Embracing the APIconomy (I): If you can’t beat them, allow them to join you

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The APIconomy is an ecosystem in which banks and FinTechs co-evolve and co-innovate. Now is the time to invite others onto your banking platform.

In our previous blog series, we introduced the formation of Open Banking Ecosystems and how you as a bank can get there. In this series we examine why APIs are the foundation of Open Banking and how they allow you to welcome third-parties to your ecosystem.

Figure 1 Overview

In 2018, Open Banking is no mere hype anymore, it is a compulsion to act. At the very latest since PSD2, every bank must realize that opening up is the only way to go forward. But, this is only one of the driving forces of the Open Banking development.

Most of your existing customers are more than likely also a customer of Amazon, Apple, Facebook, or Google. Spoiled by these firms’ superior service orientation, they have been conditioned to expect instant gratification whenever they use one of the services. Why wouldn’t they expect it from their bank as well?

Customer expectations are ever growing and falling short of meeting those expectations opens up opportunities for tech firms to step in. They already have the customer data and made first advancements into payments. And then there are FinTechs and other third-party providers (TPPs) accelerating competition with innovative solutions and a customer-centric approach, not reluctant to utilize latest technologies such as artificial intelligence, chatbots, and biometrics.

How should your bank act now?

For a long time, most banks tried to counter FinTechs with the development of competitive internal solutions, often falling short, however, as legacy systems and a lack of data insights are holding them back. FinTechs are here for the long run. That is why we propose a slightly modified approach true to the saying if you can’t beat them, join them – accordingly, in the case of your bank: if you can’t beat them, allow them to join you. This is no mere proposal to friendly co-exist with the ever-growing number of financial startups, this is a call to co-evolve with them. An increasing number of banks seem to realize that: 8 out of 10 bank executives consider FinTechs as opportunity for partnerships.1

The way we see it, we are better together than on our own. If we broaden our scope and look at more ideas, it will be easier to find the best ones and increase the likelihood of success even before the ideas reach the market” — Jarkko Turunen, Head of Open Banking, Nordea2

Figure 2 What banks and TPPs bring to the table

APIs are the way to go

Your biggest assets as a bank are your existing customer base and the trust those customers put in you, two benefits you don’t want to put at stake by leaving distribution to third parties – unless you’re okay with becoming a commodity. Nor can becoming a sole product aggregator keep you safe from the ever-growing chance of becoming disintermediated. We believe that the way to go is the transformation towards an API-enabled bank built upon an open banking ecosystem. And as per usual, time to market is key since switching costs are lower than ever. That’s why APIs are ideal. If done right, they are

  • fast,
  • easily alterable,
  • simple to integrate, and
  • enable personalization and automation.

APIs are nothing new. They have allowed companies such as Amazon, Salesforce and Google to get to where they are. Yet, the great majority of APIs are still private. Mainly either used to overcome silos in legacy systems or to build API-based customer solutions, these APIs are only accessible within the firm’s environment.

Figure 3 Different API types and their monetization and innovation potential

And then there’s public APIs, either for specific business partners or truly open for everyone.3 Around 15 years ago, Amazon founder Jeff Bezos famously required internal developers to only communicate via interfaces that could easily be externalized – or get fired. This helped Amazon to where they now offer numerous public APIs for partners and developers. Other companies followed and started transforming towards an API-driven architecture, albeit maybe in a less drastic way.

The number of public APIs has exploded over the last couple of years across industries allowing platforms and services to easily connect with each other. Open banking APIs are also gaining traction with PSD2’s entry into force, although still reluctantly due to security concerns.

To unleash the true power of the APIconomy – the ecosystem in which banks and third-parties co-evolve and co-innovate – you’ll have to run open APIs, granting others access to your platform or your product portfolio.

Figure 4 The five pillars of successful API management

There are several steps to embrace the APIconomy. We have compiled a five-point plan for successful API management that we’re going to explain over the course of this blog series. Opening up your data for TPPs via APIs adds an additional set of customers: third-party developers. Just like your traditional set of customers, they come with certain expectations. Read about how to offer a compelling developer experience (DX) and how to manage that new set of customers in our next article.

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1. Capgemini World FinTech Report 2017

2. Capgemini World Retail Banking Report 2017

3. Open API programs usually still have a registration and/or authentication process in place.

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