The managed rollout of the Payment Services Directive 2 (PSD2) Open Banking initiative has resulted in significant changes to the banking landscape across Europe. The initiative requires banks to open up their systems and infrastructure to allow non-bank players to provide innovative new solutions to end users. With competition increasing due to the financial ecosystem opening up, what can banks do to ensure that they retain market share?
The risk to banks
There is no doubt that many banks have seen Open Banking as a risk rather than an opportunity – by opening up the industry to new players, banks’ strategies and business models will need to change to keep pace with their more agile counterparts. If they fail to keep up with the pace of innovation, they risk losing their customer base, with a serious impact on revenues.
Many banks have been slow to innovate in this area, with some even missing the Open Banking rollout deadline. Some incumbents were better prepared, and began dipping their toe in the water to discover the potential benefits of Open Banking early on. A big part of this was exploring Application Programming Interface (API) technology, and how it can bring banks together with FinTechs and other regulated businesses to deliver better offerings for their client base.
The more agile challenger banks, many of which were already reliant on collaboration with other entities for their business models to work, were in a better position than incumbents to embrace Open Banking. However, there are a few notable exceptions. Since 2016, HSBC has provided a developer portal to give access to its APIs , and Spanish Bank BBVA led the way by offering APIs for accounts, cards, payments, and loans to approved developers, ahead of regulatory timescales.
Don’t worry – be API
API technology has played a huge part in making banking services available to regulated Financial Tech companies, allowing them to provide optimised digital experiences to their customers. This includes being able to offer preferential FX rates, lower fees on international payments, and faster approval of loans.
The benefit to the end user is clear. As well as providing them with products that previously may have been difficult to access, the process is seamless, with the API connecting directly to banking infrastructure.
The great thing about APIs is that they can work both ways. Although banks have to provide FinTechs with access to their customer data, third-party APIs can reduce the strain on banks by eliminating the need to develop their own products and solutions. Several Financial Tech businesses, including Transferwise and Zopa have built APIs that are now being utilised by challenger banks to provide better experiences to their customers.
Another way in which APIs are providing added value to banks is by streamlining the underlying legacy infrastructure, without adding significant cost. The flexible and scalable architecture of APIs means that banks do not have to invest in overhauling their aging technology to be able to offer innovative ways of delivering products to customers. By being able to keep costs down, they are still able to compete by passing these savings onto their customers.
Whether banks choose to collaborate with Financial Tech businesses, or develop in house solutions to capitalise on API’s benefits, those who are willing to embrace change and provide open, transparent banking services will flourish in this new ecosystem.