A paper published by the SWIFT Institute – The API Economy and Digital Transformation in Financial Services: The case of Open Banking – looks at the various applications of open application programming interfaces (APIs), in the context of adoption of APIs in the financial services sector. It also looks at the key challenges and opportunities arising from open APIs in the banking sector in the UK and the EU, following the implementation of the revised Payments Services Directive (PSD2).
Three of the challenges regarding the adoption of open APIs were outlined in the paper as follows:
1. Speed v. security
Fintech companies are agile and innovative, while banks tend to be slow-movers, constrained by the need to ensure security for all financial services they provide to their customers. Indeed banks' reputation depends on the security they provide for their customers' investments. The paper states: “Banks’ longstanding and hard-earned reputation for providing full security on all financial services may also play a role. This orientation towards perfecting the processes to establish full security may make it difficult for banks to work with FinTechs in terms of speed and experimentation.”
2. Owning the customer
According to the SWIFT Institute paper, banks may have to “rethink their assumption that they 'own the customer'”. It explains that open APIs often lead to modularity in terms of services which will make it difficult to claim a customer. In a world of financial services – in which large banks, smaller banks and third-party non-banks are able to get access to customer data, opening up the market for competitive products – it will be increasingly difficult for some of the traditional banks to maintain their customer share. There is likely, therefore, to be a shift from 'owning' the customer, to 'sharing' the customer. And, in a system in which banks will see different applications built on top of their own platform, one of the big challenges will be knowing which brand is the customer's primary interface.
3. Buy, build or collaborate
Banks will have to decide what they need to build in-house and when it's preferable to collaborate with or even buy services from a third-party. The report states: “In a world where a large variety of services will be provided as part of a platform, banks will indeed need to reconsider their competitive advantage compared to the numerous players that are specialised on various technologies and data-related services.”
CTMfile take: PSD2 is not far off now and banks and fintechs are thinking carefully about the practicalities and possibilities of open APIs. This paper is essential reading for those who want to get an insider view on what banks and fintechs are really thinking.
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