Clients able to open a new account and a credit card with a bank without having to go to the bank in person, and can also access discounts, points, and other services in real time. Furniture stores can finance a bedroom purchase using loans, which can be offered with a simple click on a mobile device; or, users can obtain a pre-approved loan from the real estate portal itself, presented with a previous selection of the houses they can access according to their income. These are some of the examples of how Open Banking is already transforming banking and the consumer experience.
Open Banking, the key to digital innovation
It is not news that most of the financial world considers Open Banking as key in its digital innovation plan, turning traditional banking into two sides of the same coin. On the one hand, it is now required by regulation, so that other companies can have access to their customers’ data and their banking services. And, on the other hand, the benefit of this requirement is being able to access customers that they could not reach before and even offer current customers more innovative services.
In order to comply with the legal requirements of Open Banking, banks have been forced to develop their own Application Program Interface (API), which provides companies with a single point of access to all of a bank’s services. These services are offered to their clients when the user experience and the design of their product have become essential to monetizing said investment.
3 Uses of APIs in the context of Open Banking
Let’s start by explaining the three main ways to use APIs:
- Using the API as a distribution channel: One of the existing examples is to convert an overnight banking procedure into one that is processed in real time. This is what happens with ACH payments in the USA and, with the CitiConnect case study, CitiBank created one to facilitate access to treasury products
- Using APIs as a Service (also called Banking as a Service, or BaaS): This is probably the manner of use with the greatest future prospects. Money laundering prevention and Know Your Customer (KYC) processes are necessary and used by banks for analysis and customer segmentation that can be used by other entities through one or more APIs. One example of a case study would be the company, Shufti Pro, which has started to market its own KYC process to banks and other clients.
- Using the API as a product platform: It is the way that large banking entities have found to comply with the regulatory requirements that are demanded of them, providing their data to third parties through their own APIs and charging for each connection. This is the case with BBVA, DBS of Singapore, Capital One, and Bank of America, among others.
Banks are focused on monetizing this effort through their API platforms to other companies by offering testing and implementation free of charge, but charging for each of the connections made with their real customers.
New forms of income in banking
Banks, therefore, are constantly looking for new ways to boost revenue from their APIs. Financial institutions that operate in markets where open banking is developing can find inspiration in Europe on how to make use of the regulations and taking monetization into account from the beginning.
This could position banks to adopt technologies and business models that grant them a long-term competitive advantage. Banks with a vision of open banking beyond regulatory compliance will be better positioned to compete with fintechs and with tech giants, like Google or Facebook.
In order to keep up with those considered digital innovators, major banks are trying to build new business and technological capabilities, re-evaluating their operating models and investing in open technology architecture. In addition, some of them are also beginning to rethink their data management needs and find new ways of working with other companies that are already working in this field.