Following the European Payment Service Directive PSD2, banks need to open their API by the beginning of 2018. How can banks turn this potential threat into an opportunity?
In part 1 of this series on Banking-as-a-Service, we briefly touched upon how the potential to revolutionize the delivery of banking and financial products. We defined Banking-as-a-Platform in the context of the Banking-as-a-Service stack in our publication about Banking as a Service. We introduced the legal backgrounds, in particular the European PSD2 directive in our blog series on FinTechs, Banking-as-a-Service and Banking-as-a-Platform.
By providing a universal technical interface, the Banking-as-a-Platform providers allow third party developers to create applications that plug into the bank’s core banking system and provide new services as well as innovative ways to purchase and use existing bank services. Serveral players have emerged in the market. Some are active as Could Service Providers, other locally install their API-store at the costomer location - such as the Open Bank Project.
"The Open Bank Project is an open source API and App store for banks that empowers financial institutions to securely and rapidly enhance their digital offerings using an ecosystem of 3rd party applications and services."
The Open Bank Project, 2017
At this point, it might seem like some of these applications might create a platform similar to Amazon. You select a product and the platform shows all the sellers (i.e. banks) selling the same product with the differentiator being the price and the service rating. Some analysts believe this might lead to a communization of banking products and eventually put pressure on margins enjoyed by the banks which might actually hinder their ability to deliver superior and safe products. But will this really happen?
Can banking really be commoditized?
This is not the first time that a technological revolution has swept across the banking and financial services industry. When the first ATMs and credit cards emerged, they did force the banks to change their service delivery models (reduce branch network), but did it really make them lose money? No. In fact, fewer branches actually decreased overheads for banks. The increase in the number of transactions being handled digitally (rather than manually), improved the revenue generation from the payments business.
Similarly, when payment service providers, digital wallets etc appeared, banks adapted and created their own competing platforms while retaining the advantage of using mountains of customer data to market the right products to the right customers. This does not mean that these service delivery revolutions or the Open Bank Project will not have an impact – it most definitely will. The point is that the focus for banks will shift to creating products and services that are better than their competitors – it will, in fact, create a push against the commoditization of the bank’s products.
Product competition prevents commoditization
There are so many ways banks can prevent being dragged into margin-only based competition. The best way is to create better products. With the wealth of data already available to banks, they can structure products that are more focused and better suited to a particular class of clients.
They can use the third party applications that are developed to better market their products to a particular customer class. For example, let’s say a customer wants to start micro investing and downloads an app for that – a bank can have this app plug into the customer’s bank account in order to fund the purchase of securities as well as save the profits.
This way the bank can directly benefit when the customer makes more money, as they will have a great amount of cash available with them which they can deploy productively. Why not open the bank’s market and security research sections to this customer and help him make more money which, as we just established, is beneficial for the bank as well? Finally, if the customer wants to invest in higher growth markets abroad, can’t the bank offer their suite of forex products, international money transfer products and so on?
There are limitless possibilities to those with the right imagination. The success of a bank in this new OBP driven digitization will depend on their ability to innovate on products, as well as ensuring that their core banking systems can securely and quickly interface with these third party applications and provide them all the relevant data.
To get the full picture of Banking-as-a-Platform in the context of the Banking-as-a-Service stack, read our publication about Banking as a Service.
References and Further Reading
- Read more articles on FinTechs in VentureSkies' blog section.
- Read more on the services and packaged solutions which VentureSkies offers for FinTechs.
- PSD2 Directive - DIRECTIVE (EU) 2015/2366 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (2015), The European Parliament and the Council of the European Union.
- DIRECTIVE 2007/64/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC (2007), The European Parliament and the Council of the European Union.
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