Open Banking is changing the very nature of banking and banking institutions. At the highest level, it is dismantling the “pipeline” universal banking model and enabling a ‘platform’ model in its place.
Consequently, banks, which traditionally manufactures their products and distributes them through their own channels to their own customers, are now offering a variety of financial and non-financial products sourced from other providers or distributing their own products and services on third-party channels.
How are banks doing this?
They are doing this by working with their external ecosystem in a variety of ways:
- Creating joint products with partners: Examples include Paytm which has introduced a co-branded credit card with CitiBank (and VISA), and Marcus by Goldman Sachs (and Mastercard) which has collaborated with Apple to launch the Apple Card.
- Embedding non-banking products within customers’ primary journeys: DBS is a great example, with successful marketplaces for used cars, property, travel and utilities that allow it to enter the customer journey well before the customer starts looking for a banking product.
- Collaborating with third parties to deliver even rival products: Once again, consider the example of Paytm, which is working with IndusInd Bank and ICICI Bank on high value fixed deposits and digital loans respectively.
What business models are being utilised by banks?
- Banking-as-a-Service (BaaS): BaaS is a recent development, with the model still in an early stage of adoption. Possibly, its most famous exponent is WISE, which offers a set of APIs for creating bank accounts, making and tracking payments, and accessing the details of their activity. Developers can leverage WISE's infrastructure to build financial experiences into their own front-end applications.
- Marketplace: The marketplace model is gaining popularity with many banks creating marketplaces selling best-in-class financial and non-financial offerings in one place. In a way the marketplace is the opposite of the BaaS model because here, banks – much like departmental stores – aggregate the best options from other providers to fulfil even the non-banking needs of their customers. Apart from the earlier mentioned DBS Bank, Standard Chartered Bank runs an internal virtual marketplace for colleagues that offers different types of career and development opportunities across the organisation and where its leaders can identify, develop, and deploy talent quicklarketplace featuring a variety of services, such as wealth management, pension accounts and accounting software.
- Utilities: A very interesting spin-off is the utilities model where big banks capitalize on their scale and efficiencies to provide back-end infrastructure services to other banks/ providers who then focus only on front-end activities. Payment utilities are now quite common, and the action is picking up in banking as well. For instance, ABN Amro Bank has set up Stater NV providing mortgage services, such as collection, communication and loan management, to other small lenders and fintech companies.
What is powering the digital ecosystem and fostering open banking paradigms?
The above business models, while different on the surface, are all powered by APIs on the inside. APIs work at several levels throughout the open banking enterprise: specialized internal APIs or microservices enable banks to solve problems and create new value for clients; APIs help in customer acquisition and product expansion; an API led architecture can enable banks to innovate on par with the best companies in the world.
Therefore, the importance of a sound API strategy can never be overestimated. While developing their APIs, banks pay heed to the following:
- APIs are based on good design principles and values, such as user-centricity, reusability and end-to-end process coverage.
- The strategy produces a strong operating model, as well as a monetization model that supports key business values.
- If the business is to adopt an API-first approach for delivering new features in the future, the APIs are designed for maximum reusability today.
- A modern API management platform with clear ownership is essential, as is a sound governance mechanism for executing internal and external APIs.
- Last but not least, the bank’s leadership nurtures an API culture throughout the organization.
Having the right talent and training resources is critical, because over time, the bank must have multiple agile teams, working across the enterprise, developing APIs.
What is next for APIs and Open Banking?
Open Banking has started to come into its own. It is a significant opportunity. Open banking is set to become mainstream and will pave way for new possibilities such as open finance. It will eventually foster new business models, market competition and innovation, creating a win-win proposition for both financial institutions as well as for varied customer segments.