It is close to impossible to predict how the future of financial services will look like in ten years. However, some scenarios are starting to stand out as inevitable. One of those is the concept of the bank as an open platform.
Gartner predicted this outcome three years ago and stated that by 2016, 75 percent of the top 50 banks in the world will open their API and 25% of these banks will have their app stores for customers. Gartner may have been a bit eager I terms of the timeline, but all signs point to the fact that this will become a reality within a near future.
Digital ecosystems are shaping the future of digital distribution, and is shaping customer expectations and behavior across the globe. Facebook and WeChat are building digital ecosystems around their payment platforms, Amazon seeks to expand their ecosystem through Alexa, Apple is relying on a proprietary hardware approach to their ecosystem in a post-iTunes reality and Microsoft is betting on a building a digital ecosystem for enterprises centered around MS Office and Outlook through acquisitions of business-centered services like Skype, Yammer and LinkedIn. Digital ecosystems differs from the traditional approach to digital marketing where the dominating logic has been to bring customers to the company’s website. Citi research refers to this development contextual commerce, where a technology/platform enables a consumer to interact and transact with their chosen merchant/brands in the consumers preferred context or medium.
Regulatory changes are fueling the inevitability of the platformification of banking. I have covered this topic in-depth in earlier blog posts, but in short, the coming payment service directive for European banks requires banks to open up their APIs to third parties in order to encourage innovation in the payments space. For more on PSD2, check out these blog posts:
- A short introduction to PSD2
- PSD2 – Opportunities, threats and strategic options for banks
- What does PSD2 mean for online merchants
- The what, who, when, where and why of PSD2
For banks that choose to look at this as an opportunity rather than a threat, embracing a platform strategy is crucial in order to benefit from the fundamental shift in the banking landscape that the directive represents
Collaboration between incumbents and startups has become a hot topic in every industry facing digital disruption, and financial services is no exceptions. During the last year we have seen numerous examples of bank and fintech collaboration, both banks collaborating with fintechs, fintechs collaborating with other fintechs as well as banks collaborating with each other through blockchain consortiums just to name a few.
When it comes to collaboration, APIs and banking as a platform is the future, it’s needed to industrialize the collaborative environment and create a digital ecosystem. To understand the new world of open platform banking many banks are testing the waters by hosting hackathons on their platforms. Still barely scratching the surface of the opportunities for banking as a platform, banks like Capital One and BBVA are opening their APIs to third parties.
However, bank APIs are so far in large extend only open to selected startups, or as sandbox APIs where data structures are similar, but the data set is scarce and populated by dummy data. This is a contrast to how the digital ecosystems like Facebook, Amazon and even fintechs like Stripe are offering self-service access to their APIs to anyone that meet the basic requirements. We even utilized Stripe for an MVP in order to speed up time to market when developing our crowdfunding solution in SpareBank 1.
In this future banks have a couple of options. Build and own their own digital ecosystems and/or participate in external ecosystems. I believe that both is a necessity for survival. Like every unbundling banks graphic has shown us the past year, there is a fintech company able to substitute every service offered by the banks. At least at the front end. Banks are still providing current account, capital for mortgages, deposit guarantee schemes for savings and in general, take care of the underlying machinery.
CBW from Kansas is one bank that has utilized this as an opportunity. Starting out as a partner bank for Moven, but is now expanding its APIs to both startups and incumbents that will benefit from building on top of a licensed bank infrastructure. Railsbank is a new player in the fintech landscape that is aiming to connect banks and fintechs through a simple API with regulatory compliance included in the service. Solaris Bank out of Germany is a fully licensed digital bank designed to power an array of fintech services. Its banking as a service (BaaS) platform to eventually provide a full range of traditional banking transactional services, from a licensed banking entity. ABN Amro is another bank taking an offensive approach to banking as a platform and consider third-party apps as an extension to the bank-as-a-platform and therefore a partner in both customer experience and distribution.
When it comes to banking as a platform – resistance is futile, and I agree with BBVA in their saying that a company without an API is like a computer without internet.