Open Banking: How to Capitalize on Initial Success

Data aggregation and personal finance management are useful functions for consumers, but they don’t feel like the boundary-pushing, world-changing type of experiences that many were expecting. Recently, British fintech company Revolut announced that customers will be able to view account balances from other banks in a single screen in their app. It’s a nice feature and demonstrates that open banking democratises data - but it's hardly boundary pushing.

The banking ecosystem is still in its infancy and now is the time for banks to establish API-driven ecosystem strategies and gain a foothold in this emerging market. We believe that banks need to do the following in order to succeed:

• Articulate an ecosystem strategy that defines immediate targets for connectivity and partnership.
• Extend the regulatory API channel to include API experiences that drive strategic value.
• Develop a technical capability behind ecosystem APIs that can deliver the capabilities and quality services needed for success.

The challenge remaining for banks is to align both their business and technical strategies towards unlocking ecosystem value. The good news is that two years of open banking have helped grease the wheels. But the job is not done and the winners have yet to be decided.

The “post-open” banking world

When it comes to API-enabled ecosystems, openness can be an ambiguous term. Generally speaking, an open API strategy implies a minimal barrier to entry and interoperation. For example, an API that requires developers to register and authenticate their application through a self-service portal could be considered to be open if the process is seamless. 

But open banking has a special meaning in European banking and that definition is bleeding into other regions of the world as well. For the European market, open banking is the manifestation of open data initiatives. It means that data and services should be democratised and made available to all. This is a good and important objective and we’ve already seen the positive results. But there are more ecosystem opportunities available to us.

In a "post-open" world, banks need to move beyond the goal of simply exposing data and services available to third parties. Rather than creating generic and standardized capability platforms, banks must seek and enable partnerships that allow them to re-orient towards their customers. They must shift their strategy from open data to targeted interactions and competitive advantage.

This doesn't mean that banks should claw back their existing API initiatives. In fact, moving from an open model to a targeted model will require more investment – not less. Post-open banks will need to publish APIs that are more purposeful in their monetization, product growth and customer reach potential. It's a subtle shift, but it means that banks must have clear and articulated ecosystem strategies that allow them to unlock value with API programmes as a vehicle.

This graduation from open models to targeted API models has already played out in other industries. Over the last five years, we've witnessed a market shift amongst technology companies away from voluntarily open, flexible and generic platforms of APIs towards closed models of business objective-focused APIs. Netflix, Twitter and Facebook have all changed the access models of their APIs to align with the way they want their businesses to operate.

Unlike these technology companies, post-open banks won't be allowed to shutter their open APIs. Instead, they need to supplement the regulated, open ecosystem with APIs that release value in the market. This new wave of assertive and targeted API strategy has already begun in the corporate and commercial banking sectors. Commercial banks must offer compelling API experiences to corporate customers who plan to use the APIs directly. As a result, banks are motivated to offer differentiated and market-leading API products in order to attract consumers to their platforms and core banking products.

This market driven approach to APIs will eventually be relevant to all sectors as organizations compete to form the best partnerships and bring their services to consumers in a compelling fashion. The open, standardized ecosystem drives aggregation behaviour, while a digital partnership system drives market-differentiating experiences. Both are important and successful banks will need to participate and compete in both systems.

Competing in the post-open world of banking

Succeeding in a post-open banking ecosystem will require a true combination of business and technical leadership. Banks must be capable of articulating the sectors, domains and partners they want to target. But they must also must be capable of executing and connecting with these ecosystem targets in a time and cost effective way. In particular, banks will need to make smart bets on which segments of a value chain can provide the best return in the API market.

The San Francisco-based API company Twilio is an example of an organisation that has demonstrated an understanding of how to succeed in an API market. Twilio has become a market leader in the cloud communications space without possessing any telecommunications capabilities of its own. Instead they offer an experience layer on top of other providers. U.S. financial services start-up Plaid has applied the Twilio model to the financial services data space and won the attention of Visa who recently acquired it for $5.3 billion USD (TechCrunch).

Both Plaid and Twilio have succeeded by focusing on the value of the developer experience for API users. However, this is only one approach. Behind Plaid and Twilio are a set of capability providers who profit whenever data or services are accessed. These backend providers can profit earlier in the value chain, without having to invest heavily on a differentiated developer experience for users of their APIs. Other providers like Amazon, Google and Microsoft offer platform cloud systems and use APIs as differentiators to ease integration and automation.

“Other providers like Amazon, Google and Microsoft offer platform cloud systems and use APIs as differentiators to ease integration and automation.”

So, it’s clear the bar has been set.

Before long, if not already, all the major competitors in this space will have implemented and refined open banking as a service. But that’s just the beginning. Banks would benefit from embracing open banking’s underlying philosophy. It’s truly about innovation and strategy — hitting the targets others cannot reach and seeing the possibilities others cannot see.