In the past five years, challenger digital banks have taken off across the UK and Ireland. The rollout of open banking APIs looks set to accelerate this trend, leading the way to a new multi-banking landscape.
Yet, some pillar banks are adopting smart technology strategies to exploit open banking for themselves, offering business clients and consumers hope for a dynamic, fully integrated banking future.
In this article, some industry leaders offer insights into their use of API banking technology and the IT strategies that are working now.
Changing the banking game
Fintech startups like Revolut, Starling and N26 have been media darlings for some time. Client numbers at these challenger banks have grown massively over the last five years, as evidenced by app download statistics.
Revolut alone has ten million users, including seven million in the UK, and reported revenue growth of 350% in 2018. The company’s valuation has tripled since then to £4.2 billion, following a series D funding round that raised £386 million, led by Technology Crossover Ventures, which also backed Spotify and Netflix.
Most of the challenger growth has been achieved without access to existing banking data for individuals. Instead, the fintechs have focused on digital payment cards or e-wallet services, and on giving consumers an excellent customer experience in on-boarding, accessing and using these services.
However, with API banking now implemented or being adopted by many banks, challengers old and new can use that banking data directly to expand the information available in their apps and even offer new services.
It would seem that established banks are facing an existential threat. For the first time, all financial players are competing on a level playing ground of data.
Customers don’t need to switch banks to see their old data on a shiny new app — they simply give the app access permission. This also means individuals can view their data from different institutions in one place, taking a key step towards a single, personalised portal for all their banking information.
But the banks are still the banks
For many within the banking industry, the narrative is not so clear cut. The fintech challengers do not offer the full services of a traditional bank, and many of them are currently selling services at low margin just to grow client numbers.
As the Revolut valuation continues to go up, so do its losses. It’s an unsustainable business model, and many challenger banks will be forced to either charge more and be less competitive over time or switch to an aggregator role, acting as a marketing reseller for valuable consumer data
In the UK, many pillar banks still view their traditional competitors as their main competitors. Opinions abound over what will happen next, but one thing is clear: with API banking finally live and available, right now is a pivotal moment.
Many CIOs and digital leaders in established banks have come to see the opportunities of API banking. While it does open the bank’s data to competitors, in many cases, the APIs also provide a new platform for banks themselves to access data with more efficiency and flexibility.
As a result, smart leaders are seeing a move to open banking as the springboard they needed to start innovating at market speed, without the drag of legacy systems and siloed departments.
It also brings a range of options to combine new external services with existing ones, including:
Jumpstart internal system transformations and go straight to a data-led transformation using own API and API-wrapped internal services
Open APIs to partners to rapidly enhance service offerings (like partner insurance) and gain more customers
Become a consumer of other APIs to extend reach and range of services, such as by providing multi-banking services and a personalised finance portal
Provide customised services to clients through an API to drive loyalty and stave off competition
Innovate quicker and more specifically by avoiding back-end silos
Open for opportunity
For Seán Jevens, Head of Day-to-Day Banking Strategy and Propositions at AIB, API banking offers a means of developing new services quickly. “Where the backend systems are tightly coupled to the frontend, it can make sense to use new open banking APIs as part of the bridge towards a more modern service delivery framework,” Jevens explains. “The alternative is to lose potentially years in time-to-market while trying to revamp your entire architecture.”
AIB began working on their open banking API a number of years ago and are seeing the hard work paying off, as frontend and backend systems are now separated through service layers and service APIs. The result allows AIB to develop and deliver new digital services in timely, regular releases and light-years faster than before.
For now, open banking regulations don’t extend to data for loan or mortgage accounts, so banks and fintechs alike are still a ways from providing an all-in-one portal for people’s banking data. Still, API banking is playing a key part in AIB’s IT strategy.
“We will exploit API banking to provide new services and a broader ecosystem of financial services for our customers,” says Jevens. “But for all of our decisions in digital, we are guided by a fundamental principle: Don’t do it because you can do it, do it because you should do it.”
Jevens points out that AIB have provided multi-banking for enterprise clients since 1999, using SWIFT information to help customers get a holistic view of their banking through AIB’s online banking. “In some ways, business customers may have more to gain initially from these services,” he says. “Their requirements are more complex and pressing than those of consumers. For example, better banking integration for business clients could reduce the overhead in approving bank payments as part of a corporate workflow.
“A lot of what our customers want is more around financial education,” he continues. “By providing more analytics, we can help customers inform themselves and engage more with their finances. This is a real value add, compared to adding more technical features that may not be used or appreciated.”
