2018 April 21st Vienna - Digital banking and mobile payments summit - Open banking APIs friend or foe?
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Threats & opportunities banks of Open Banking APIs. Possible strategies to follow and emerging business models arising from the PSD2.
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2018 April 21st Vienna - Digital banking and mobile payments summit - Open banking APIs friend or foe?
- 1. OPEN BANKING APIs FRIEND FOE
- 2. Dennis?
- 3. 50 Shades of Open ? Source: EBA
- 4. • Make payments & identity seamlessly integrated in the customer journey • Open banking APIs will help streamline financial administrative processes by taking out unnecessary steps in connecting applications and boosting the take-up of added-value financial services. Meta innovation trend
- 5. Multiple open API initiatives have already emerged First movers open APIs payments industry – non exhaustive
- 6. Leading to fragmentation and merchant concerns • Lack of interoperability, not only in terms of payments systems & legal (eg VAT) • Roadmap pressure ! • Up to merchants to decide how much risk we accept
- 7. Standardisation needed. Also multiple initiatives emerged – non exhaustive Source: EBA
- 8. In general, a company can play 4 different strategic roles Source: EBA
- 9. Which roles can bank play in value chain ? Pivot between producer and distributor Source: EBA
- 10. • Banks => buy-build: eg ING Lendico, ABN New10/Tikkie; • Less partner (except eg iDEAL) • From payments to higher margin services Leading to plenty of partnership forms & possibilities
- 11. Disintermediation risk Reputation risk Digital transformation vs Service innovation Better distribution Risk mitigation But next to the opportunities, it also poses banks with some serious challenges
- 12. Stereotypes • Fintechs: focus & excel in 1 thing (service) • Banks: do all services (and hence not excel), are slow, playing defensive (lot to loose) It all boils down to power play and the simple question: “Will you integrate my API or do I need to integrate yours?” Power play ahead in the fintech battle
- 13. Open banking APIs leads to innovation in the payments sector for consumers … Examples: account overview & budgetting
- 14. … but so far perhaps even more for merchants Examples: accounting, VAT submission, invoicing
- 15. But it can also lower indirect costs for merchants Replaces ageing banking payment (debit) systems => higher reliability
- 16. Alternative points of interest arising from PSD2 other than purely payments-related Identity: onboarding/identification (already bank verified) Rise of Identity-as-a-Service (IaaS) business model ? Example of customer control through digital identity tools Source: Innopay
- 17. But also possibility for merchants to lower fraud … Through instant risk decisions and AS PSPs reducing fraud through new services Check customers and their financial position
- 18. … and increase conversion AS PSPs could also increase check-out conversion through new data propositions Example: for multi-banked customers - aggregate customer data over several relations (banks / credit card providers / …) => Better credit scoring
- 19. Are they successful so far ? 60 applications
- 20. Real money & profit for the moment, seems to be in B2B
- 21. • Fintech surge led to total disintermediation and (too?) many niche suppliers. • Not handy from a customer’s point of view. • Ecosystems will emerge which tie it at the back together. • Biggest question is probably related to the role of bank. Pessimistic scenario: bank just a back-end factory ? Payment habits in 5 years with widespread API usage; Will we have an established “new normal”?
Editor's Notes
- PSD2: Strategic and practical reflections on current state of OpenBanking APIs and how new applications can foster innovation in the financial sector. And hence, whether in the end, they are friend or foe from incumbents point of view
- Varied, but relevant background Supply and demand side financial services, so as banker and as merchant Worked traditional banks as well as fintech
- There is not 1 form of open API Come in various forms & shades So when one talks about ‘open’ APIs & formulates strategy, important to get the clarify which variant you’re talking about Key technical aspects: API 101: - data transport: most use secure HTTPS as transport protocol - data exchange format: XML or Json most common - data access mngd: multiple frameworks eg Oauth - API design: 2 most common design principles are REST or SOAP
- Innovative applications can, for example, help merchants with budgeting, invoicing, accounting, which, of course, is not core banking. Connection is about seamless integration and thus eliminating unnecessary and time-consuming steps in opening accounts, uploading information, sending information and initiating banking services. Thus, by freeing up time for end customers, it gives them more and real-time control over their finances.
