PayPal began the open banking revolution back in 2004 when it launched the PayPal API. Fast forward to 2011, and Credit Agricole became one of the first banks in the world to provide an SDK and an app store so that third party developers could build new mobile apps to help customers better manage their finances. In 2013, we predicted that 75% of large, global banks would launch a public Web API by 2016. Open banking is going mainstream.
Open banking is the creation of new business models by internal and external ecosystems. The premise of open banking is that future value creation will come significantly less from owning and more from sharing, providing and leveraging key assets. Open banking uses APIs to make services like algorithms, data, identity, processes and other business functionality available to ecosystems of customers, employees, third-party developers, fintechs, vendors and other partners. This enables new types of value creation for the bank, for example revenue sharing, API calls, compute time and licensing and maintenance.
Here are four reasons that open banking will go mainstream in 2016:
- CEO business priorities — APIs enable several of the CEOs' top business priorities, including revenue growth, efficiency, customer experience and talent management
- Digital banking transformation — APIs are a key element of digital banking transformation because they are a new channel, and they engage new ecosystems of internal and external partners
- Competitive pressure — Fintechs are using APIs aggressively to enable digital transformation, and many licensed/regulated banks are beginning to use them in similar ways
- Regulatory pressure – Regulatory changes sometimes reshape an industry by resetting the rules of competition. PSD2 requires that banks provide mandatory access to customer accounts for regulated third parties and should be transposed by EU Member States in national law by 13 January 2018. The HM Treasury in the UK has called for the creation of an open banking standard to make it easier for customers to share and use financial data. The Open Banking Working Group is now in the process of creating the Open Banking Standard.
Security, regulatory compliance and reputation risk remain enormous challenges for banks as they become more open. CIOs are adapting governance, creating curation processes, changing organizational structures and taking other actions in order to address these challenges. The biggest challenge is culture, however. The banking industry has focused on making money on money since the industry was birthed. But it’s getting harder and harder for banks to make money on money (see http://www.forbes.com/sites/dinamedland/2015/01/21/financial-services-is...).
Open banking is about making everything for sale. It provides a new way to increase digital revenue for the banks that are willing to think differently about what it means to be a bank. Open banks and fintechs will continue to erode margins and customer relationships for those banks that don’t.