Although we’re at the beginning of a new era of open API banking, some banks have already been using APIs for a long time. Banks historically used APIs to connect their internal systems, as well as to connect with external systems such as the core banking system that powers ATMs. However banks face new challenges in exposing APIs publicly, and it seems developers are the key.
Most banks have built their IT infrastructure like Russian nested dolls, building layers around the core banking system. Concerned with security issues and the location of their data, most banks have developed their systems internally, generating high IT costs. Increasingly, it appears that this kind of architecture is drastically hindering banks’ capacity to innovate. Conscious about the necessity of opening up the market to new entrants and creating space for new payments model, the European Commission has been working for a decade on the PSD. The latest version of the PSD2 will drive banks toward an open API banking model that is likely to bring innovation. The following diagram shows the traditional model and the new possibility for banks to connect to external services or platform through APIs.
Banks can now connect to external services such as Ryple, Kraken or Smava to add these services to their offerings. The ability to connect and combine services in this way can also allow banks to focus on their core competences of banking and delegate the customer relationship to mobile phone carriers or the big internet companies such as Google or Apple that are likely to enter the mass banking market. Conscious of the importance of reinventing banking and creating differentiation factors, a few banks are experimenting with how to form new relationships with developers that will allow them to innovate and take advantage of new ideas.
In 2013, BBVA organized the Innova Challenge, a hackathon based on the use of BBVA data. The appealing amount of prize money lead participating developers to create some amazing projects. One project used BBVA’s data to predict waiting time at a cultural site. Another built a model correlating transactions, ratings and location. And the last finalist provided an application to help business owners estimate their success. Similarly, ING organized a hackathon for “empowering people to stay one step ahead in life and in business.” The company also benefitted from the participants’ innovative ideas, including the possibility for an account to be linked to an additional debit card credited with a specific amount.
The existing ecosystem of fintech startups has been shaken up by traditional institutions’ sudden interest in “tomorrow’s banking.” Digital currencies offer a new field for innovation with the development of second-generation cryptocurrency that could bridge the gap from individuals to multinational companies. Banks could benefit from the possibility of it decentralizing and reducing the cost of transactions by creating a distributed ledger using blockchain technologies. Building on cryptocurrency, IBM and Samsung believe that Ether could offset the cost of running the simple programs that must be run constantly to connect software with objects or monitor specific activities such as temperature. At the same time, alternative payment methods such as account-to-account payment are seen as a very hot, new segment of banking.
Both banks and startups have a growing interest in creating a marketplace where developers could ‘shop’ finance and banking related APIs. Finextra’s survey reveals that 66 percent of banks intend to create their own app store on the back of PSD2. Surfing on this trend, xignite launched the #FintechRevolution API ecosystem in an attempt to create the first financial API marketplace.