There’s a story about a man who took great pride in his perfect lawn. He was traumatized one morning when he awoke to find it ruined by a large crop of dandelions. He tried every method he knew to get rid of them. Still, they persisted. Finally, he expressed his frustration in a letter to the Department of Agriculture, posing the question, “What shall I do now?” In due course a droll reply arrived, “We suggest you learn to love them.”
Having taken great pride in their well-manicured and protected payments systems, many bankers are now receiving similar advice when it comes to government regulations intended to prise open the value chain to make payments more competitive. The most disruptive crop of dandelions is the EU’s revised Payment Services Directive (PSD2), which requires European banks to grant third-party providers secure access to customers’ transaction accounts through application programming interfaces (APIs). While Europe is ahead in implementing these types of competition-focused regulations, similar efforts are now being discussed in other parts of the world.
So how can banks learn to love these weeds of competitive disruption? In short, by viewing them as an opportunity to capture new payments revenue, provide innovative customer propositions, and change the competitive dynamics of the banking sector.
Banks first need to turn outward and reimagine their role in commerce. To do that, they should first catalogue and understand the many and varied ways in which APIs are already used within their institutions to move data between disparate systems. The technology is not new, but the idea of monetizing existing services by making enterprise IT systems, services and data easy to consume externally, is. To boost revenues, for example, banks could give third-party companies easy-to-use, fee-based APIs for payment and authentication services. Or, banks could apply well-defined APIs to standardize and simplify the customer onboarding process to drastically lower cost and improve the user experience.
A prerequisite is a C-suite attitude that views open APIs as a strategy enabler rather than a technical regulatory issue. It also means evolving the bank model to be purchaser-driven where value is created from the outside in by customers and third-parties choosing to access services rather than having those services bundled as part of a relationship. It also means a joint commitment from both business and IT to make bank payments open, nimble and innovative. It’s that attitude that will help banks position themselves to orchestrate the connection between consumers and merchants across not only payments, but also other financial and non-financial products and services.
It sounds simple, but the winners will need to identify and understand the key use cases to drive quick wins, and then build on them to capture broader share of mind and wallet. Through PSD2, European banks are being forced to configure third-party account access, and now need to get creative about the products and services that go beyond the basic regulatory requirements. These could be things like managing digital identity for customers across multiple merchants or creating clearing houses for merchants to allow them to easily plug into multiple bank API platforms through smart routing.
Consumers, merchants and banks are going to explore this new environment together, and that creates true strategic ambiguity where banks that are agile and entrepreneurial will be the ones that thrive. There will also be a need to pick the right partners to navigate this new landscape and ensure that the terms of trade are positive for all participants. Those who adopt the weed-killer approach, and try to defend their traditional proprietary position in the payments value chain are unlikely to be the winners. Those who embrace the dandelions and recognize that we are entering a future where the payments ecosystem is far more diverse are likely to be the banks that succeed.
I invite you to read our recent report, Driving Innovation in Payments, Powered by APIs and Open Banking.