By Neil Sheppard - January 27, 2022
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Learn about the future of APIs and Open Banking within the financial services landscape
Application programming interfaces (APIs) have changed the digital landscape irrevocably. Large multinational companies, such as Amazon and Netflix, and midsized tech firms, like Uber and Airbnb, have long used APIs to streamline market acquisition and retention initiatives. The financial world has taken more time to follow suit, but the gate has now been swung open, and APIs are set to galvanize the financial ecosystem, allowing both big and small tech firms to enter the playing field, stimulate innovation, and enable deeper engagement with customers with more personalized products and services.
At the same time, APIs have also brought banks and other traditional financial institutions a competitive edge, allowing them an enhanced ability to build tailored offerings, improve loyalty and create new channels for revenue.
Yet there is still so much potential left untapped. In a world that is quickly moving to put customers at the center, and where data is currency, the financial industry must determine what priorities will drive future change. Financial technology leaders must look beyond just compliance and regulation, and consider the best route to improved revenue, collaboration, and efficient and seamless customer interaction.
For Michael Pierce, Commercial Director of Banking at FintechOS, the value of API and digital banking ecosystems directly corelate with the fact that the industry is undergoing a critical shift. As he explained in a recent webinar featuring Finextra, Lloyds Banking Group, and Nordea, consumer behaviors are changing faster than they have before, and now more than ever, consumers demand personalized services. In his view, this has resulted in financial consumers no longer wanting to be sold financial products; instead, they are looking for frictionless experiences that are tailored to their needs. This, he believes, is what has fueled the rise of propositions like BNPL, embedded finance, and banking-as-a-service, and why financial institutions must adopt an API-first approach to remain competitive.
To understand this, we can take a look at how the evolution of banks has changed within the last five or six years. Previously, banks seemed to have been built for banks, and it was up to consumers to slot themselves in. But now, with radical changes in consumer behavior forcing a shift, banks have begun to see the need to build themselves differently, centering themselves around their customers. For that to be truly possible, however, and for banks to be able to build these experiences around their customers, the only real option is to adopt APIs.
With APIs, value can be created in a number of ways. First, there is value to the consumers. According to Pierce, “by embracing the ecosystem approach, banks can enable real-time delivery of hyper-personalized services that make customer experiences just generally better”, usually saving them time, effort, and money.
The second area is organizational. These tools allow for more automation in processes, which ultimately allow financial institutions to optimize cost margins, and create more products and services.
In the Nordics, for instance, where there is already a very strong presence of fintechs, open banking is not completely new. According to Agnija Gailane, Community Manager, Open Banking, TxB Solutions at Nordea, consumers already use third-party services to do their daily banking, to do shopping, to apply for loans or to acquire services. The value created was more of a shifting technology. Fintechs decided to switch to open APIs, which was much more efficient, cost-effective and used up fewer resources. They were also able to integrate with the banks to get data quickly, and it is also regulated, so there was a standardized way of working which guaranteed a secure and safe process.
Additionally, this could mean that financial organizations no longer have to build their own products from scratch, allowing them to form partnerships that could let them get to market much faster. As an example, BancaProfilo developed a super App called Tinaba, in which they formed a partnership with Alipay. This connected merchants with 1.2bn Chinese and Asian users, opening up lucrative new revenue streams.
There is also value to society. Better data-driven insights resulting from access to data via APIs allow for better decision-making. Additionally, new technologies are constantly emerging as a result of broader access to data, which in turn allow for the creation of products that can focus on previously underserved populations.
As Vilmos Lorincz, Managing Director at Lloyds Banking Group, says, “Firms are trusted custodians of data; we have been trusted to use it in the best interests of the customer.”
The big challenge facing the financial industry is one of silos, not just in how data is used, but actually in how organizations work. There is a need to centralize and organize the data we have, so we can get an authentic 360-degree view of the consumer and truly deliver innovative customer-centric experiences. However, this can only work if we shift to an ecosystem-driven platform that is both collaborative and innovative, because our technology must have the ability to change quickly and with minimum fallout.
Business models are shifting rapidly — we can see this in the adoption of embedded finance, for instance, where retailers are already seeking to offer services that were traditionally the domain solely of banks. There are new avenues for revenue generation, and new revenue streams are emerging. As the financial ecosystem continues to evolve, it is imperative for survival that financial institutions follow suit.
Let’s take Shopify as an example. While Shopify is not a financial institution per se, it has begun to offer financial products that have increased both its customer engagement and revenue and provides a great example for what can be done with the proper use of integrated data.
In 2019, Shopify generated nearly $400 million in revenue from its payment capabilities. In the third quarter of 2020, it was estimated to reach a volume in payment transactions of around 14 billion US dollars. Shopify earns between 2.4 and 2.9 percent on each transaction, plus a base fee of between $0.25 and $0.35 per transaction. The business also extends additional credit to qualified merchants on its platform with a 12-month term. This frictionless process is handled entirely via the Shopify account. The company has not only been able to reduce transaction costs for its customers by integrating the financial processing of purchases made via the platform but has also been able to open up an additional source of revenue for the company itself.
This is a perfect illustration of the importance of ecosystems how future customer-centric solutions will be reliant on the integration of data. If you have better data on customers, and operate a centralized platform, then you have better insights, and therefore can offer better-tailored products.
The consensus is that integrated ecosystems will play a big role in the future of finance. Open Banking, as driven by APIs, will become standard and will be expected by customers as the minimum baseline for services. Consequently, data will play an even bigger part in personalization and product selection, and there will be immense pressure to make sure products on offer are tailored to the target audience, even if it is an audience of one.
Google, Amazon, and other similar big tech firms have done a very good job of understanding and using customer data and this will become more important as the landscape evolves, as these firms will both offer a playbook to emulate, but also become competition to keep abreast with. At the moment, Amazon already gives SME loans and offers insurance. Apple has payment systems like Apple pay and offers an Apple card as well as BNPL capabilities. Google also has Google pay, and as mentioned previously, a retailer like Shopify has already earned $2bn just from payments.
While banks will always be a part of the ecosystem, likely to provide balance sheet and credit expertise, there will be a continuous evolution of services. There may be an increase in potential revenue generation for banks in the background, but they will need adaptive, flexible, and powerful technology to really take advantage of the opportunities.
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