A report from Aite Group suggests that to better serve financial customers, banks should begin implementing open APIs.
APIs can shorten the time to market for new offerings, the report found, and give clients more control over their user experience and their data.
Many banks are already using APIs for their internal systems, but the report noted “the real value — although it’s more complex to achieve — is to expose APIs to external systems and provide a horizontal view of the bank’s services” that fintech developers can access.
As of the end of 2016, 81% of banks were sharing APIs with trusted partners, but only 38% supported an open-banking platform to give developers access to their platform.
A new regulation, the European Payment Services Directive (PSD2), requires banks in Europe to allow third-party payments providers to access accounts to initiate payments on customers’ behalf, starting in 2018.
Although U.S. banks won’t be subject to the rule, Aite noted that non-European banks are taking it as an indication of where the industry is going.
“They see the directive pointing to an industry trend of open-banking-platform evolution, which these banks are already experiencing with new payments initiatives,” according to the paper.
Part of that trend is the rise of “neobanks,” as fintech companies emerge that offer banking services primarily or solely through digital channels.
“For neobanks, the use of APIs is fundamental to their strategy — enabling a differentiated customer experience through partner apps, connecting with social media and other third-party platforms, and bundling third-party services into their product offering,” according to Aite.
One of the main challenges to banks implementing an open-bank strategy is figuring out how to monetize it. As the report noted, the cost of implementing a new technology can be determined, but estimating revenue sources is harder.
Aite identified five models to help banks determine how to roll out APIs.
- Bank channel. In this model, private APIs are a channel for the bank’s own products. The bank can move to market faster and has more flexibility over development since the APIs are developed in-house or by a third-party vendor hired by the bank.
- App market. Banks can make their internal APIs available through a portal for end users to install on their devices, charging the developer a fee to use the app.
- Distributor. Banks connect with other financial services providers to offer combined services through their own app, splitting revenue with the partner firm.
- Aggregator. In this model, banks connect with other banks through open APIs to offer combined services through a single app.
- Banking as a platform. Finally, banks could offer an open-banking platform with APIs from other institutions with a revenue-sharing agreement and licensing maintenance fees.
— Read State Bank Regulators Announce Plan to Update Tech Platform on ThinkAdvisor.