People have always needed the products and services that retail banks offer, and they probably always will. But they may not always need the traditional banks as we've known them. Savings accounts, checking accounts, money transfers, credit cards, home and auto loans, small business loans - these are all a big part of people's lives. But there are also other financial tools and services that the banks don't offer, requiring customers to find them elsewhere, and access them across various providers and online interfaces. Currently, the retail banking industry is struggling to provide an omnichannel experience for its customers, but that is changing because of APIs (Application Programming Interfaces).
Consumer behavior is evolving with the emergence of new mobile technology. They want to choose how they interact with their bank and access their finances. Add to that the recent disruption by fintech companies who now offer competitive products and services, and you've got a recipe for change. That change may transform digital banking into a BaaS model (banking as a service).
In order to keep customers happy and loyal, it has become essential for banks to provide everything they need under one roof and within one platform. However, outdated legacy systems make it difficult for traditional banks to transition into the digital age themselves.
Banking core systems are decades old and very complex. If created today, a very different architecture would be used. Upgrades and maintenance of these systems are costly, and every change to the system requires a lot of testing due to the sensitive nature of the information.
Being an established traditional bank has had its advantages up to this point. Brand recognition, reputation, security, accessibility, and product offerings, to name a few. However, emerging digital banks have an advantage in the digital age, and that is modern data architecture. New financial service companies aren't bogged down by legacy systems that don't want to play with the APIs.
When banks open up their APIs, it opens up opportunities to improve their communication with other financial tools and apps without having to rebuild their legacy systems. Plug-and-play apps that integrate with your bank's existing platform will revolutionize mobile banking and enable an omnichannel experience. Customers will be bale to customize the platform based on their needs and preferences. Open APIs make it easier and faster to develop such apps and tools, whether developed internally or from a third party.
Here are some examples of banks and organizations utilizing the capabilities of open APIs:
- The Open Bank Project: An open source and API app store for banks that empowers financial institutions to securely and rapidly enhance their digital offerings using an ecosystem of 3rd party applications and services.
- The Bancorp: Offering private-label banking and technology solutions to non-bank companies ranging from entrepreneurial start-ups to those on the Fortune 500.
- Fidor Bank: Based in Munich, Fidor products and solutions complete an inter-operable layer including an API infrastructure on top of existing core infrastructure to create an open platform enabling banks and non-banks to connect 3rd party platforms and applications easier.
- Citi Ventures: Not yet offering an open API, but investing in fintech research and projects, including the distribution of API toolkits to developers for realistic mockups of potential solutions.
The companies listed above are gaining traction because they provide something traditional retail banks don't, or they work within a more convenient channel. Similar to the exploding martech ecosystem, third-party APIs enable developers to create and bring banking products to market without being tied to one platform. Developers have more freedom to build the features and functionality they want, and that customers desire. Rather than the slow process of banks developing the tools themselves or updating their systems, open APIs will let them integrate apps like these directly into their own platform.
Mobile banking has increased by 50% since 2012. In that same period, venture-capital investments in fintech have increased from $3 billion in 2012 to $22 billion in 2015 (Accenture). What has spurned this growth is the advancement of third-party APIs.
In 2014, Gartner Research predicted that by 2016, 75% of the top 50 banks in the world would open their APIs, and 25% of those banks would have app stores for customers. It's difficult to say if that prediction became reality, but PWC's 2016 Global Fintech Report certainly shows that the topic is on the minds of financial institution management. 78% of financial industry CEOs support the integration of fintech at the top levels of management. Also, only 25% of respondents do not deal with fintech at all, while 32% engage in partnerships with fintech companies, and 15% have established their own startups to incubate fintech companies.
Banks Evolving with Customers
Retail banks need to not only understand what their customers want, but also be prepared with data and strategies to market new products in this realm. Adopting and integrating new technology is challenging, but equally important is marketing these capabilities to consumers.
According to the EY Fintech Adoption Index, early fintech adopters tend to be consumers in higher income brackets and younger age groups.
That same EY report found that the number one reason that consumers use fintech products is that it is "easy to set up accounts" (43% of respondents). The second and third most common responses were "more attractive rates" (15%) and "access to different products/services" (12%).
The top reason that consumers don't use fintech products is simply lack of awareness of the product (53%). Although popularity is growing, marketing and awareness are clearly hurdles for fintech if they want to gain significant market share. All the more reason to emphasize proper data analysis when targeting consumers.
In a BaaS environment, the banks shift from being builders of financial solutions to assemblers of financial management tools. In doing so, banks can accelerate their entry into new markets as well as their analysis of consumer needs. (Cognizant)
All of this hinges on the retail banks' willingness to open their APIs and accept roles of participants as opposed to owners of the platforms in which they would operate. Doing so would also open up the banks to a sea of new customer data, allowing for better product development, customer experience, and marketing capabilities. While historically slow to change, the retail banking industry is now embracing technology that could lead to a BaaS model and an omnichannel customer experience.