Open APIs Alone Won’t Change Banking

Daniel Eberhard

Open Banking API’s

Most people think of banks as one monolithic entity, but they are actually made up of hundreds of independent, pseudo-integrated systems. When a bank wants to make any kind of change, it has to conduct regression testing on potentially hundreds of systems and justify the operation-related and reputation-related risks if it fails.

Multiple players have aimed to step up to meet the opportunity (Plaid, Wipro, and Dwolla, to name a few). Although each has a different approach, they generally leverage API to function as a sort of middle layer, allowing banks to integrate with third-party applications and establish new distribution channels without disturbing their core infrastructure.

Most open banking platforms are still in the conceptual stage, but they represent the best shot a bank has at staying technically relevant without investing millions, or even billions, in a core tech overhaul.

Open Banking Is (Almost) Upon Us

Calls for open banking have grown in recent years as consumers demand more transparency and increased data security. Open banking software would theoretically provide more transparency by allowing people to monitor their finances more closely through secure apps and APIs and employ fintech’s much quicker access to deploy their own products.

However, the fintech sector enjoys a key advantage when it comes to open APIs. Not only do APIs offer faster ways of deploying new tech, but they also raise customer expectations and hasten the value-creation arms race. If product experience becomes dependent upon technology, it’s only to the benefit of fintechs and the banks that deploy tech-first approaches.

The Post-API Era

Market pressures will eventually force most banks to adopt open banking, using APIs to make the transition. Some regulations, like the Second Payment Services Directive in the U.K., are actually forcing banks to make their data publicly available by 2018. Once APIs are deployed, access to the best financial products will be democratized, which is when things will get really interesting. Most banks still rely on selling expensive credit and investment vehicles to meet quarterly projections, and convincing boards and staff to cannibalize their own revenue streams is incredibly difficult.

Until we have truly open banking and API access, fintechs need to focus on a few narrow approaches:

1. Go really niche, and offer extrapolations. Target a small group of customers using your Scaling strategies. Once you’ve achieved success with a core audience, extrapolate the results to demonstrate the broader potential. Focusing on a very narrow niche provides the best chance of getting strong engagement metrics. At Koho, we get users from 18 to 60, but we focus on 28- to 33-year-olds who are starting to prioritize their finances.

2. Map out an end game. For an API partnership to work, you must understand what the client’s goals are. Make sure its leadership takes innovation seriously. Many “innovation departments” are well-intentioned but end up as academic tire kickers.

A recent Bain & Company survey found that innovation was among the top three priorities for many top executives, yet less than 25 percent considered their organizations “effective innovators.” Don’t be misled by promising verbiage; establish what success looks like to the client from the outset.

3. Pursue decision makers who aren’t bound to profits and losses. Motivating traditional banks through revenue is unlikely, even for the most successful fintech, so they’ll be more inclined to listen if there’s a strategic benefit.

The biggest benefit fintechs offer is risk control. Banks can’t afford reputational risk, which ties their hands on implementing new technology. Investing in startups as minority shareholders provides a low-risk way for them to get insight into customer behavior and hedge with the winners.

Ethical cross-selling is another in-demand ability. Customers generally need six to eight financial products by the time they reach adulthood. Most people would prefer to get them all from their primary banks. But these companies rely on entrenched branch and sales teams that are compensated through incentive structures that hurt customers.

The Wells Fargo scandal is a prime example of this phenomenon. Employees were rewarded for the number of products sold to each user, driving many of them to take drastic and unethical measures. Fintechs that can crack above-board, transparent cross-selling improve their chances of attracting banks to their APIs.

Open APIs enable companies to meet consumer demands for secure, transparent, user-friendly banking without executing a complete overhaul of their technology stacks. Those with established proofs of concept and traction will be in the best position to take advantage.

By Daniel Eberhard

Episode 3: The Bottomless Cloud – An Interview with David Friend of Wasabi

Why data is not “the new oil” and why “cloud” means more than we think ...

Episode 5: How the Pandemic is Changing Business and the Cloud

An Interview with Ed Dryer of Steadfast With the global pandemic wreaking havoc on business ...

Episode 1: Why Small and Medium Sized Businesses Need an MSP

Small and Medium Sized Businesses Need an MSP Small and medium-sized businesses don’t enjoy the ...
Ajay

The Quest to Bring Computers to People – Personal Computing

The quest to bring computers to people,' rather than people to computers" resulted in the invention of Personal Computer The world changed its direction a ...
Gilad David Maayan

Leveraging Managed Kubernetes to Improve Your Operations

Leveraging Managed Kubernetes Kubernetes simplifies container orchestration, but sometimes companies are struggling with Kubernetes adoption. Many organizations do not have the required expertise to configure ...
Martin Mendelsohn

Supporting CISOS, CIOS and CTOS That Are Overwhelmed During the COVID Battle

The Covid Era and CISO Stress Even before COVID-19, senior technology executives, including CISOs, CIOs and CTOs were overwhelmed, and felt an increasing lack of ...
Patrick Joggerst

Why Platforms Matter as UCaaS Adoption Continues to Soar

UCaaS Adoption Continues to Soar Industry analysts agree – the unified communications-as-a-Service (UCaaS) market will continue to grow by leaps and bounds in 2020 and ...
Mark Barrenechea

Introducing the Information Advantage

Technology. Information. Disruption. The world is moving faster than ever before at unprecedented scale. Businesses today are operating in the next industrial revolution, and the ...
Kayla Matthews

40% of Organizations Are Leaving Office 365 Data Vulnerable

Office 365 Data Vulnerable Microsoft Office 365 is a popular platform for individuals and organizations alike. But, recent research shows many organizations are apparently too ...
Aruna Headshot

2019 Predictions for Innovating, Transforming and Enabling Workplace Transformation

My Predictions for 2019 As we think of the top Collaboration trends for the coming year, we should start by taking a look back at ...
David Gevorkian

Website Accessibility: Compliancy, Laws and Best Practices

Key to Making Your Website Accessible The internet has changed the education sector in so many ways. With e-learning, more people around the globe are ...
Armen Najarian

Martech: Brand Marketing is the New Demand Generation

Martech: Brand Marketing First, An Apology Sorry, demand generation professionals. We still love you and your jobs aren’t going away. But, as you are well aware, the ...
Bruce Guptill

As The Digital Workplace Strengthens, Traditional Business Thinking Must Die

The Digital Workplace The cloud-driven, digital workplace is enabling better ways of working, new ways of doing business, and entirely new business opportunities. It is ...