The combination of rapid technology innovation, cultural and behavioural shifts, and new financial regulations are transforming the banking sector at a speed that is unprecedented. This presents significant challenges for incumbents, together with profound opportunities for banks to renew and transform their service offerings to meet the high expectations and demands of their corporate and personal customers.
From innovations in cross-border payments, the global adoption of new instant-payment infrastructures, to the growing expansion of OpenBanking and API connectivity models, our industry is changing at an unprecedented velocity.Regulatory mandates are playing an important role in driving this transformation. Beyond PSD2 in Europe, schemes or initiatives are underway globally, including in the US, Australia, Hong Kong, Singapore and India.
So how are banks facing up to the challenges and new opportunities presented by Open Banking and broader market changes? A recent study of 160 international financial institutions by Accenture provides interesting insights into the digital transformation strategies of banks globally. Despite investment of over $1trn over the past three years, most banks have focused their technology expenditure on cost reduction initiatives, with seemingly few investing significantly in new service offerings or seeing an increase in revenue generation.
Of the 160 banks surveyed, only 12% have a fully developed digital transformation strategy, with half making relatively little progress on transforming business models or service propositions. A full 38% are still developing the right approach or have a transformation strategy lacking coherence. It is not surprising that Accenture concludes with the recommendation that banks need to look beyond simply expending more on technology. They advise refocusing attention towards investment that drives ‘innovation and new business models’, developing the ability to add ‘new services that customers are willing to pay for’ in order to remain relevant and generate new revenue.
Investing beyond compliance
In an Open Banking context, the objective should be very clear. Of course, the regulatory mandate for banks to develop secure and scalable Application Programming Interfaces (APIs) that enable the consensual sharing of customer data to Third Party Providers (TPPs) remains obligatory.
Beyond a compliance and a ‘business as usual’ mindset however, an increasingly attractive transformation path is for banks to become TPPs themselves, to create new products and value with a consumer focus that can match any offering by a shiny and innovative new challenger. PSD2 represents a significant pan-European opportunity for banks as a TPP to connect with 500 million potential new customers. By registering as a TPP and offering a central platform where account information or payment instructions can also be communicated to and from other financial providers, together with offering new and hyper-personalised service capabilities, banks not only cement their relationship with existing customers, they provide an attractive proposition to grow market share and generate new revenue.
Most banks have already introduced some basic multi-bank capabilities to their own mobile banking applications, enabling customers to see an overview of their financial health and allowing for better decisions when it comes to spending and investing. Likewise, through shared account information, banks gain a better view of their customers’ needs when it comes to designing tailored and personalised services.
API fragmentation challenge
In developing rich ‘TPP’ capabilities, banks must overcome many obstacles. Not least, the fragmentation of API standards across Europe.
When banks are simply responding to requests from other TPPs, they are able to dictate the API format that others need to use to communicate with them, as long as they meet the requirements as defined in the Regulatory Technical Standards (RTS). In this respect, banks maintain some control. As a TPP however, banks relinquish this control. Like any other TPP, they too will have to reach out to the 5000+ banks in Europe, and cater for the different APIs which those banks publish. It remains unclear how many different APIs will be issued, but already we have a diverse range of country, region, or bank-specific APIs in operation. By mid-2019, around 140 European banks have so far published their own APIs.
How can banks acting as TPPs overcome this API fragmentation challenge in order to reach the large pan-European market?One clear strategy lies with the deployment of an API interoperability hub. By using an interoperability hub, any bank choosing to offer TPP services can undertake the translation and aggregation of many different APIs. The bank themselves can use a single API format of their choice, with the hub seamlessly handling the API conversion and connection processes.
An interoperable API hub approach also delivers considerably improved efficiencies and operational simplification for the bank acting as a TPP. In addition to API format standardisation, a comprehensive hub should also be able to centralise and handle complex security and financial crime compliance obligations, such as transaction risk analysis (TRA) and fraud reporting —essential requirements in managing the connectivity of multiple APIs under PSD2.
An interoperable API hub can play a central part in enabling banks to focus on their core service propositions and their customers’ needs. Our industry boasts a strong history of innovation. With the right strategy and approach, today’s open-API and real-time economy presents enormous rewards for those banks that embrace—and deliver—on today’s innovation imperative.