During the 17th century, when the idea of an open economy was still in its embryonic stage, the Netherlands created and dominated a network of global trade routes and commercial partnerships spanning from Europe to South East Asia. Such was their spectacular trade mastery, that the Dutch East India Company, established as a chartered entity for the spice trade, was at its peak worth $7.9 trillion in today’s standards - more than 20 of the today's biggest global companies combined. Meanwhile, the Dutch invented the risk-sharing idea of the joint stock company. The economic success propelled the Dutch Golden Age, in which science, art, and liberal thinking were among the most acclaimed in the world. All despite a lack of natural resources and recurrent turmoil in Europe.
Traditionally, banks have built, owned and controlled the channels and applications through which customers access their services – be it retail customers checking their balance online or undertaking a mobile transfer; or corporations seeking a working capital finance. As a result, banking has been typically vertically integrated, and in essence ‘closed’, thereby severely restricting the number of product offerings and often resulting in high processing cost.
Over the recent years, regulatory forces, like the Revised Payment Services Directive (PSD2) and Open Banking Initiative (United Kingdom), have been driving the development of banking services based on open sharing of capabilities among partners. Product stacks based on in-house banking offerings are gradually morphing into business ecosystems where participants are ‘trading’ with other network members’ capabilities, allowing greater specialization and tailored services. This reciprocal exchange, facilitated by APIs serving as the ‘trade corridors’, is driving compelling value propositions by generating more competition and innovation, while promising to redefine traditional banking.
The possible result? Even ahead of the regulatory obligations in Europe, the number of banking APIs available for third parties to connect to surged severely, from barely double digits a decade ago to over 1,500 in 2017. After implementation of PSD2 in 2018, that number will ratchet up again— likely by a factor of 10. By 2020, €61 billion (seven percent) of the total banking revenue pool in Europe will be associated with Open Banking-enabled activities, it is estimated.
Open Banking Is a Two-Way Street
The Dutch circumvented trading challenges, like the closed Japanese economy of then, by establishing an impressive range of commercial partnerships, to boost import and export. How can banks, mirroring the Dutch traders of the past, position themselves to secure their share of the new value being created by incumbent and challenger banks?
On the export side of this new trading paradigm, banks become ‘access facilitators’ by making data and services available, with due consent and in a regulated way, to third parties such as other banks, retailers, telecom providers, and tech giants. Third parties will then be able to integrate such information into their platforms to co-create solutions.
The pioneers in this direction have been the French lender Credit Agricole and Spanish banking giant BBVA. Both banks offered third-parties access to their open APIs and allowed them to leverage on core bank functionalities to develop financial apps, innovate new business models or simply improve their user experience. Using BBVA API Market, for example, third parties can manage, control and analyze payments, verify the identity of a BBVA client, notify users of their operations and access segmented purchasing patterns. In France, BNP Paribas has partnered with the Open Bank Project to make a wide range of APIs available in a sandbox environment for developers to create atomized banking services like identity management. What is most beneficial about such exports of data and services, is that banks can enhance their value creation by increasing reach, monetizing assets and participating in a wider ecosystem.
The broader question remains whether the growth in outbound Open Banking is more likely to be driven by collaboration or regulation. Nonetheless, new services will further disseminate across industries, offering new business to a range of financial service providers.
On the import side, banks become ‘value aggregators’ by incorporating product and services from third-party partners into their own offerings. Doing so help banks embedding themselves in more transactions, from banking services they do not offer to retail, consumer goods purchases, travel and other non-banking services.
Challenger banks like Starling Bank (United Kingdom) and N26 (Germany) are making use of fintech APIs, similar to those of Transfer Wise, to enable convenient cross-border transactions from a mobile app. Rewards and receipt platform Flux has become the first fintech to directly integrate with the Starling marketplace, allowing Starling customers to get itemized billings and automated loyalty points from partner merchants. Spanish giant Santander’s Money Plan app aggregates bank accounts, cards, insurance and investment funds in a single platform, allowing users to better manage their finance. Fintech data aggregators like Yodlee, Fintonic, and Yolt offer comparison platforms for banking, money transfers and utility prices, while using collated data and exploring insights to advise on product switching.
Such new interaction models can help ‘importing’ banks rapidly scale their offerings, build customer loyalty, grow new revenue streams and create a single anchor point for a platform-based ecosystem.
A New Dutch Golden Age for Banking?
Will traditional banks withstand the pressure of new market entrants and challenger banks? Can they reinvent themselves and become modern-day Dutch traders? While each side of this trade paradigm can offer significant opportunities to European banks, it must be emphasized that the largest value creation lies for banks in leveraging both the export and import flows and mastering this bilateral trade. Revisiting the Dutch traders, this could mean banks ‘exporting’ capabilities where they have a competitive advantage and enhance their reach, and ‘importing’ new value propositions from others to scale their offerings, thereby enabling an ‘open’ market.
Such effectively designed ecosystems can create value for all partners involved, including the bank, third parties and customers and akin to the Dutch Golden Age can propel a paradigm shift in banking. It is not an easy task. Banks will have to navigate through challenger banks and digital giants, like Alibaba, Amazon, Apple, Google, or Samsung, and a complex world of bilateral exports and imports. Steer towards Open Banking opportunities rather than approaching it as threats. Thrive and strengthen your customer franchises and brand by maintaining a defined culture, and growing business through open collaboration with the world beyond financial services.
More information needed? Satisfy your appetite by reading our latest thinking: The Brave New World of Open Banking.