The Future of Banking Depends On Open Banking APIs

Open Banking enables third parties to develop new products and services through use of APIs. By working together and taking advantage of APIs, banks and fintech firms can leverage their complementary strengths, enhancing the customer experience much more than either entity could do on its own.

By Jim Marous, Co-Publisher of The Financial Brand and Owner/Publisher of the Digital Banking Report

Organizations in all industries are battling for customers based on providing a superior customer experience. The banking industry is no exception. In fact, as digital banking applications have grabbed a greater share of customer transactions, the need to provide an easy-to-use, frictionless experience, with new digital services offered across a greater number of touchpoints has never been greater.

To satisfy these increased expectations, financial technology firms (fintechs) have entered the financial services marketplace. While most of this competition has not achieved significant scale, that shouldn’t signal that these solutions are not important to the industry. In fact, nearly one-third of banking customers have a relationship with at least one non-traditional firm.

According to the World Retail Banking Report 2017, published by Capgemini in conjunction with Efma, fintech firms are more likely than traditional banks to provide consumers with positive banking experiences. That said, more collaboration than ever is taking place between banks and fintech firms, leveraging the benefits that each can bring to the table to create customer-centric solutions. This collaboration has lead to the emergence of Open Banking and APIs, using customer data and innovations to create new revenue streams and more contextual services.

“Fintechs are now earning higher positive customer experience scores than traditional banks, and banks are openly seeking to collaborate with fintechs,” said Anirban Bose, Global Head of Banking and Capital Markets, Capgemini. “Open Banking offers banks an opportunity to retain and grow their customer base as they add the varied services of third parties to personalize and customize products and services. For banks that don’t think strategically and establish a role in Open Banking, there is a chance they will be disintermediated from their customers.”

The Evolving Relationship Between Banking and Fintech

The emergence and acceptance of digital technology caught the banking industry flat footed. After decades of being able to dictate the products, services and channels the customer would use to transact banking business, the consumer took control of the relationship almost overnight, expecting the same simplified interactions offered by firms like Google, Amazon, Facebook and Apple (GAFA).

Without the legacy technology and outdated processes of a traditional financial institution, fintech firms quickly identified a large number of narrowly focused solutions that would leverage consumer data, advanced analytics and digital technology for an improved customer experience. These innovations were welcomed by an increasingly tech-savvy consumer base, especially in the lending and payments product lines. Without the burden of a extensive physical infrastructure, fintech firms were also able to take advantage of significantly lower costs to serve.

According to the World Retail Banking Report (WRBR), while a small minority (2.9%) of consumers do all of their banking with non-traditional firms, more than a quarter (26.5%) use both traditional banks and non-traditional firms. More than one-half (52.4%) maintain relationships with three or more non-traditional firms, while only 7.4% have a relationship with just one. In total, 29.4% of consumers globally use at least one non-traditional firm, with many of these consumers being the most desirable to the traditional banking community.

While once considered a formidable threat, the largest traditional banking organizations now view fintech firms as potential collaborators, bringing agile processes, an innovative culture and much needed technological expertise to the table. Many fintech firms have come to realize that traditional banks have a better knowledge or regulations, greater access to capital and the scale of customer base needed to be successful.

This year’s WRBR quantified the robust appetite for closer partnerships between fintech firms and banks going forward. The vast majority of banks (91.3%) and most fintech firms (75.3%) say they expect to collaborate in the future, with banks providing access to their broad resources, experience and expertise, and fintech firms offering agility, speed to market and a fresh take on customer-centricity. By working together and taking advantage of APIs, banks and fintech firms can leverage their complementary strengths, enhancing the customer experience much more than each entity could do on its own.

According to the WRBR, “Given the pressures of cost, regulation and fast evolving customer expectations that banks are already struggling with, there is only so much that can be focused on at the same time. This makes the option of partnering with a fintech highly attractive for banks.” This realization has opened the door for the emergence of Application Programming Interfaces (APIs), which can bring together the power of customer insight and fintech innovations.

The Benefits of Open APIs

While APIs are not new to banking and are nothing more than a structure for how software applications should interact, they provide the gateway for innovative, contextual solutions that would be difficult to offer without Open Banking. As outlined by the WRBR, there are three types of APIs:

1. Private APIs: These are APIs that are used within the traditional banking organization, reducing friction and enhancing operational efficiency. A vast majority (88%) of banks viewed private APIs as essential in 2015.
2. Partner APIs: These are usually between a bank and specific third-party partners, enabling the expansion of product lines, channels, etc.
3. Open APIs: In this scenario, business data is made available to third parties that many not have a formal relationship with the bank. Because of the structure of open APIs, many banks have a greater concern around security.

Most banks ease into the use of APIs, moving from private, to partner and sometimes to open APIs. It is believed that, over time, APIs will evolve to the more extensive options in response to the consumer desire for greater digital solutions not currently provided by legacy organizations. This will also occur as both fintechs and traditional banking organizations understand that they need each others strengths. This collaboration will enable both banking organizations and fintech firms to offer more to customers than previously possible.

APIs can help banks pursue new distribution channels, while also finding new ways to improve the customer digital banking experience. In addition, the product development process can occur more quickly, responding to rapid changes in digital technology and capabilities (voice banking, P2P, loan processing, risk management, etc.). According to the WRBR, 78.3% of banks are counting on APIs to help them improve the customer experience, with fintech firms agreeing. They also agree that new revenue streams are possible.

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