Open Banking and the current Spaghetti Junction

From my early days of blogging (back in 2006 when I knew that the subprime crisis was brewing because of my work at Dalton Investments) I thought of a bank as a boxed building that was internally split in two departments. I drew on napkins a bank layout with an entrance on the Southside, with a revolving door, for depositors to enter. On the north side, there was another entrance with the exact same revolving type door, for borrowers to enter. Inside the box building, there was a separation of the deposit and the loan area. The separation in my imagination was a special corridor were the magic of credit – money creation – happened.

Banks have always created money in this fairly simple way, which depends on Reserve ratio requirements imposed by the regulatory bodies in each region. In addition, we have always had non-depository lending institutions. And last but least, we have been extremely innovative in increasing the leverage in the economy through “exotic and complex” off-balance sheet financial structures, like the derivatives that brought upon us the 2008 crisis.

Fast forward 10 years after the subprime crisis, and banks are very often thought of as utility companies, their risk appetite has completely disappeared, and they have been forced to rethink their value proposition. The latter still a work in progress.

Accenture published earlier this year a report titled “The Brave New World of Open Banking”. Through their surveys, 65% of respondents see Open Banking more of an opportunity rather than a threat. With PSD2 the number of APIs will increase tenfold and

“We estimate that by 2020, €61 BN (7%) of the total banking revenue pool in Europe will be associated with Open Banking-enabled activities.”

The report closes with a heading “Open Banking is here, whether you like it or not”.

None of us can declare a winner amongst incumbent banks, Fintech banks, tech companies or other commerce conglomerates. None knows exactly how this open collaboration will shape up invisible finance. An up-to-date check across the board will give us a sense of how my 10yr image of the closed box with the magic corridor, is evolving right now. It has all sorts of windows opened, it is digitally connected with all sorts of entities (from McDonalds to travel agents), it even connects to plug-and-play tech platforms. Let’s take a closer look.

Banks with API offerings

DBS Singapore has opened its API since Nov. 2017 and now claims to be the largest Bank API platform. Companies like McDonalds is tapping into the DBS payment API and making cashless payments easier. The social enterprise Homage, that offers on-demand in-home caregiving services for seniors, taps into the DBS reward loyalty API, so that family members of the seniors who need care, can instantly redeem their credit card reward points for Homage services of their loved ones.

BBVA APIs are accessible to Spanish retailers, so that they can offer on the spot financing of a purchase to their customers. Spanish retailers using this API, have a simple loan button on their checkout screen.

The Bank of Ireland offers through API, to the 2.4mil customers of the Post Office, savings, loans, FX, mortgages at more than 11,000 post office locations. Recently, they also offer mortgages that are partially funded from the pension funds of their customers.

Lots of other banks are in sandbox mode, like BNP Paribas.

These brave moves are looking to test the waters, of new revenue streams. But most importantly, to build brand and recognition at the B2B with these partnerships that have network effects.

Fintechs with APIs for Banks and other Fintechs

Partnerships especially in the lending space, between banks and lending marketplaces, have been around for a while. The JP Morgan partnership with OnDeck, is just one example of an incumbent linking through API to Ondeck to offer its small business clients loans without affecting the bank’s balance sheet.

Starling Bank has partnered with Transferwise, to offer its clients first class FX services.

CBW bank, the small bank out of Kansas that has won the best digital bank Celent award, has powered Moven the American challenger bank.

Solaris Bank, the Fintech offering Banking as a service, is in partnership with the app Kontist, that offers a digital bank account customized for the needs of freelancers and the self-employed.

These moves are enabling banks and fintechs, to serve more customer needs, focus on customer experience, mitigate business risks, and most importantly, go-to-market in a very short time rather than the traditional way of building in house.

Banks offering non-banking products via APIs

Commonwealth Bank in Australia has grown its mortgage business by linking through APIs to real estate databases and enabling customers to search for real estate.

This kind of offering is what customers want. It is really a goal-based service rather than a product based service. It brings the customer close to the bank that will execute the financial transaction but has never before been involved in the need it is serving (a home for the family, an investment for income etc).

Financial Tech Service providers offering APIs

This moving part of the reshaping is very active. Temenos has a marketplace with 70 APIs around Open Banking. I checked their Wealthtech offering and it included (already integrated) Edgelab, a risk mgt fintech, and Apiax,  a cross-border Regtech tool that makes the life of financial advisors easy and secure.

Finastra, has launched FusionFabric, the cloud-based platform for the API economy as they market it. I picked from their store, Fractal, specialized for SME credit profiling, and Active Allocator, a sophisticated asset allocator that is a favorite of FT Partners and mine (to be integrated).

These kinds of platforms from existing core banking providers act as significant filters to innovation and offer to bank clients, vetted solutions. Any Fintech that gets on these platforms, will at least avoid the “unbearable procurement processes of large banks”.

All these financial services providers can feel the threat of being completely disrupted and have moved faster to serve the bank needs. At the same time, since they own the distribution channel to the banks (their clients) they are the new gate keeps for Fintechs struggling to scale through partnerships with incumbents.

Internet of Finance powered by APIs in the East

I am not going to touch upon this approach which has nothing to do with all of the above. In the West, we are transforming existing banks, financial service providers, and Fintechs have predominantly, moved from a War stance to a partnership stance in order to scale and access distribution channels. This is the current reality (90% more or less; 10% are true business innovation). In the East, APIs and what we Westerners call “open banking” is in a more mature stage and already operational at fairly good scale, simply because the BATs are conglomerates that link their divisions through APIs and create even more powerful network effects.

spaghetti_junction_by_colliemom.jpg

Open banking is still a brave new world, as Accenture characterized it. I feel that APIs are opening up in all sorts of directions, many are dead-ends and will never lead anywhere, others are badly maintained, some are becoming the best way to market. APIs are not plumbing but rather highways to lead to a new world order. For now, the spaghetti of these highways is chaotic and confusing. Let’s watch and see.

 

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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