Today’s banking customers no longer compare financial institutions themselves. They compare experiences. They’re so used to having a world of data and complete control in their hand that every interaction is now measured by the same expectations.
This digital-first model has changed the game forever. To survive, banks must have the right framework in place to become active parts of customers’ digital lives – from onboarding to supporting customers’ goals to immediately responding to unhappy customers before they can exercise their power of immediacy to choose a competitor.
The Cheap and Cheerful Fallacy
In Europe, the threat of disintermediation has been a real issue for banks since PSD2 and open banking showed up on the radar. The rest of the world continues to watch and learn, but some visionary banks have already embraced API-led, open banking platforms. While many large players are strategically investing in open access, many tier-2 and tier-3 banks still only look to buy tactically.
While this may “tick the box” around open banking, the problem is that “how to go open” is such a fundamental question that banks who fail to focus on the most strategic plan may actually hurt themselves twice. First, they’ll miss by not choosing the best solution. Second, they’ll force themselves to buy something more robust and agile within just a few years of the first purchase.
Sharing is Good for Business
Open APIs are paving the way for third-party developers worldwide to build applications and services independently. However, combatting disruptors and new entrants should not be the main driver for open-access banking. Instead, banks need to grasp the way open access changes their business models and presents more flexibility to how and where they position themselves in the market.
By embracing concepts of open banking, banks can underpin new emerging business models. Consider a simple banking supply chain model: funding – product manufacture – product servicing – product distribution – product sales. A bank may play in all or just one of these steps. Open Banking initiatives allow banks to adapt their business models and distribution strategies across products and geographies, thus driving scale in manufacturing and/or differentiation in distribution
For example, a bank specializing in retail product manufacture could increase market share by allowing third parties to service and sell their products through product-defined APIs. Meanwhile, the same bank also could maintain a presence in the full value-chain by limiting the services available through APIs.
Calibrate Your Strategy
With an open access gateway that is agile and adaptable, banks can quickly recalibrate their market offering by reconfiguring services accordingly – without the need for fundamental technology upgrades and rollout. This allows them to quickly choose where and how they face the market, and test out different business models as the open banking paradigm evolves.
Some banks may be put off by open access given that the return on investment and revenue generation numbers are far from clear. However, bank valuations will increasingly be driven by technological capability rather than just the balance sheet, meaning the real value of open access may be much greater than at first glance.
Banks are already operating within an entirely new financial services industry and they must transform their business models to respond and stay relevant. It is mission critical to make the move to open APIs a long-term strategy.