Managing new banking business models with open banking platforms

Although the concept of Open Banking has been around for a number of years, the industry has mostly encouraged it for the sake of complying with regulations. In the aftermath of the pandemic, there was a definitive and rapid survey of open banking approaches and acceptance worldwide. In the devastating aftermath of Covid, for example, many beleagured lenders – especially small businesses and individuals – have found the Open Banking ecosystem an easier source of credit. By authorizing their banks and various other institutions to share their data with real-time third-party providers in real time, lenders can avail a larger offer of credit at more favorable terms. And this is just one of the many forces that have brought about an accelerated acceptance of Open Banking, which has made it an important transformation lever of our world. Along with the growing appetite for Open Banking, the scope of Open Banking has also expanded recently. The early days of Open Banking had limited exchange of information and little else; As participants now rely on trust, today they offer a wide portfolio of deals, including credit, payment and accounting solutions, with plans to also introduce savings and investment products. Two factors support this growth – firstly regulatory pressure in many countries and secondly the proliferation of open APIs. The numbers speak for themselves – in the first two quarters of 2020, Open Banking API platforms worldwide grew by 49 percent QoQ. In the latest EFMA Infosys Finacle Innovation in Retail Banking Study, financial institutions said that Open Banking APIs will have a moderate to very large impact on the banking business in 20212. APIs are a great feature of Open Banking ecosystems, which facilitates the efficient exchange of data between participants and a variety of offers on third-party / non-banking channels.

The growing impact of open banking

Open Banking changes the nature of banking and banking institutions. At the highest level, the universal banking model “pipeline” is broken down and a ‘platform’ model is made possible in its place. As a result, banks, which traditionally manufacture their products and distribute them to their own customers through their own channels, now offer a range of financial and non-financial products obtained from other providers, or distribute their own products and services on third-party channels. They do this by working with their external ecosystem in different ways: - Creating collaborative products with partners: Examples include Paytm, which co-founded a branded credit card with CitiBank (and VISA), and Marcus van Goldman Sachs (and Mastercard), which co-founded Apple Apple to launch. - Destruction of non-banking products within the primary journey of customers: DBS is an excellent example, with successful markets for used cars, real estate, travel and utilities that make it possible to enter the customer’s journey before the customer to a banking product start searching. - Collaborate with third parties to deliver (equally) competitive products: Think again of the example of Paytm, which works with IndusInd Bank and ICICI Bank on high-value fixed deposits and digital loans, respectively.

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Banks are transforming their platform businesses into the following innovative models:

- Banking-as-a-Service (BaaS): BaaS is a recent development, with the model in an early stage of acceptance. Perhaps the most well-known exponent is Goldman Sachs, which provides a set of APIs for creating bank accounts, making and tracking payments, and gaining access to the details of their activities. Developers can use the bank’s infrastructure to incorporate financial experiences into their own applications3. - Marketplace: the market model is becoming popular among many banks that create marketplaces that sell the best and non-financial offers in one place. In a way, the market is the opposite of the BaaS model, because here banks – like department stores – have the best options from other providers to meet even the non-banking needs of their customers. Apart from the former DBS Bank, Starling Bank operates in the UK a successful market with a range of services, such as wealth management, pension accounts and computer software. - Utilities: A very interesting effect is the utility model where large banks capitalize on their scale and efficiency to provide back-end infrastructure services to other banks / providers which then only focus on front-end activities. Payment tools are now fairly common, and the action is also increasing in banking. For example, ABN Amro Bank has established Stater NV which provides mortgage lending, such as collection, communications and loan management, to other small credit providers and fintech companies.

APIs – enable the digital ecosystem and promote open banking paradigms

The above business models, although seemingly different, are all powered by APIs on the inside. APIs operate at various levels in the open banking business: specialized internal APIs or micro-services enable banks to solve problems and create new value for customers; APIs help with customer acquisition and product expansion; An API-led architecture can enable banks to unite with the best companies in the world. Therefore, the importance of a sound API strategy can never be overestimated. When developing their APIs, banks need to consider the following: - APIs must be based on sound design principles and values, such as user-friendliness, reusability and end-to-end process coverage. - The strategy must provide a strong business model, as well as a monetization model that supports key business values. - If the enterprise wants to take a first API approach to deliver new features in the future, today it needs to design APIs for maximum usability. - A modern API management platform with clear ownership is essential, as well as a sound management mechanism for implementing internal and external APIs. Last but not least, the bank’s leadership needs to foster an API culture throughout the organization. Having the right talent and training resources is crucial, because over time the bank must have multiple agile teams working across the enterprise and developing APIs.

What’s next for APIs and Open Banking?

After a slow start driven by regulatory coercion, Open Banking began to come into its own. This is an important occasion. Public banking is becoming mainstream and will offer new possibilities such as public finance. This will ultimately promote market competition and innovation, which will provide a win-win offer for both financial institutions as well as for diverse customers. The author is the world head and CEO of Infosys Finacle