Another key development of 2015 has been the open sourcing of bank services. I’ve talked for a while now about Banking-as-a-Service (BaaS) – first blog entry almost seven years ago – and this forecast that anyone in the near future would be able to build their own bank through apps, APIs and analytics. The core of this view was based upon banking processes becoming open sourced through APIs* and, in 2015, it’s finally happening. It hasn’t happened yet – this is an ongoing process – but it is definitely happening and is taking place in three forms: voluntarily, customer demand and regulatory action.
Voluntary open sourcing of bank processes has only a few purveyors, but the list is growing. The most aggressive of the early leaders is illustrated by PrivatBank in the Ukraine. PrivatBank has 100s of APIs available direct from its homepage, and has been building these since 2009 as open source services for their clients and customers. The top 10 APIs include rates of exchange, account balances, account statements, online payments and merchant checkout.
Other key protagonists of open sourcing the bank include Fidor and BBVA. Strangely, many traditional banks are averse to the idea of open sourcing the bank as they fear it could commoditize them or disintermediate them. In fact, the fact that they are NOT open sourcing the bank is the most likely reason why they will be commoditized or disintermediated. This is because the banks’ processes cannot be included in other services easily and hence other services go and find a bank that can be easily included. I guess this is best illustrated by PayPal who launched API platforms in 2011, and just look at their growth since. In fact, due to the lack of action of incumbent players, a whole new business has been built in just four years by Stripe, a company valued at $10 billion today just because they built the simplest APIs for checkout online.
Image from Bracketfire Software
This leads to the second key strategic development in 2015: customer demand. Customers are demanding open API services from their financial institutions as everything moves to an app. App services such as AirBnB, Uber, Facebook, Tripadvisor, Apple Pay and more are demanding simple plug-and-play code for payments to be offered by financial providers as the payment is no longer the important part of the process. The important part of the process is getting a room, taking a ride, posting an update, booking a trip and buying something you need. No one cares about the payment piece of that process except the payment provider. That is why it’s key to offer an easy way to integrate the payment into the process but, more than this, making the bank relevant to the whole structure.
Looking at cars, make it easy for me to access your loan offers. Looking at houses, can we plug a mortgage API into that app process? Thinking about the future, if I search for ‘retirement’ does your pension API pop up?
These customer processes built into smooth, frictionless and simplified apps will be a big focus area for financial providers in the next few years, with the most visionary plugged into those processes. It goes further than this though, as financial data can be mined by others to create new apps and processes. Therefore, new services can be built from the financial data leveraged in those APIs.
A great example is knowing where is the busiest places based upon payments traffic and advising me where is quiet. If I am a tourist in London, should I go to Madame Tussauds now or later? How busy is Bluewater right now? When’s the best time to go and see Star Wars: the Force Awakens? These are all questions that can be easily answered by financial data, as banks know every Point of Sale (PoS) and therefore can real-time track and trace where is busy and where is quiet.
This will prove to be a fascinating playground as, even if banks ignore their competitors voluntarily open sourcing or ignore their customers demanding, they cannot ignore their regulators, and regulators are now forcing the opening of bank processes. This is clearly evidenced in 2017’s Payment Services Directive update in Europe, commonly referred to as PSD2. I blogged about this recently, and the key question is that if banks are being forced to open themselves for third party account access through Open APIs, shouldn’t the bank proactively move to maximize their opportunity in this space?
The UK has been quite aggressive in pushing the Open API structures, and this piece from American Banker tells the story rather well: UK Push for Open Bank APIs Makes U.S. Look So Last Century
* APIs are Application Programming Interfaces: a set of routines, protocols, and tools that make it easy for a programmer to take one of these and integrate it into their software and code. As a result, if someone is building a new piece of software and wants to plug a payment checkout process into that software, then they will seek to find the easiest code out there that allows that process to take place.