Regulations mean in most cases costs, mandatory implementation, additional reporting and potential audits. And of course a need to be complaint. We rather do not think about them as a business opportunities or innovation drivers. Especially in banking industry, while number of regulations increased dramatically during last few years. Revised Payment Service Directive, known as PSD2, can be perceived differently, as a trigger for the new opportunities for banks and for the market. European Banking Authority (EBA), a EU banking regulator, understands fundamentals of digital economy and knows that financial industry need to be more open. Payment and banking industries need to adopt technologies and business models similar to the other industries (or fintech) to provide value to their customers in digital era.
New business models and digital economy are based on open API concept.
Somebody said that not having APIs currently, is like not having a website in late 90s. API is a very old, technical acronym for Application Programming Interface. It is known in software development for years. It is nothing new. API is an interface which allows business service exposition, and then a business interaction in digital economy. It is an interface, which encapsulates business functions and offer them as a service. In modern approach APIs are used to exchange information and get access to services between channels, applications, systems, even infrastructure layers.
There are two important roles directly associated with an API: a service provider and a service consumer. None of them is an end user. A provider creates and exposes APIs so they can be used or consumed. A consumer uses them to build and to offer a business benefits to end users. Bank can be a provider, can be a consumer or can play both roles.
It means that banks can provide some services in form of APIs to the market (like ATM locator, foreign currency exchange, etc). They can also use services exposed by other companies to offer more value and better experience for bank’s customer (for example central bank currency exchange service, geo-locatization of branches and ATMs via google maps service, etc). A service consumer can build its business combining APIs from many different providers focusing on customers, unique value and benefits for them.
APIs are part of the digital strategy and digital mindset how to build and provide value.
PSD2 strategy needs
There are few regulations which will impact banking industry, especially in Europe: MIFID2, GDPR and PSD2. GDPR and PSD2 try to address some of the digitalization challenges.
The PSD2 directive itself focuses on three major areas:
– Payments service by 3rd party payment providers (TPP)
– Account Information service (XAS)
– Increased, standardised security
More APIs than those 2 mentioned above will be required for PSD2 implementation, but from business perspective those 2 are the most important part of the directive.
The payment directive creates rules for the new entrants in payment markets (TPP). Internet payments are nothing new. We use them on e-commerce sites for years, since the beginning of the Internet. We have e-payments APIs right now ready for and used by e-commerce. Examples are PalPay, e-card, FirstData. Some of them use payment capability directly from the banking accounts, another use credit cards capabilities. On top of this we have mobile payments services too like Apple Pay or Android Pay. Thanks to PSD2 there is a chance that e-payment services will be more standarized, secured and for free.
There is much more disruption for banks in account information APIs than in payment APIs. Giving access to the bank’s clients Account Information to other 3rd parties (which can be another banks too) is a threat of losing relationship with clients. Aggregation of information about all accounts associated with the specific person – here is a space for keeping relationship with customers. Most of people have accounts in more than 1 bank. The same with corporations. New players in accounts aggregation space can be more challenging for banks.
Banks have to be ready for a regulation implementation. But they can also create their own strategy and define which role they would like to play in a new, post-PSD2 banking market. And it is much more than physical readiness of a few required APIs. This is a conscious business decision, which will determine the direction where this regulation will drive the banks. It will also define their role in a future of e-commerce, payments and financial markets. Even if scope of APIs will be limited only to those defined by PSD2 impact of those decisions can be much greater.
Regulation driven innovation
PSD2 has been doing one good thing: it pushes banks towards APIs economy. And of course banks can do a bare minimum – implement only those APIs required by the directive … or they can start building their own digital strategy, based on APIs and openness.
Because APIs are all about providing or consuming business services there are many areas where banks can use them. They can be used internally or externally. Mobile banking backend is usually based on APIs – because this is the way we integrated systems and applications nowadays.
Main areas where APIs are used are:
– Innovation – both internal and external, hackathons, ideations, challenges
– Building ecosystems. Ecosystems can be setup around clients and partners.
– Making markets – by connecting service providers with service consumers
In digital economy companies are not valued by what they owned, they are valued by what and how they share. Digital economy is sharing economy. And it doesn’t mean that the sharing is for free.
Having APIs just as a provider is not enough, we need a whole business model and monetization strategy to make APIs integral part of bank’s strategy (digital strategy at least).
There are few basic options:
- We can offer them for free (login with Facebook or Twitter or central banks services for currency exchange are a good example of free APIs)
- We can ask consumers to pay for using APIs (Saltedge.com )
- We can incentivize consumers for using APIs too. They can help to promote our services
- And we can setup indirect business models with more complex monetization strategy.
It is not just APIs, it is a business strategy
The Euro Banking Association (EBA) demonstrated very good understanding that banks need to be more open. They need to open up with their services and share the information with external internet based participants (both clients, partners and other players). It is because in a digital economy everything is more connected than ever. And without this step financial institutions would not be able to support economies and governments. On the other hands, the regulator tries to help defined secure standards assuring the end clients that business can be done securely in the internet.
Financial services companies need to evolve to an API based business to enhance end to end security and to boost innovations and efficiency. API based bank business architecture will help in agile delivery model implementation for the new products, services and values. And it will provide a fundament to build a digital ecosystem around the bank.
In this new digital economy based on APIs banks need to decide on their strategy, approach and which role they want to play. There are many choices: financial services provider, integrator, financial and non-financial services platform and many others, even more disruptive.
In 2000 Elon Musk had a revolutionary idea to create a fully digital, internet bank. Although many thought that this idea was crazy, Musk succeeded despite very low internet adoption globally. Still today the concept of digital only, easy to use, customer friendly bank is a great challenge for many financial institutions. Often they blame regulations as “too hard to comply with” seeing them only as a limitation, not as a drive to act and evolve. In PSD2 case we can see opportunities for reshaping banks role in future economy.
Today Musk is trying to fly to Mars. PSD2 can be a rocket for the banks, moving them faster towards interconnected digital world .
- “API Economy – How to unlock value with new business models and winning experiences” http://www-935.ibm.com/services/us/gbs/thoughtleadership/apieconomy/
- “Understanding the business relevance of Open APIs and Open Banking for banks” https://abe-eba.eu/downloads/knowledge-and-research/EBA_May2016_eAPWG_Understanding_the_business_relevance_of_Open_APIs_and_Open_Banking_for_banks.pdf
- “The Payment Service Directive What It Means for Consumers” http://ec.europa.eu/finance/payments/docs/framework/psd_consumers/psd_en.pdf