Historically, the economic moats surrounding major banks globally are wide enough to ensure continued growth, compared with other sectors threatened by highly agile and scalable technology companies.
Banking has never really been a competitive industry. In reality, it’s more like an oligopoly – major banks remain uniquely and systematically important to the economy, and is the major repository for customer data.
Some factors have changed, however. The financial crisis had not only left a negative impact on trust in the banking system, but the ubiquity of mobile devices had begun to undercut the advantages of physical distribution that banks previously enjoyed. Smartphones enable a new payment paradigm as well as fully personalised customer services. In addition, there has been a massive increase in the availability of widely accessible globally transparent data, coupled with a significant decrease in the cost of computing power.
Banks are subject to a lot of noise about FinTech today. Optimism regarding technology is at a high, mobility is widely regarded as a game-changer, and vast amounts of capital are being deployed into FinTech startups – made possible by access to large quantities of new and big data that banks have built and leveraged over centuries.
All this has led to customer data becoming the next banking battlefield.
As all banks know by now, the industry has less than two years to comply with PSD2. Many banks have yet to embark on the digital transformation strategies that would allow them to fulfill their obligations under PSD2. To them, it is just another EU directive to comply with. This thinking is understandable, for as a standalone piece of regulation, it is an awful lot to comply with.
PSD2 is an opportunity for banks at the digital vanguard to offer their own tailor-made, high-margin financial services to their competitors’ customers – all this using customer data that competitors will be providing for free through open APIs, as mandated by the revised directive. Laggard banks will only be able to watch while their lunch is being eaten.
The API economy is a commercial exchange of business functions, capabilities, and/or competencies as services packaged in APIs – and is the driving force behind much of the digital transformation across industries today. This enables business leaders to transform their organisations, build new ecosystems, and monetise core assets, services and products.
European banks must construct APIs that meet this requirement by 2018, and some banks have already started working with partners in the fields of P2P, personal finance management, and biometrics to assist in the creation of the Open API platform, with the growing belief that established financial institutions and startups must work together in order to move ahead.
By applying APIs to their proprietary (or otherwise, legacy) systems with nimbler, unregulated tech companies, banks could innovate much faster than by limiting application development to their own compliance-inhibited, resourced-strapped IT departments. And by sharing APIs, in some cases through hackathons, new ideas can be generated and tested.
To that end, both Citi and MasterCard have published their own APIs to give developers an opportunity to create solutions that change the way people bank. In Citi’s case, that means banking APIs for services like logging into an account, getting a list of transactions, or paying a bill. In the case of MasterCard, APIs are used for digital wallets, finding an ATM, processing a transaction, and fraud detection. Both of these companies have come to realise that they are becoming services that are embedded in a FinTech ecosystem.
Most banks today want to be digital banking leaders – after all, that’s where the customers are. But what separates the leader from the laggards is becoming more tech-savvy, more client-centric, and more inclusive to adapt to a disruptive model to facilitate changing expectations with time-to-market.
Innovation can no longer be just internal. And for banks, the main driver of growth will be innovation through openness.