Are APIs the new goldmine for banks?

The Post API World

The future of banking is being completely altered by the Payment Services Directive 2 (PSD2) which comes into play in January 2018. 

PSD2 opens the floodgates to financial services innovation. Instead of making banking more complex, PSD2 is forcing banks to open up their systems of record to third parties, including non-traditional Financial Services (FS) companies like Amazon and Facebook. Banking will finally become transparent to those who matter most – the consumers. 

Application Programming Interface (API) technology will play a vital role in turning the Open Banking dream into a reality, as they allow data to be transferred and shared between different organisations. Banks now should be developing and executing a plan which highlights the FinTech partners they would like to work with and how they can manage, monitor and monetize new relationships. 

To remain competitive banks need to develop strong and committed partnerships with third parties, these partnerships have led to rising interest in the development of partner ecosystems. Gartner research shows 79% of top performing businesses today are actively participating in a digital ecosystem. This is because a partner ecosystem expands a company’s digital footprint and amplifies its reach similar to how traditional acquisitions and mergers give companies a competitive edge. 

These partnerships provide operational intelligence which improves efficiency, whilst also providing insight for business critical actions and potentially, new customer offers. Using technology to help weave partnerships creates the best of breed experience for customers, as all services can be obtained from one platform. 

Partner ecosystem a pleasure or a pain?

As banks look to evolve and create partner ecosystems, business processes are going to increase in complexity as more partners join, creating an intricate web of communication, process and policy. This results in a technological jumble, a knot of API connections crossing over each other accessing different databases across a bank. The global banking industry manages trillions of pounds worth of assets, this year alone HSBC is reported to have a total asset net worth of £1.94 trillion, so managing the sheer volume of assets alongside new partner is fraught with complexity. 

Additionally, connecting different systems of engagement and systems of record is complex and not the core business of most existing in-house IT teams. According to Time Magazine, every two minutes approximately 104,000 transactions are made in America; these have to be captured and approved by banks. As the number of partnerships increase, so will the number of transactions, due to the ease and accessibility purchase opportunities are presented to the customer, so there will greater strain on the bank’s IT systems and possibly more outages.

A customer can potentially access all their services on one provider's platform, so will these ecosystems increase competition or create monopolies in the banking industry? If one company develops partnerships quicker it could potentially cut out the competition. However, there are many hurdles in creating the perfect ecosystem. Cultivating the best partner ecosystem is vital for success, otherwise poor partnerships built in haste could seriously impact the business. Highlighted below are the key aspects which determine a successful partner ecosystem. 

1. Supportive technology - The technology in place must make the process simple, easy and safe. The exchange of information must be kept secure to ensure sensitive data is protected.
2. Trust & communication - It is imperative these are in place for a beneficial partnership to be developed. If not, offerings can end up becoming complicated for the customer and causing friction between the partner companies.
3. Cultural understanding - This can be particularly tricky between modern startups and the traditional banking industry as they may find new processes intrusive and a direct contradiction to the way they normally work.
4. Keeping the customer at the centre - In order to work succinctly with a partner, servicing the customer must be the common denominator.
5. Provide complementary offerings - The services provided need to be complementary, to avoid direct competition or wasting time building the same product.

As banking systems are forced to open up and banks are encouraged to offer better customer service, partnerships are being sought. The banking industry could become the template of best-of-breed partnerships. 

However, creating an ecosystem without the right technology could very easily become confused and dominated by one partner. To control and manage this new business paradigm it is paramount to focus primarily on the customer. If all ecosystems are created with the customer as the focal point, it will be beneficial for all involved as they mine the gold out of this new revenue stream. 

Connecting with the right partner

Selecting the right partner is merely the first step to become a truly relevant Financial Services organisation, to build a successful ecosystems banks need reliable APIs, we recommend following the three ‘Ms’; manage, monitor and monetize, when using APIs below: 

• Manage – First, analyse the systems of record to grasp what each customer needs are and match them with the product/service from the appropriate partner. End-to-end partner management, including revenue sharing and incentivization. Banks can on board and manage thousands of new partners using any pricing model such as subscription, freemium and on-demand. The Products and Services catalogue shows the value add each partner brings to a bank. Financial Services organisations now know what they can deliver to their customers at every stage.
• Monitor - Banks can monitor the performance of specific offers and product bundles and build upon successful packages. Banks can also track the performance of their rivals’ offers, making market competition transparent. Track and calculate the value obtained from each partner relationship to determine which are profitable and reduce the partners who are responsible for value leakage. 
• Monetize - Monetization of APIs is end goal for every Financial Services organisations in their journey to compliance. Banks and their partners must capture new revenue from the PSD2 regulation. This is driven by dynamic pricing, invoicing and billing modules.