The countless paths of open banking
Is it a bank? A service platform? A factory of financial products? A distributor? Does it sell or buy information? All this and more. APIs are revolutionizing the world of banks and are set to transform banking into the largest operations scalextric imaginable.
Welcome to the age of open banking, the best moment in history for clients, users and banks. The new European regulation, PSD2, and its accompanying ample digital transformation have set the tone for a transformative financial ecosystem to be able to bloom. After this directive entered into force in Spain on November 24, the banks are now open wide to welcome third parties. In return, they will provide other services in a win-win model where everybody wins if they are in the right position. This change does not derive from the technology or regulation; instead, it derives from the transformation of banking business models, from a centralized to a collaborative structure.
In the context of this revolution, banks can choose from almost unending possibilities and their decision depends on the role each entity wishes to take on. According to the report Strategic Options for Banks in the Post PSD2 Age, by the group of experts in open banking at the Mobey Forum, banks can select from countless models depending on the production and distribution of their services and the development of new business opportunities, including marketing their own APIs.
APIs are the driver behind this digital transformation. They comprise the generating core from which we can interconnect the terrifying network of digital services inherent to opening and integrating financial products. As developers of their own APIs, this new universe also means that banks need to promote their programming interfaces and, as such, access new sources of income.
Changing without anybody changing
Banks do not necessarily need to change their role. However, given how ultra-competitive the sector has become, it would be not very intelligent to face this revolution without a strategic plan. Albeit most banks say they are open to collaborate with third parties, a lot of them are concerned about risks and collateral impact, according to the Mobey Forum's report.
In the new age of open banking, banking institutions may choose to become producers, distributors or a combination of both. Most banks have decided to take the middle path: offering their own products as well as third-party products through their own channels. As a result, they have an advantageous product portfolio they can offer to their clients but they also run the risk that these same third parties cannibalize them.
In this associative symbiosis, the digital natives –which lack the portfolio built over a long time by traditional banks– come out winning. The key here is to define the level of involvement of all parties in a balanced way so that the more veteran players are not swallowed up. Mobey Forum mentions three major business profiles in its report: producers, aggregators and providers.
Producer and nothing else
Under this role, banks develop their own products to be distributed by third parties. The upside is that sales channels increase. A typical business model would be splitting the revenue, at least in the short term. In the medium term, the collaboration could turn into a more detailed agreement, a recommendation included in Mobey Forum's report. As an example we can mention the partnership between the fintech Tink and the Swedish banks SEB and SBAB. With Tink's mortgage service, users can execute their loan and receive a counteroffer from SEB or SBAB within five minutes.
As distributors, banks give their clients access to financial products from other companies, in addition to their own products, through their channels. This is the most attractive model for banks. Its advantage is that banks can leverage a more comprehensive product portfolio without having to invest in new developments and products. However, creating links with external suppliers involves the risk that these third parties may end up cannibalizing you.
The treasure of information
Besides deciding which side of the scale they would like to be on (producer, distributor or a combination of both), having access to countless information offers banks a second choice: information provider or aggregator?
Banks should become aggregators if they wish to achieve fast development of new services and/or leverage the information from third parties to know their clients better. By collaborating with a information services firm, banks could capitalize even more on data marketing. As an example we have BBVA's Aggregation Service, which integrates all of a client's accounts and cards (with BBVA and other banks) into a single application.
As regulations and banks move in this direction, an increasing number of financial institutions make open APIs available to third parties so that the latter may add external information to their own platform.
As providers, banks supply information to third parties, which then use the banks' knowledge of their clients to improve their own services. This should range from financial data and information on accounts to client analysis, profiling and classification to finance management.
At the forefront of open banking, several banks even promote their own portals for implementing their APIs. These include BBVA, Danske Bank, Nordea, Swedbank, Erste Group, Société General, HSBC, Barclays, Lloyds Bank and CapitalOne, among others. And many of them go beyond the standards required by the PSD2.
Faced with this range of possibilities, each player must decide how fast and how far they wish to go. Some banks will be reluctant to start the transition while others will be so far ahead that even this directive will be left behind.
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