OPEN BANKING & OPEN BANKING APIs: THE FUNDAMENTALS

//OPEN BANKING & OPEN BANKING APIs: THE FUNDAMENTALS

OPEN BANKING & OPEN BANKING APIs: THE FUNDAMENTALS

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Despite many definitions that different markets and banks take, Open Banking is a phenomenon expected to grow in momentum in the next few years. Although originating from the financial services industry, other industries will see opportunities too. Open Banking is essentially the unbundling and re-bundling of financial services so that these “services” can be consumed by, and offered by trusted third parties. The means by which data and functionalities are extended out to third parties is through application programming interfaces (APIs), which by their very existence in the organization indicates the organization’s willingness and capabilities to be open and collaborate. We know that digital transformation and investments into 3rd Platform technology have enabled enterprises to be well connected with their business ecosystems and their constituents for inbound and outbound flows of products, services, and information. APIs are going to be one of the key tools for those connections towards these third parties.

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The use of APIs has been noted in the banking system for quite some time now, but this was mainly limited to connecting internal applications and processes for information sharing and process standardization within the same bank (in this case, these APIs are classified as private APIs). Internal APIs are used widely in connecting various product systems with channel systems, or core banking systems to systems of engagement. This rather closed use of APIs had been often viewed as “technological enablement” — essentially, a way of making technology (systems, business processes, IT assets) perform and work efficiently in terms of accessing to the source of backend data.

The same mindset remains the order of the day in many banks, as they move toward open APIs. The organization is cautioned against looking at APIs only with a technology mindset as this limits the potential of open APIs and requires an overly complex technology architecture discussion. The organization should look into the data each partner or party should get, access, and/or share. Thus, in order to scale up its open APIs strategy, they need to set up a crucial business discussion on why organization needs.

When starting conversations on open APIs with CEOs and senior business executives of various banks and financial institutions in the Asia/Pacific region, the first concern raised is typically, “We understand that API is all about hardcore technology so we should not really get involved and just let our chief technology officers (CTOs) decide on this.” This is a bad question. The major risk with this approach of API being considered as technological enablement is that it remains as part of decision making mainly with the CTO and the technical team, whereas open APIs, specifically external/public APIs, require decision making more at a strategic level. At this level, the discussion will be akin to when the bank is launching a new product, in which top management considerations include future business potential and changing market dynamics, over underlying technology.

Banks perhaps need to take a page from financial technology (fintech) and third parties that view open APIs as products. This mindset shift has been done before: banks are now speculating mobile banking (apps, micro-apps, and so on) and internet banking not as technology enablement — as they did in the past — but as products or channels. To this end, banks are continuously trying to improve, innovate, and expand with new functionalities and features to make these products or channels even more convenient and customer-friendly. A plan for sustaining these products is critical, even at such an early stage.

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Banks and their growing network of partners are already looking to make their platforms and services more flexible and easier to connect to. Traditional technology providers are following the lead by opening their platforms and facilitating connections — away from the traditional way of providing products, licenses, maintenance agreements, and other services. We expect API services and access to APIs to be a new model of revenue generation for these technology companies. Meanwhile, third-party partners (TPPs), third-party payments, fintech companies, and the like are willing to integrate with banking systems through open APIs so they can create more avenues for new value and revenue creation.

Open APIs goes well beyond the technology they are running on. It is advised that banks approach open APIs from a product perspective. Thus, they need to estimate the business potential (total addressable market, revenue potential, growth projections) similar to the way they develop a business plan. The business plan also needs to include an assessment of scope, terms of partnership, product life-cycle management, and service pricing (the approach is to price depending on service tiers).

In summary, the discussion might move further into the fundamentals. Some organizations are already discussing traditional revenues (net interest margins, standard banking fees, and commissions) versus revenues that are partner-generated or at least have implications on partnerships

Michael Araneta - Associate Vice President of IDC Financial Insight Asia Pacific