The three bank trajectories
As we pointed out at our launch, fintech is ready and hungry to create engaging apps, bots, dashboards and services that encourage customers to be more interested in their own financial management.
Within banks, there are often conflicting opinions about how open they should be in building APIs that can help themselves and fintechs create those apps. In the UK, CMA regulations will require banks to use an open banking API standard by 2018. PSD2 regulations in Europe are less prescriptive about APIs, but will still require banks to open up to third parties.
We believe we will see three main trajectories emerge that demonstrate whether banks are really on board with the new regulatory environment. Already, we are seeing some banks fall into at least one of these trajectories.
Basically, banks have three options:
They can become the infrastructure
They can reinvent themselves as platforms
They can resist and play dirty
Banks become the infrastructure
Banks have less than a year before they must provide some mechanism to allow fintech to connect with a customer’s bank account (where the customer has given consent).
Some UK banks haven’t really started working on how to open APIs, or are just looking at the minimum necessary requirements to meet regulations. These banks may be looking to form a stable of their own fintech partners that are able to provide additional services and new products. Others may still be doing the uphill work of selling the API message internally, meaning the best that they will have ready will be the bare bones APIs required by regulation by January next year. That will push these banks out of many of the fintech conversations and will relegate them to being the infrastructure (often referred to as “dumb pipes”) that move data from their legacy infrastructure to the external app creators who are building more customer-facing products.
Banks reinvent themselves as platforms
Meanwhile, forward-thinking banks have already noticed that changes are in the wind. They recognize that while the new CMA and PSD2 regulations are leading the API agenda, this was the overall direction needed in any case. Customers want digital experiences at any time of day or night, with greater insight into their own data and they want that on mobile so they can make instant decisions.
The Royal Bank of Scotland has been running hackathons with the Open Bank Project for several years now to better understand how to build out an API platform that encourages fintech to build new apps. HSBC and Standard Chartered have both already released some open APIs. HSBC has started conservatively, but very much in line with the CMA’s Q1 2017 goals of providing APIs for products and branch locations, while Standard Chartered has already pushed the envelope with an API to integrate a customer’s account data. (Both of these API functionalities are accessible via the TrueLayer platform: you do not have to code for each bank individually, our API has you covered.)
From banks making a platform approach, we think you will see them embrace two major strategies. First they will be working to make their APIs useful to fintech. You can already see this with Standard Chartered’s accounts API: they are encouraging fintech to start building account aggregators that let customers get a 360 degree view of all their finances. No doubt, as they are doing that, they are identifying a stable of fintech partners they can work with more exclusively in the future. Expect to see Standard Chartered acquire some of the early fintech’s that build for their customers. In addition, these banks will be speeding up their own time-to-market for new products. What they learn from opening APIs they will use in-house on core features and services, allowing third parties to build additional customer value that sits outside the banks’ business plan directions.
Banks get ugly
Sadly, there are already a number of signs that suggest that some banks won’t give up the stranglehold they have over customers without a fight. It is a lazy and weak strategy, but it has already reared its head in both the UK and, to a greater extent, in Europe.
Here in the UK, the initial reluctance of banks to engage in open API discussions suggested they were trying to slow down and obfuscate the process. At the start of last year, for example, after initial work was done to create a roadmap for open banking APIs, banks returned to the table and started asking the same questions that had started the whole roadmap process. The idea was to slow down discussions and revisit decisions so that action would be delayed at least another year. Luckily, the CMA wouldn’t have a bar of it and kept up its pace. Attempts by banks to dominate the Open Banking API Implementation Entity committees was also deflected last year.
In Europe, it is worse. The lack of national collaborations to discuss how regional markets will implement the PSD2 regulations has meant that open banking API standards are moving at a snail’s pace. It seems like European banks are thinking that by not organising and by not collaborating around open API standards, they can slow down or confuse the agenda for the rest of this year.
There are other signs that banks may be ready to create more barriers to open APIs. Industry analyst Mark Boyd has researched and written the APIdays Banking APIs: State of the Market Report for the past two years. As the following diagram from his 2016 report shows, one of the main findings was that while half of all banks surveyed saw it as extremely important to leverage APIs to speed up their own product development, less than one-fifth thought the same way about offering APIs so that customers can integrate all their financial accounts into one dashboard app for a global view of their finances.
Many banks are still afraid that the mere act of providing this greater financial insight to their customers will reduce the customer’s dependency on them, rather than seeing it as a strategy for building relationships, trust and customer value. “It is almost as if banks are not interested in supporting their customers towards wealth management or financial literacy”, Boyd told the APIdays banking conference in London last October.
Where are banks headed?
This is all why TrueLayer’s platform is so important for fintech.
Regardless of which direction banks are heading to, fintech needs to have consistent tools available to them to create apps and services that provide greater insight into financial data, allow customers to switch accounts, apply for credit, or better manage their savings and wealth.
It is important for individual banks to have open APIs, but fintech also needs an abstraction layer so that they can integrate with all of the bank APIs available at once rather than have to code for each individually. And even if a bank is getting ugly, fintech won’t be held back. As always, we can’t wait to see what fintech builds next.