Digitisation is taking off, and tomorrow's bank will be quite different from what you see today. Now perhaps wallets and smartwatches just popped into your head, but what I am talking about is APIs and FinTech. Recently, I attended the two-day API conference on Open Banking & FinTech. Right in the middle of London's financial heart, bankers, start-ups, consultants and technology companies gathered to share insights on the future of banking. The general consensus is that banks will become platforms. I was quite surprised that all those present unanimously agreed on this point. Allow me to share some new insights with you.
FinTech companies are ready for action, so things can happen quickly. But what actually does happen is up to customers.
Laurens Hamerlinck Focus Team Innovation Centre
FinTech: rival or partner?
A new competitor has arrived in the banking world: FinTech. Technology-driven companies that specialise in one specific discipline, such as risk analysis, financial insights or payments. By finding such niches and perfecting their services in that area, they are unbundling the banking landscape. If you were to merge the top FinTech companies, theoretically you would have all the components to build a new bank. But how do you go about such a merger?
From mobile first to API first
The answer: with APIs. Every self-respecting digital company has adopted API, which is short for Application Programming Interface. APIs are digital gateways to a company's data and services; and in many cases an API is a product in itself, targeted at developers. Online marketplace Mashape offers an overview of a wide range of APIs, sorted by category. A true API economy is on the rise. Many technology companies, including FinTech ones, consciously opt for an ‘API first’ strategy. They primarily offer their services through this digital channel and let go of their digital front office. It is up to the market to decide how the service will be used or integrated.
If the APIs are of decent quality, they can be fantastic products for developers. After all, the bulk of the construction has already been completed for you. Does your app need a geographical map? No problem, integrate with the Google Maps API. Want a fingerprint login option? Just use TouchID. APIs are the LEGO bricks of the digital economy. Transportation network company Uber, for instance, was built practically overnight with APIs. It uses Braintree to facilitate payments, Twilio to communicate, and Checkr to screen the drivers. Add the Uber dressing and there you go.
PSD2: showing your cards
As from 2018 a new European payment guideline named PSD2 (chapter XS2A) will come into force. This guideline requires banks to build an API that offers third parties access to transaction data (with customers’ permission). The topic was discussed at length during the conference, as banks were anxious to learn whether this change is a threat to them. And they should be, because theoretically, banks could lose contact with their customers. Many FinTech companies are itching to start using these mandatory APIs to create cross-bank financial apps for clients and much more. Germany has already seen a tentative launch of this development with KontoPilot by Deutsche Post. The app creates an overview of your current accounts and credit cards across all banks.
Back office gets the risk, platform the opportunity
The warnings went: ‘Banks will become back offices!’ The shouts went: ‘What will remain of the added value of banks?’ The role of banks is going to change, and it is only a matter of time. The PSD2 legislation will come into effect in 2018, which is really not that long from now. FinTech companies are ready for action, so things can happen quickly. But what actually does happen is up to the customers. They have a choice whether or not to give the new players access to their bank details. We all know the cliché, but even in these times, the best way to stay relevant as a bank is through the customer.
Greater than the sum
Banks must want to become a platform, as a solid platform enables them to develop new solutions for customers. Immediately after Apple and Google opened up their platform, the world was treated to a massive array of apps. Banks are equally able to do this. How? By entering into collaborations with the outside world. Take the safety and reliability of banks, and add the speed and innovative power of FinTech companies. The result is a very interesting cross-pollination. It is no surprise that innovative banks are looking to approach this new industry. The wider crowd of developers offers perspectives as well.
Hackathons reveal that creativity and innovative power are many times stronger outside the bank than within. They have become a major component in the innovation strategy of large players such as BNP Paribas and Citibank. It will still take some tweaking to optimise cooperation with this creative crowd of developers and FinTech start-ups. The key to success seems to be to trust one another and look together for win-win outcomes. A great example: Apple is netting incredible profits with its App Store, but returns 70% of this revenue to the developers' community.
Towards a bank as a platform?
Evolving a bank into a platform opens the door to new opportunities. Surprise the customers with smart banking innovations that they would generally only expect from start-ups and technology giants. The first experiments in the banking sector are interesting steps, but this is only the very beginning. The true transformation will take a little longer, with the PSD2 legislation pushing banks firmly in the right direction. Meanwhile, the FinTech sector will continue growing at record speed.
Fortunately, many start-ups and FinTech companies are actively looking to cooperate with banks. In turn, banks are increasingly open to partnering and co-creation. Sometimes cultural differences and the banks' closed infrastructure get in the way, but that too is already starting to change. Banks are a platform in the making. After all, tomorrow's bank is no longer about creating the best product, but about offering the most attractive platform.
ABN AMRO is keeping close track of these developments, and we are exploring the steps we are going to take. I see the opportunities. Can you see them, too?