed or are offering reduced hours, and instead people are turning to mobile and online channels to manage their finances.
Globally, open banking regulations have been introduced to widen competition and create new consumer choice. Other goals were also in place: Europe wanted to create a level of interoperability for European citizens that makes it easier for them to manage their banking across EU country borders. Brazil, Mexico, Indonesia, and other countries have highlighted the importance of open banking in enabling financial inclusion. Singapore and Japan see it as part of a wider digital transformation of societal and economic infrastructure. In the United States, it has been left to the market to work more collaboratively by sharing open APIs that allow new partnerships to emerge.
Regardless of the regulatory driver, the goal is to move to a more digital connected experience where customers can link their bank accounts to a range of services. It is a tricky balance for regulators to encourage: on the one hand, they want to loosen the banking industry’s grip over financial services, as the product range being offered is commodified and failing to reach specific consumer needs. But even while encouraging new market entrants, regulators need to make sure there is still something in it for banks.
So if this is the balance that needs to be reached, then it raises several key questions: What are the business models that will enable an open banking market to become viable? What are the key use cases that will allow fintech to enter the open banking market? Will this market expand in 2021 and enable these new fintech to be viable businesses? At the end of the day, will consumers benefit from these market changes?
Over the next four blog posts, we will dig into APIdeck’s data to look at what it shows us about the directions of open banking for 2021.
First, let’s look at what is in it for banks. The last financial crisis in 2008 saw governments around the world needing to support banks, as they were “too big to fail”, as that would have serious ramifications for societies and economies. New measures were brought in to reduce risk, but overall banks were bailed out. Since then, the Internet has grown up and new approaches to building applications have become possible. Traditional industries around the globe have faced disruption, as new tech companies have enter various sectors and offered new products with a priority focus on user experience. This has happened in financial services, outside of the banking industry: payments providers, international transfer providers, and crowdfunding services in particular have built snappy user interfaces that drew large, global audiences to their products. Governments have seen consumer demand and interest in these products and directed their banking regulators to ensure that banks open up their services so that these new market entrants can enter the traditional financial services sector.
But it is a constant coaxing and prodding approach: regulators are mandating that banks open APIs to enable the growth of these new financial services (the first generation overall had operated outside of the banking sector). But while new competition is encouraged, regulators also want to see banks succeed in the new market as well. But in this new digital economy, the traditional bank business model is just not profitable. McKinsey estimates that banks are on track to reduce their economic profitability by just under $1,500 billion. This is because while banks are in the process of expending capital to digitise their processes, they are not diversifying their business models, so the profit being generated after capital costs (the measure of innovation effectiveness) is minimised, as shown in Figure 1.
It is not just that the bank’s reliance on an outdated business model is unprofitable. Banks are usually also weighed down by an outdated culture that sees other potential ecosystem partners as competition. Bank management, especially in retail banking, may not be used to working collaboratively with external suppliers to provide services to customers and may perceive those with a strong customer experience focus as a threat, rather than a relationship that extends the end customer’s overall engagement with the bank. Even where the bank culture encourages these partnerships, and where management teams are skilled in building collaborative ecosystem relationships, the infrastructure may hold them back. While many banks have commenced their digitisation journey, they have not yet created the internal API-enabled infrastructure that would be necessary to expose functionalities securely with trusted partners. Those that are thinking through how to compete in the new open banking market are considering four main business model approaches. Within each, there are more detailed business models available (for example, a bank that open APIs can offer some for free, package some as premium products for sale by subscription or per API call, or even create revenue-sharing models where fintech users of a bank’s APIs get a commission for bringing new customers to the bank).
Overall, the data shows that banks are moving towards using APIs in four key ways, sometimes implementing strategies across several of these approaches, as shown in Figure 2.
The four approaches are:
- Open Platforms: Banks can create open banking platforms with a catalogue of APIs available that can be tested and used by any fintech to build new products (but the eventual product must be approved by the bank before being made available to end consumers).
- Partnership platforms: In this approach, banks seek out fintech partners with non-competitive products and use partner APIs with selected fintech to extend product range to their customers.
- Incubators and acquisitions: In this approach, banks offer a pool of funding to early stage startups to help them build new products and mentor/advise them along the way. Alternatively, banks could also acquire existing fintech in order to extend their API capabilities or infrastructure.
- Banking-as-a-service: Banks can also provide full range of white-labelled core functionalities in order for fintech and enterprises to build their own customer-facing bank offerings built on the bank’s infrastructure.
What I hope to see in 2021: Banks need to decide what mix of business models they want to pursue. I would love to see more banks experiment with these approaches and to be more public about the revenue generated from different business models they are using in each of the four approaches. I understand that the pricing structures may be commercial-in-confidence, but in quarterly and annual shareholder reporting, it would be great if the revenue and expenditure data was itemised to the level of understanding what revenue a platform approach is bringing in. Often this is obfuscated in current financial reporting. Banks need to appoint someone with Platform and Partnerships responsibilities at the C-level, and have their budget and revenue more clearly delineated so we can see the impact a move to platform approaches is having on a bank.
*This is a guest post in partnership with Platformable and is part of the Open Banking Q3 report.
Platformable provides API strategy and data products measuring ecosystem and participation intelligence for governments, businesses, and nonprofits. Mark Boyd is the founder of Platformable.*