May 28, 2020
Banking-as-a-Platform: A new model for a new banking environment
Reading time: Seven minutes
In the first installment of this two-part series, in collaboration with Axway, we look at how banks can leverage APIs to create new revenue streams, build partnerships and reach new customers.
Banks increasingly have to compete with big technology companies and a crop of fintechs who are coming up with innovative and customer-centric solutions. In order to survive and thrive in this era, banks will need to adopt new models.
Most major banks today are vertically integrated, with closed-loop offerings. Their products and services run within proprietary distribution channels and tightly controlled infrastructure, such as Bankers Automated Clearing Services (BACS) or Automated Clearing House (ACH).
Driven by regulation, the advent of open APIs will upend the status quo by allowing third parties to act as alternative distributors and offer a new range of products. As the delivery of financial services changes, incumbent banks are being forced to consider alternative models — Banking as a Platform (BaaP) is one of these options.
Banking-as-a-Platform (BaaP) enables third-party developers to build products and services for bank customers. Developers can extend platform functionality using APIs, while the platform itself manages data exchange and oversees authentication, as well as ensuring compliance.
These APIs should not be viewed simply as technical interfaces that expose data to third parties, but instead as radical enablers of new and exciting customer experiences. Unlike traditional approaches, BaaP does not just create and push products. It’s interactive. It allows users to create and consume value.
The BaaP approach isn’t strictly about revenue. It’s also a way for banks to build partnerships and reach new customers. Banks cannot afford to stick to a classical pipeline business model. A report from McKinsey warns of the risk of inaction in this scenario: “Change is rarely comfortable, but as market evolution illustrates, the forces of change are inevitable. Banks are better served getting ahead of and defining the trend rather than waging a futile battle to repel it.”
The regulatory mandate to open APIs is both a threat and an opportunity for financial institutions. Per one recent study from Accenture, banks that embrace Open Banking trends could profit from a potential revenue uplift of 20 percent, whereas those failing to do so risk losing 30 percent to disruption by the end of 2020.
Banking-as-a-Platform in practice
Banks are losing ground in the battle for payments. They must work with negative interest rates that cut into their margins and contend with tight regulatory constraints. They also must deal with the fallout from the Covid-19 pandemic, and they have a ball and chain inherited from the old world: the branch network.
However, banks do have a number of things going for them — chief among them: trust. This trust could be the foundation of a marketplace of services offered to clients through applications. Clients will be reassured by a bank’s brand and its know-how in dispute management and “Know Your Customer” (KYC) qualification.
Fast-moving banks are doing just that, turning to platform or marketplace models by partnering with agile startups, updating legacy systems and building their own platforms. For instance, DBS is ramping up its digital efforts for corporate banking customers by relying on APIs. Last year, they reported a net profit increase of 28 percent to USD 4.17 billion. Early adopters like DBS are reaping the first-mover advantage.
Generally, banks will be best served by reselling on their own marketplaces not only in-house services but vendor services where commission revenue is possible. Once a bank begins demonstrating maturity on delivering its API product set, there are several more specific methods for monetizing APIs worth considering.
- Data model – a bank receives data every time someone consumes its API. One potential monetization here could be the sharing of this data
- Transaction model – like traditional transactional models, this approach allows third parties to integrate and use their services through plug-and-play APIs
- Revenue sharing model – an option that supports open innovation and co-creation with third parties
Adopting an API-fueled, platform strategy brings with it many organizational and technical challenges. Organizationally, banks will need to create multidisciplinary teams, redesign customer experiences and reshape business architecture.
On the technology side, they will need to update development approaches, pursue process automation, experiment with rapid prototyping and maintain the APIs themselves. All these ingredients ensure the right kind of environment — one where third parties can integrate and test their apps in a sandbox, and then easily move to production.
The future of platform banking
Open banking is gaining momentum worldwide with PSD2 (Europe), CMA (United Kingdom), UPI (India) and many similar initiatives being undertaken elsewhere. These regulations seek to open the financial sector to competition, stimulate innovation, reduce costs, increase transparency and empower consumers.
This is necessitating an industry-wide shift in mindset. Strength is no longer found in a singular value-added product (which can only grow linearly), but rather in the value indirectly captured by the (networked) relationship between the service provider and service consumer.
There is growing recognition that a BaaP approach will become a major feature of the financial services industry, but we’re not there yet. According to another survey by Accenture, incumbent banks made up only 30 percent of the BaaP players. This is because the cost of creating a platform from scratch is high, and such a project could mean taking on significant technical debt.
Despite this, financial institutions are uniquely positioned to use the BaaP model to provide both a network of innovative products and services and the trustworthiness of a long-standing institution. By welcoming open APIs, banks can form a new decision-making framework that caters to their preferred strategy and the realities of the market.
In the next episode in this two-part series, I’ll be taking the idea of BaaP to the next level by putting forward the idea of “the true platform.” This concept pushes the Open Banking model a step further by viewing banks as a security intermediary, creating and offering an ecosystem of service providers and developers, who are also consumers of these services.