- PayPal: one of first, used API to extend their transational capabilites to other platforms, so distribution strategy play BBVA and Credit Agricole => offer open API marketplace Fidor Bank, also offers marketpalce, but went bit further and spun it off into seperate business unit, Fidor Solutions Credit card providers also developed own open APIs to give improved retail ecommerce experience Fintech players like bunq (NL) > (open) API operating model by design Even SWIFT has APIs to support core messaging service to enable global funds transfer
- However, the emergence of all those APIs by individual market players is leading to fragmentation like we saw already in the epayments space And gives rise to merchant concersn which were voiced in the ERPB and adressed by working group on payment initiation services Concerns are grosso mode 3 fold, and inter-related
- Fragmentation Risk was also perceived in the market, on the supply side, leading to standardisation initiatives However, multiple unstructured & unregulated standardisation have emerged already Leading to new risk of Fragmentation upon fragmentation Can be grouped along 2 axis: - standardisation in terms of technique & functionality, or also operational & legal standardisation - who is involved/ leads the standardisation effort: individual playsr, free format community (ie interested parties), industry led, or universal standarisation protocols Count at least 10 in the groups Community/Industry
- From incumbents perspective, how to deal with those open APIs and formulation a strategy for that, 2 fundamental questions need to be answered: - Who is creating those financials products - Who is distributing them Leading to 4 potential generic roles in the finacial services value chain Most of larger financial institutions already play roles 1-2-3, whereas 4 is still at early stage of development
- Legend: - bank = green box - third party = white/blank Integrator: internal use of APIs Producer: offer APIs to others Distributor: you integrate other players APIs Platform: facilitate business of others as intermediary
- Roles 2 and 3 lead to plenty of Opportunities for partnerships between fintech companies and traditional banks/PSPs Looking at the market, incumbents seems rather into the Buy/Build partnership form, instead of truly partner on an equal basis; and build usually under new brand instead of core brand Partnership focus also seems to evolve from focus on payments to higher margin services, credit in particular ING bought Lendico ABN build and launched Tikkie and New10
- From the different strategic roles, one can already deviate several advantages of such an open banking API strategy But the challenges are also clear
- Role of new players and challenges for banks (incumbents) in a renewed payments landscape in Europe Furthermore, if a bank has an open API and lets other third parties integrate its functionality, customers leave its closed banking environment and do the same things within the environment of your API partner, potentially reducing the relationship that customer has with the bank.
- Now, the most important question, what’s in it for the customers ? For consumers, open banking API advantges started to materialise first in the domains of budgetting & bank account overview & mngd
- However, looking at the emerging applications, they seem so far perhaps lot more promising for merchants With open banking api integrations popping up with: Accounting – real time transactions synchronisation => always real-time up to date accounting VAT submission – automated link between accounting system and VAT submission => always enough money set aside to pay VAT + on time with VAT payment Invoicing – invoices to be paid are automatically presented for approval within online banking system, approved with 1 push of the button => less hassle with invoice payment
- Besides payment related, other, more interesting I would argue, points of interest arise from PSD2 First of all with regard to authentification & identifications As customers have already gone through very rigid banking KYC checks, one can envisage new identity-as-a-service business models; whereby merchants/applications piggyback on the banking KYC already in place to offer a superiorly improved customer experience on their end
- Also, as banks know their customers and their financial history, merchants could also use that transaction history to enrich their fraud models, and hence come to better risk decisions
- Related to that, better risk information also leads to better credit scoring and hence possibly higher conversion
- Now, question is if these open API marketplaces from banks are succesful ? I would argue based on the number of applications that are developed on them; not so succesful so far Certainly not relative to other open api ecosystems like from FB, Apple or even accounting like exact, which have hundreds or thousands of apps developed on them
- Based on my own experiences, the real demand, traction and hence money seems to be in B2B side of open api banking; ie merchants that use the open api banking platforms to enhance / enrich their offering to their retail customers Whether it is in payments where retailers are embracing that as part of their loyalty programs, or financial players choosing not to build a complete product suite themselves but choose to take the distributor role mentioned earlier, like Van Lanschot; or merchants looking to increase their conversion by incorporating white labelled credit facilities and APIs (like Autoscout24 using SolarisBank) Big deals can be made here And many more to come in the wake of the psd2, here is where the most interesting developments are taking place at the moment and the 2 – 3 yeras to come in my humble opinion
- One might argue that this is not handy from a customer’s point of view, because a consumer would not want to open tens of different accounts, one for each specialist product. Ecosystems (marketplaces) will emerge which tie it at the back together is, in my view, a key trend for the coming years. The biggest question is probably related to the role of bank. If we extrapolate the open banking API and integrations by API partners, then the pessimistic scenario is that a bank is just a back-end factory, left only with processing capabilities, aiming for compliance and regulation.