Other parts of this series:
In the first blog in this series, I shared some of the observations from a white paper I co-authored with Finastra on corporate APIs. In this blog I would like to discuss how the proliferation of APIs affects banks’ business models.
In our view, banks’ future business models will emerge from three main strategies:
1. Banking as a Platform (BaaP)
Banking as a platform enables third-party fintech developers to build products and services for bank customers. Banks provide the tools, while third parties create the customer experience.
BaaP lets banks become infrastructure providers to third parties. Building a BaaP architecture without the constraints of legacy systems creates application “stacks” that act like building blocks; they are accessible to third parties though an API layer and can be mixed and matched to create new products and services. The banks deliver their expertise in security, authentication and compliance while fintechs provide other capabilities and services.
An example of this is Yolt (an ING venture), which aggregates ING and partner products and offers them to consumers. In this use case, the contracting parties are the banks and their customers.
2. Banking as a Service (BaaS)
We no longer live in a world where one provider of financial services builds the entire customer experience. Banking as a service extends banking services by offering an invitation to do business through a unified digital channel. This should not be confused with banks offering open APIs to distribute their services on third-party ecosystems.
In this service-enabled approach, the platform owner offers specific services to enable third parties to provide their services. An example is Ping An’s One Connect platform, which sources capabilities through the Ping An group as well as from other companies (such as tech startups) and then offers them in a SaaS model to financial institutions (the clients). As a result, One Connect is becoming a leading provider of services to financial institutions in China—it is already being used by more than 480 banks, 40 insurers and 2,400 other financial institutions.
3. Banking as a Marketplace
Banks can now become marketplaces, offering customers a range of products and services from other providers. Regulations such as PSD2 now mean that banks should be building open APIs to give others access to their customers’ information, but they can also use competitors’ APIs—and innovative fintech solutions—to create alternatives.
For instance, we see a growing number of marketplaces designed for entrepreneurs, offering not only banking services but also accounting, fiscal and legal services.
If a customer needs a financial service that the bank doesn’t offer, the bank can refer them to a partner that does. In this model, the marketplace owner facilitates transactions between the producer and the consumer, amplifying the network effect. Banking as a marketplace offers a great opportunity for new entrants to the financial industry to level the playing field.
Accenture analyzed 167 platform cases and found they were evenly split between the three models. However, incumbent banks made up only 30 percent of the banking-as-a-platform players, as the cost of creating a platform from scratch is particularly high.
Open Banking is here to stay—and going global, thanks to regulation and individual banks’ initiatives. By considering open APIs, banks can create a new framework for decision making that supports both their chosen strategy and the realities of the market.