LONDON–The need to provide compelling digital experiences for the growing number of tech-savvy customers in banking will drive the adoption of open banking application programming interfaces (APIs), predominantly in the payments and lending areas, according to a new analysis released by GlobalData. But there are also some downsides, the analysis suggests.
GlobalData noted that in 2018 European banks entered into a new era of transparency as regulations such as the Revised Payment Services Directive (PSD2) in the European Union and the Competition and Markets Authority’s (CMA) Open Banking in the U.K. came into force, with a mandate for banks to share customers’ data with their consent to non-banking third parties.
“The favored method of sharing banking data is through APIs, which are sets of instructions that can build connections between the products/services of a bank and a fintech provider instantly,” said GlobaData.
The Result
The result has been the rise of numerous third party providers (TPPs) with API revenue models already built into their business plan, GlobalData said.
“With banks coming under pressure due to increasing costs, rapidly diverging consumer patterns and evolving regulations, and fintech providers realizing that banks are the best means to win trust and distribution, their appetite for collaboration is growing,” Kiran Raj, Disruptive Tech Analyst at GlobalData, said in a statement. “While it is a do or die situation at some point in future, the best case for banks could be to gain first-mover advantage by partnering with fintech firms, strengthening their position as a trusted advisor to their existing customer base and find new revenue through digital channels.”
‘Interesting Stories’
According to GlobalData, an analysis of its Disruptor Tech Database presents some “interesting stories” of API collaboration between banks and fintech providers under the open banking regime, including:
- San Francisco-based Token.io became the first licensed payment initiation service provider (PISP – a type of TPP) to complete an end-to-end transaction in June 2018 via the Token network using Santander using the U.K.’s API payment initiation endpoints. Token supports a single API that networks with the variations in APIs that banks have.
- London-based iwoca has grown to be the first business lender to connect with all of the U.K.’s CMA9 banks under open banking. iwoca’s API platform allows it to access the transaction history of a borrower’s multiple bank accounts to quickly and simply provide a loan.
One Potential Downside
While the value proposition of APIs expands beyond traditional banking by including new and user-friendly services a consumer may demand in a digital world, GlobalData said the downside to the open banking comes in the form of fraud and security implications for customer data. However, there are strong customer authentication (SCA) requirements that banks must adhere to and that will mitigate the threats of open banking.
GlobalData added, “In the open banking phase of digital transformation, banks that open up their APIs to TPPs can tap significant innovation. It is estimated that the effective implementation of open banking will allow banks to register a 20% increase in their revenue by 2020. For banks that don’t open up, there is a chance of being disengaged from their customers.”