It has become obvious that banks need to embrace new technologies, whether it is the use of APIs, blockchain, AI, Machine Learning, the cloud, or others. They need to reinvent their business model around the digital distribution of data (payments, transactions, customer info) to be part of the Open Finance move that it is emerging.
(Incumbent) banks and Open Banking
PSD2 has forced banks into opening and connecting to third-party providers (TPPs). Consequently, the transformation that most traditional banks are undergoing today is not only about business digitalization, but also about connecting to other players on the market.
As part of the regulation, API (Application Processing Interface) technology is used to connect and share information between entities. However, an open finance market is not only about exposing APIs and sharing data, but also about consuming APIs and aggregating data from other service providers. This ensures consistent levels of consumer protection across the payment value chain whilst, at the same time, enabling those new providers (TPPs) to compete with incumbent banks.
With banking quickly transforming, there are still some hurdles that need to be removed by banks to stay on track on their journey to open finance. These include:
- Operating with complex infrastructures that are (many times) based on paper transactions using cash, checks, ledgers, branches, ATMs.
- The lack of flexible IT infrastructure that would allow for an easy onboarding and offboarding of partners, with a high degree of scalability and low operating costs.
- Running operations in multiple countries (all attractive from a business perspective), which are heterogeneous in both stages and speed of adaptation of payments digitalization, open banking, PSD2.
- Paying attention to the local specifics and adapting their business development plans accordingly.
To build open banking capabilities that offer benefits for all participants’ parties and also overcome some of the challenges mentioned above, many banks have partnered with various fintech, TPPs, and tech companies.
Creating an Open Banking Community
The primary condition for these partnerships to work is to supply the right information and provide adequate tools (APIs) that later would enable the bank/fintech collaboration to craft the invisible banking functionalities every consumer dreams of. These partnerships don’t just work on paper. Banks need to attract these partners, build, grow, and nurture their open banking community to strengthen their position and accelerate their commercial efforts. Offering high-quality documentation, sandboxes, developer tools, and seamless access to APIs, as well as the establishment of different events, such as hackathons and knowledge-sharing workshops, are therefore considered as important as the bank’s delivery efforts themselves.
However, banks seeking to spread their open banking vision and claiming a solid position in the open banking landscape are advised to do more. Building upon their Open Banking offering and publishing rich API catalogs are just some pieces of advice stressed by INNOPAY experts in The Paypers’ Global Open Banking Report 2020. For instance, ICICI Bank has developed an impressive API Catalogue, which leverages India’s Aadhaar infrastructure for customer identification and authorization. Combined with India’s sector-wide API strategy as part of the India stack, this might lead to potentially more Indian banks starting to release their Open Banking services soon.
What’s more, by focusing on providing a solid Developer Experience, banks can entice collaboration and innovation within a wider community of API consumers (both developers and businesses). A solid Developer Experience is based on financial entities having a blog or article section on their developer portal, where they publish news items about updates, recaps, or teasers about events, or other open banking-related topics. All these developments are centered around an increase in communication towards the existing and potential visitors to the API portal.
As developer portals are now also used by less technically skilled and more business-oriented visitors, banks increasingly cater to a wider audience on their API portals. Online or offline –at industry events– banks have started to share partner use cases and testimonials that promote the creditability of brands and products and substantiate customer satisfaction. Furthermore, by choosing to publish these stories on their API portals, financial institutions reveal greater awareness of their target groups.
To position themselves at the heart of this vibrant ecosystem, banks need to combine a rich API offering with a solid community-building and engagement strategy. Some key considerations to support this strategy include deciding on a target audience, on a purpose (what banks would like to leverage through their developer portal), and the scope of the API offering.
Deciding on the target audience is important to establish how the developer portal can take account of preferences of third parties. According to INNOPAY consultants, there are various methods for determining your target audiences. One way is to identify personas and develop user profiles. For example, ABN AMRO has used personas as a tool for analyzing the implications for different target audiences. The purpose of a community is influenced by what banks would like to leverage through their developer portal. Generally, banks aim to create traction around APIs that, in the end, enhance API consumption amongst businesses. They can facilitate community engagement through partnership programs – either premium programs or more open, community-based ones.
In premium programs relevant developing parties can contribute to improving current offerings and help banks expand their business by bringing in their own network of potential clients. However, some banks prefer community-based programs, where community access is relatively open and input from the community is leading. Benefits of such community-based programs include the broad availability of content to a wider audience and increased contact between developers, sometimes resulting in innovative solutions.
When it comes to the scope of the API offering, the nature of the APIs and customer base (in the B2B or B2C area) will ultimately determine what type of developers a bank will attract, which will in turn influence how best to approach them. For example, an API catalog with a strong focus towards corporates will likely have a significant corporate customer base, and one tailored towards merchants will logically have more SME-type customers.
Going beyond technical considerations, and focusing on commercial aspects, participants in the open banking ecosystem (regulators, banks, TPPs) need to find ways to benefit from the API economy. API monetization is the first step in this direction. When it comes to regulators, they have taken different views on commercializing APIs across the globe. While in the UK and Europe, access is free, Brazilian regulators are exploring a framework of API pricing and restricted frequency for both banks and non-banks.
Recent market activities around mergers and acquisitions (M&A) and partnerships (Visa-Plaid, Mastercard-Finicity, PayPal-Tink) reveal the development of a strong proposition and outstanding use cases for businesses and consumers, based on open banking, which can potentially boost revenues. Furthermore, software providers are using API platforms to offer payments and related services and are generating an increasing proportion of their revenues from non-software led solutions (payments, value-added services).
Therefore, if banks and other TPPs are to benefit from investment in APIs, they need to set a strategic participatory framework, which can be more important than monetization models.
Open banking can be viewed as a crossroad where financial institutions, consumers, technology providers, and regulators meet and want to safely and timely take part in the traffic. To make this happen, both banks and API consumers should maintain a strong community that explores new ideas and brings use cases to life at scale.
About Mirela Ciobanu
Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in drafting industry reports, carrying out interviews, and writing about innovation in payments and fintech. She is passionate about finding the latest news on AI, crypto, blockchain, DeFi and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor’s degree in English language and holds a master’s degree in Marketing. She can be reached at firstname.lastname@example.org or via Linkedin.