The current Open Banking offering provided by most banks stops at the lowest common denominator, providing access to a client’s current account and allowing for payment initiation and account aggregation. Many banks have seen such APIs as a threat and just a way to fulfill a regulatory requirement, as they have been very hard to monetise.
They now stand at a juncture: keep the continued investment in further APIs at a minimum or invest to develop new premium API's with valuable functionality in the hope to defend or extend market share and capture revenue.
Assuming a bank has already successfully implemented the pre-requisite PSD2 mandated simple APIs for account access and payment initiation on standard current accounts, here are three possible scenarios this bank might find itself in as it analyses its strategic investment options in Open Banking for 2020 and beyond:
Scenario 1: Keep the lights on but nothing more
In this scenario, the bank considers the PSD2 required APIs a burden and a disadvantage. They have been costly to build, they are somewhat costly to operate, and because of PSD2, these APIs must be provided essentially free of charge to any adequately licensed TPP provider.
Even worse, exposing a core product like the current account - the traditional link between a bank and its clients - as a standardised product via an API, is bound to increase competition, reduce margin, and result higher in client churn. Clients using one of the increasing number of AISP type aggregation apps will spend most of their time and attention in that app (rather than the banks app), and they will find it much easier to compare and potentially switch between suppliers of the current account offering.
This is clearly an undesirable situation, and the bank may conclude that adding even more functionality to its API could lead to an attack on a larger part of its product offering. Consequently, the bank may decide to keep their Open Banking at a minimum and not venture beyond what is mandated by PSD2.
Scenario 2: Expand the Open Banking offering to stay relevant
If a number of competitors offer more products via APIs and the base of users of aggregation apps start increasing, the bank may find that it will have to expand its API offering, simply to stay in the game.
Consider the situation where a customer is using an aggregation app and would like to have access to a current account, a savings account, a credit card and perhaps a car-loan. If the bank only offers an API for the current account, but a number of competitors also offer APIs for the other products, then the bank only gets to compete for the current account - the most commoditised and possibly low margin product of all.
Further, if a client likes the aggregation app, but still would like to keep most of their banking business with the same bank, then the bank simply won’t be able to compete, as it is not able to offer all of the required products in the app preferred by the client.
If - or when - this comes to pass, the bank may reluctantly extend their API, even if by doing so they help pave the way for commoditisation of further banking services, as the alternative is even worse.
Scenario 3: Extend the Open Banking offering to create value and capture market share
While the two first moves were defensive in nature, a bank may also decide to add APIs to increase market share. This may happen in two situations:
- The bank may voluntarily choose to provide API access to products and services, where they have a competitive advantage. As discussed before, for some offerings, this may bring the bank in direct competition with its competitors, but this could be desirable, if the bank indeed has the best offering. For savings accounts it may actually have the best interest on deposits, and for loans it may be able to offer the best terms or best address the needs of a certain segment.
- Alternatively, the bank may try to offer APIs and seek integration to new sales channels. One example could be an integration with the business system of a car dealership, which would allow the dealer at point of sale to easily help the user obtain financing. Another example could be the integration with popular business management and book keeping systems, allowing a user of said system to perform relevant business-related banking operations in the most convenient and efficient way.
Making the most of Open Banking
2019 may very well be the year where Open Banking took off to become more mainstream. In their September 2019 newsletter the OBIE - creators of the British open banking standard - reported 180 members, up from just 104 members as of January 2019. At Saxo Bank, we are seeing the same trend with the number of connected apps doubled and the number of transactions from third party applications increasing by a factor of three since Q3 2018.
Banks will continue to build more APIs, either because they have to or because they want to. To thrive in the age of Open Banking, financial institutions need a considered response.
The first and immediate consideration is that any bank who wants to stay relevant must be capable of building and managing APIs. If a bank has tried to just do the bare minimum to comply with PSD2, it has very likely just invested in a very limited product - the PSD2 interface. But as APIs are here to stay and because they are bound to evolve, banks should really aim to acquire the capability of API development. For most banks, this will mean integrating some kind of API management system as well as designing an appropriate API development lifecycle model.
The second and more strategic consideration is to revisit the banks’ key strength and basis for competitive advantage. As more products and services will be exposed through APIs, they will also be subject to rapid commoditisation and margin compression. So where do you want to excel? As clients will be able to mix and match, if you only have the fourth best current account, the fifth best car loans and the third best credit card scheme, you may not attract any business from any clients.
Open Banking is here to stay, and in doing so it is transforming the financial services business. To stay relevant, banks must acquire the skills to create OpenAPIs and participate in Open Banking ecosystems. To stay profitable, banks must carefully evaluate the current and future strategy in the light of the expected commoditisation of many standard banking products.
As Open Banking is still in its infancy, banks still have time to respond. Open Banking may have just crossed the chasm of great change, and the rate of change will only increase from now on. Therefore, any bank that wants to stay relevant in 2030 must start to design their Open Banking strategy now.