FinTech APIs: Open Banking vs. Platformication

Banking is no longer somewhere you go but something you do.”

This quote from Brett King, a mobile-banking startup CEO, couldn’t describe the current situation in the financial sector any better. The rapid advent of new technologies and constantly changing customer expectations have been paving the way for the digital economy. While the amount and complexity of data are rising like never before, regulatory agencies worldwide are taking extra precautions to protect consumers’ rights in the age of data exchange and open APIs.

The PSD2 directive was adopted in the EU to foster competition and innovation among banks and payment service providers by obliging them to open APIs to third-party providers, which, in turn, spurred the development of open banking and platformication initiatives. While the two concepts relate to sharing customer data across various parties, they imply different meanings. Open banking can be defined as a service of providing consumer financial data to third-party providers through APIs. Platformication, on the other hand, is a new business model that propels close cooperation between traditional banks and innovative fintech companies and serves as a one-stop-shop for all financial services. Let’s take a closer look at these fintech initiatives that drive the banking revolution.

Open Banking: On Guard of Financial Transparency and Convenience

Open banking refers to making customer account information available to TTPs (other banks, FinTechs, credit agencies, and tech companies) via APIs. Third parties, in turn, can use this information to initialize operations on the customers’ behalf or offer personalized services. As straightforward and scary as this may sound, Application Programming Interfaces (APIs) allow for secure and consent-based data transmission of the financial information limited to the customer’s name, account number, transaction data, and credit history.

The whole concept of open banking is built on API usage. The first banking APIs were introduced as early as in the 1980s and used solely for internal purposes of account reconciliation. Today, the financial industry is well into the second wave of APIs enabled by economy-wide digitalization and regulations in place such as PSD2 and GDPR. With FinTechs and tech giants entering the realm that was traditionally dominated by banks, incumbents are forced to implement convenient innovations to retain ever-demanding customers.

That is why the most common open banking use cases include data aggregators that allow users to get a convenient overview of all the financial accounts and mortgages in one place, along with money-management applications for tracking and planning the budget. For example, the Tink case study showcases how a technological company has developed a financial management service into a financial advisor that analyzes users’ accounts and offers practical insights.

Thus, open banking is an API-enabled service allowing trusted TTPs to access banking customer data to build their own financial products on its basis. However, open banking cannot be viewed as an isolated service. It is instead a stepping-stone towards platform banking or platformication.

Platformication: A Business Model of the Future

Open APIs that have opened access to banking data created a rich ecosystem of banks, customers, and tech companies. By combining the abundance of data and customers’ trust that banks possess with the innovation and agility offered by FinTechs, it is possible to create a banking platform for players to collaborate on and profit from developing the best-in-class financial products for their customers. From there, platformication can be defined as a new business model based on the API strategy.

Banking as a platform represents the third wave of APIs set to transform conventional banking payments into a payment hub. In other words, a traditional pipeline business model, where the owner controls every aspect of the value chain, is replaced by the platform organizational structure, in which different players cooperate to solve a customer problem.

Platformication is not something novel. This business model has been adopted by prominent tech giants known as FAANG (Facebook, Amazon, Apple, Netflix, Google). Instead of merely generating products or services, digital platforms connect producers to consumers and drive the demand-supply cycle, while at the same time creating an additional value for all players.

With the entrance barrier lowered by PSD2, bigtechs, with their inherent innovation and agility, pose a more significant threat to traditional banks. McKinsey reports about the tech giants’ plans to target the sales part of the banking, bringing 47% of the banking revenue. For example, Apple introduced its credit card with 2% cashback. What is more, Bain & Company survey found that consumers trust Amazon and PayPal as much as they trust their banks. That is the case where either you adapt and collaborate, or you stay on the sidelines.

The HSBC bank is an excellent example of an agile market player. HSBC execs have evaluated the possibilities of platformication promptly and deployed a mobile-first banking platform. The API-powered service helps small businesses manage direct debits, standing orders, future payments, and debit cards, and allows them to acquire funds through an in-app overdraft application. By converting its core banking products into APIs, HSBC has transformed its value chain into a value network.

The Banking of Tomorrow Is all about Open Collaboration

‘The convenience is king’ is a major modern principle governing products, services, and technologies. High-tech advancements paired with the customer-first approach have been paving the way for open banking initiatives and eventually platformication. API services have proved to become a revolutionary link between banks’ rich data and FinTech innovations. Technologies have matured enough to allow for the emergence of open and collaborative ecosystems, where banks, FinTechs, and other companies can cooperate to deliver valuable and complex financial products to savvy customers. Apart from giving access to convenient and personalized services, open banking grants users the ownership of their banking data, secured and protected under GDPR and PSD2 regulations.

To sum it up, the financial industry’s current situation is a clear premise of the platformication as the open and collaborative banking of the future. With open banking becoming the new normal, we can see the shift towards platform banking as the next strategic priority for banks that want to stay relevant today and tomorrow in the highly technological and saturated market.