As banks become tech companies with a banking licence, executives are beginning to understand the principles of Application Programming Interfaces (APIs) but are still unsure about how they benefit the bottom line. API driven products and services present significant opportunities, but also competitive threats to incumbent banks.
How can you use APIs?
APIs allow banks to share data, both internally and externally.
Internally they are used to increase operational efficiency, and externally to share customer data in a controlled and secure way. In the payments world, they allow sharing transaction-level data, products, and financial services, whilst also enabling compliance with open banking regulations such as Europe’s Payment Services Directive 2 (PSD2).
‘Opening up’ API channels to third parties has faced huge resistance from bankers who believe in a protectionist strategy towards data; allowing a customer to access their accounts only through a bank’s proprietary application. History is repeating itself; banks were initially resistant to cash machines (ATMs) being placed in shopping centres because they believed there was value in customers having to physically visit a bank. Customers took their business to banks which had access points in places where they liked to spend time. Modern banks need to understand that APIs enable convenience and frictionless user experience where their customers are: on social media and e-commerce sites.
APIs enable an extra layer of value-adding services to be added payments products, such as social media applications with 1-click payment capabilities, account amalgamation across several different bank account providers, and account balance and forecasting analysis. Account and transaction-level data can be used to predict what customers will want and need in the future, and tailor financial products to them. Internally, APIs offer a great potential to streamline internal operations, innovate current services and develop new capabilities. However, sometimes the technical challenges and operational change associated with developing and leveraging APIs nullifies the innovation potential, takes too long to market or results in unforeseen service errors.
Meanwhile the challengers – in the form of FinTechs (Monzo, Ripple) and non-banks (Amazon and ApplePay) – are adept at quickly deploying the enabling capabilities of API technology to take market share. This is unfavourable for banks as they already have a problem attracting and retaining customers. They have an average loyalty score of 15/100 while big tech companies have scores near 70/100.
Payment products are valuable to banks, generating a major source of profits through fees, with cross-border payments being the most profitable. Challengers entering the market are increasing pressure on banks and traditional card companies by decreasing fees on transactions. Some challengers offer free cross-border transactions to their customers and generate income through other avenues, such as loans, credit cards, or additional add-on services.
How can banks stay relevant in the current environment?
Big banks have an advantage when it comes to trust. When customers were asked if they are willing to share more data with a provider in order to get a better product offering, 78% said they are willing to share with their primary bank, while 63% said they would share with another bank and just 43% would share with a non-bank. Customers trust banks, but not bankers.
Banks have resources. They have an existing sizeable pool of customers (data) to understand them better than their non-bank competitors. APIs enable opportunities to create new services – better tailored to the customer needs – built on the vast amount of customer data. API led developments in sanctions screening, reconciliation, and the KYC spaces have resulted in material customer experience and efficiency gains; frictionless straight-through-processes, fewer manual interventions, and lower associated costs.
First mover advantage is key to retaining and extending a bank’s customer base. The payments market requires agile and continuously improving services, with a focus on greater speed and a frictionless experience.
Rigid legacy infrastructure is difficult to update and costly to maintain. In practice, it takes a bold payments strategy to embrace innovation whilst maintaining a focus on security, investing in understanding the needs and wants of the customer, re-aligning resources away from siloed maintenance of legacy systems to value-adding streams, and welcoming constant feedback.
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