Financial data will soon become a new commodity owned and managed by customers, not banks. Story by Alessandro Hatami.

Banks across the globe are anxiously looking at the slow but seemingly inexorable progress of banking APIs. Regulation and market demands will require banks and other financial services firms to make it easy for another firm to gain access to their customers’ data, and to engage with their platforms to transact. Most realise that the world of financial services is going to be shaken to its foundations by their arrival. Financial data will soon become a new commodity owned and managed by customers, not banks.

Banking APIs are generally good news for all parties involved, but for incumbent banks and institutions, business as usual is no longer an option. In Europe, because of the imminent implementation of PSD2 (the European Commission’s Second Payment Services Directive supported by the European Banking Association), banking APIs are an even more urgent challenge. PSD2 sets out a series of guidelines that will define how banks will have to enable bank customers to authorise accredited third parties to securely link their bank accounts to access data or initiate payments. This is going to be game-changing.

Projecting the impact of a broad rollout of banking APIs isn’t easy. That said, we can comfortably predict a range of likely outcomes:

Better banking

Banks will improve the offering to their existing customers. By being able to complement their customer transactional data with those from other institutions, banks will be able to offer their existing customers products and services that are better tailored to their needs. By better understanding their customers, they will be able to offer:

  • more competitive pricing
  • higher level product customisation
  • targeted advice
  • more appropriate product suitability.

Banks will soon realise that APIs can become a source of new income. The analysis of customer data is a service useful to businesses beyond financial services. As an outcome of creating new infrastructure to manage the new banking API requirements, we could see banks and API service providers create completely new revenues opportunities. These could include the provision of customer authentication, risk scoring and eligibility verification, to name just a few.

There is a possible downside to this. Once a provider is able to gain a holistic view of their customers, they may realise that some provide a higher risk than initially thought. This could result in higher prices and a more restricted product offering to some customers. Customers will need to be selective on who they allow to leverage their data.

 More mobility

It will be easier for customer to change banks. Thanks to APIs, challengers and competitors are able to offer customers products and services that are a much better fit to their needs by combining data sources. By understanding new prospects better, they can “poach” their competitors’ best customers. By having lower cost bases, more up to date technology and often more customer-centric mindsets, challenger banks or comparison sites should be able to offer a real challenge to the established players.

Historically, large banks make poor use of the customer information they collect. Few banks offer their own customers better deals than those available to all. Some of this was dictated by regulation ( or the banks’ interpretation of it), but some was the result of trying to get maximum profit from a customer who is inherently reluctant to change bank. With banking APIs, we should see a sharp increase in customer mobility for three fundamental reasons:

  • Firstly, customers will see competitors to their bank provide them with propositions that are better tailored to their needs and expectations.
  • Secondly, APIs will make it very easy to change banks, as authentication will be simpler.
  • Thirdly, moving will no longer mean leaving your history behind, as a customer’s account history can travel with them as they move.

As with existing customers, lower quality customers could see price and range of the products offered to them deteriorate.

 Greater transparency

The market will become more transparent. Today, aggregators have become a powerful force in increasing competition and reducing costs – the effect on the UK auto insurance market is a good example of things to come.

Banking APIs will further strengthen this trend. With the new APIs, customers will be able to see exactly how they’re being treated by their existing banking providers. New businesses (or even competitors) will be able to extract a prospective customer’s transaction history and model how they would be served if they switched bank.

Today’s shopping comparison providers will be able to provide consumers with much more accurate data on who would be the best provider for them. The less competitive providers will be easily and accurately singled out, making it much harder for them to use clever marketing or pushy sales practices to sell their wares.

 Non-bank banking

Disintermediation of the banking customer. One emerging trend is that you don’t need to be a bank to offer banking services. Social networks, hardware manufacturers and even search engines are entering the financial services space. What’s interesting about these e-communities is that often they don’t aim to become a regulated financial services provider, but merely want to provide services to them to increase their own customer engagement and extract some of the margin.

A good example is how WeChat (with WeChat Pay) or Apple (with Apple Pay) have woven financial services (in both cases, payments) into a proposition that’s not meant to be just financial. These players often see income from financial services as marginal, but what they really care about is retention; making sure their offering become so interwoven to their customers’ lives that they minimise the likelihood of changing social network or hardware provider.

For example, Apple could expand its Apple Pay offering to provide real-time balances, but also enable bank-to-bank transfers directly from an app with no need for the customer to log in to their bank. It could eventually offer a whole-of-market comparison service, letting Apple Pay customers see where their customer would be best served. It could then extend services to enabling customers to close their account on one bank and move to it another.

Customers will know that by buying an Apple product, they will also always get the financial product that best suit their needs. The effect of this wouldn’t be to eliminate existing banks, but rather make them less relevant to their customers. Banks would then become utilities to these providers de facto disintermediated from their own customers.

 New industries

New types of businesses will appear. The availability of the new banking APIs will create new industries. As every bank will by and large have their own API, talking to all of them will be complicated. Some banks may decide to link up to the different banks’ APIs on their own, but most other will use intermediaries. There will be an abundance of data suddenly generated by these APIs. This will not only need to be extracted, it will also need to be stored, analysed and kept safe, so we will see a proliferation of new business types:

  • These API aggregators (AISPs and PISPs, in PSD2 talk) will act as hubs to provide one-stop shops to entities wishing to link with all the banks’ APIs.
  • Data management providers that will enable the creation of efficient and scalable data silos.
  • Big data analysis providers that will tap into the already scarce data analytics talent pools to help companies make sense of the data.

Banking API outcomes. Source: The Pacemakers Partners Ltd 2017.

Not everything is sweetness and light

Regulators will have to realise that data is now a new commodity that needs to be regulated and protected. The upcoming GDPR (General Data Protection Regulation) provides an initial framework for this from the data privacy perspective. More regulation will be necessary to protect data from a financial perspective.

Another big risk with APIs is that they create new entry points to the armies of hackers worldwide. Even though APIs are going to be overwhelmingly good for customers, their wide adoption can generate its fare share of cybersecurity issues. With banks creating backdoor access to their data, it will be almost inevitable that some banks (as well as some of the API aggregators) will eventually be breached. The banks, the API services firms, technology providers and regulators will have to up their games considerably to address these risks.

The cybersecurity industry will receive an even greater boost than it did with digital banking. New specialist firms will emerge to make sure that customer data is safe throughout its life cycle. They will manage and monitor the security of the myriad access points to secure data stores created by these new APIs.

Banking APIs will usher a completely new era for banking. Financial services firms will have to accept a reality where their most valuable asset – their customers’ data – is now controlled by customers themselves. This may not be the end for the big banks and financial institutions, but it’s definitely a very different world from what they’re used to.

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– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by MZinchenko, Shutterstock.com

About the author

Alessandro Hatami

Alessandro Hatami is a corporate serial entrepreneur with a track record of delivering growth through digital at some of the world's most respected companies in the payments, banking and financial services industries.

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