When asked if that’s not what Revolut and other challengers are doing, Jevens returns to the fact that the startups do not provide the range and depth of banking services that people need day after day and year after year.
“They are actually filling a niche gap in the market for a digital wallet,” Jevens says. “People will use it to pay for taxies or split the bill. They give it to their children when they are travelling to ensure they won’t go short. All exposure is limited to the card balance, so it essentially saves you a trip to the ATM, but it is not ‘banking’. We see Revolut as a complimentary service our customers can use if they want.”
The impact beyond banking
One of the biggest unknowns in open banking is how the shift toward greater data access and faster service development will change the broader landscape of financial services. “At a macro level, open banking is just one part of the move towards a more open ecosystem in financial services,” says Garvan Callan of ONEzero1, a banking industry veteran and transformation consultant.
“This move facilitates the potential to extend both distribution and manufacturing value chains, which will be a good start towards living the broader ecosystem story,” Callan continues. “But there is so much more that needs to take place before it can become a reality. If the traditional banks are to harness the API economy, they will need to implement data and analytic capabilities to deal with the flow of data and turn it into insight-led propositions.”
Slide courtesy of ONEzero1
Beyond expanded analytics, Callan explains that banks will need to strengthen their outsourcing, procurement, security, risk management — and become even more open to new, partner-based business models if they want to benefit from API banking and retain customers into the future.
“If banks can put in place these building blocks, then they have a chance to leverage the power of APIs and expand into platform territory,” Callan says. “And if you were to ask why would they — well, the competition is making its move with the challenger cohort, the world more generally has gone that way, and the customer is there already.”
Some experts see API banking and multi-banking as a route to deepen relationships with business clients even more than with consumers.
Do you think there is an appetite in SMEs to get new services from their existing banks?
A key consideration in forecasting the future of open banking is the appetite of small and medium-sized enterprises for expanded bank offering. A recent survey by Accenture of SMEs in Ireland found that 80% are interested in banking system innovations, and 40% would consider non-banking services from their bank.
Callan sees SMEs as an important opportunity for the pillar banks. “SMEs are perhaps the most digital-savvy business customers, but they’re also underserved and getting caught in the valley between the profitable mortgage consumer and the stable, cashflow-strong corporations.
“Financial services leaders need to do more for SMEs by addressing what they don’t have,” Callan says. “Imagine a bank that helps customers find solutions for their logistics and supply chain challenges, that opens new routes to market (physical and digital), supports people management needs and integrates with finance and accounting solutions to make money easier so SMEs can spend more time with customers or looking after their teams. We’ve heard lots about this but seen little traction.”
The ability of financial services providers to expand their offerings and meet the evolving demands of all customers will depend on their ability to make larger architecture changes that will support API banking as a means of delivering innovation and value. Callan says a range of factors, from technical to cultural, will dictate each bank’s ability to make those changes. He points to a target architecture from Bain & Company as an option to enable banks to create better customer engagement and experience through smart technology and infrastructure.
Slide courtesy of ONEzero1
“This is, in essence, the kind of architecture that enables API banking to deliver on its potential,” Callan says. “There are a multitude of routes towards delivering the holy grail that is a digital modern stack. However, one thing is common and constant: Facilitating the change agility and development velocity required to deliver to both the expectation and opportunity of open banking requires an API-enabled platform.
Looking ahead for solutions
It’s clear that API banking is much more than an internal technical evolution for banks. In fact, it is part of a much broader movement towards an open financial services ecosystem. And consumer expectations are accelerating that movement as much as challenger banks or open banking legislation. Indeed, the Covid crisis will also contribute as they move towards digital, remote and personalised services becomes even more profound and necessary.
Banks that adopt this approach and can deliver data through a strong front-end experience can take a leadership role. Banks that do not may suffer the fate of growing obscurity by ceeding the customer relationship to faster-moving challengers — and to the traditional competitors who choose to change.
Special thanks to Seán Jevens and Garvan Callan for sharing their insights and experiences.
Seán Jevens is the Head of Day-to-Day Banking Strategy and Propositions at AIB. He formerly worked as Head of Digital Channels at AIB.
Garvan Callan, of ONEzero1, is a banking industry veteran and transformation consultant working with business leaders to develop and execute ambitious transformations with particular focus on commercial, customer and cultural strategies. He has held a range of senior roles, including Head of Business Development at Danske Bank and Director of Strategy, Digital & Innovation at Bank of Ireland, and is a former council member and Vice President of the Institute of Banking.