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“Banking is necessary. Banks are not.” — Bill Gates
It is a fact that technology ends up changing the rules of the game and few industries are being so bombarded by disruptive news as in the financial sector, which leads to a search for new strategies, such as Banks as Platforms.
The traditional model of banks is threatened by commoditization, disintegration and disintermediation. The pressure comes from all sides (new regulations, technologies, competitors, expectations …) and the Bank-as-a-Platform (BaaP) strategy can favor banks and fintechs to use some of these forces in their favor.
In addition to the PSD2 (EU), CMA (UK), UPI (India), similar initiatives are being studied in Japan, Australia, Brazil and other countries. These regulations seek to open the financial sector to competition, stimulate innovation, reduce transaction costs, increase transparency and empower consumers.
One of the implications of PSD2 is that users will be able to access their banking information and make payments from third party payment service providers (TPPs). This integration of data and services needs to be secure, agile and scalable, which can be done by using open APIs. These PSD2 rules are expected to be incorporated into European bank operations by 2019.
More services are available through apps, collecting data and performing transactions in real time, with sophisticated UXs and algorithms triggering proactive actions.
We end up getting spoiled, you know. Who has never felt hatred in having to go to a branch just to enable something? Or to get in a line (how long will this last?) or call someone because x is not z? Speaking of Z, this younger generation (gen-z) is even less patient than me.
Companies that offer a better experience have a great advantage, as the growth of digital banks have been showing. After PSD2, TPPs will be able to access information and trigger payments from bank clients (as long as it is authorized by customers) to execute their services.
These TPPs will be able to bite most of the value that could be the banks’, leaving to them only lower added-value services (commoditization).
The big technological drivers (AI, Cloud, IoT, Mobility …) are creating opportunities in all sectors. Some of them, such as the new analytics tools and Artificial Intelligence, enable you to analyze large volumes of data in real-time, generating insights and triggering proactive actions.
With IoT, “things” also enter the game, being able to collect data, analyze and trigger internal and external actions. By implementing APIs, you can make agile, secure, and scalable integrations between legacy systems, mobile applications, cloud services, and partner ecosystems. In turn, the blockchain enables secure and traceable transactions in a decentralized manner.
The possibilities of combining these technologies to generate new business are innumerable, for example: devices performing microtransactions with cryptocurrencies (payments, investments, loans …) in an autonomous and direct manner with each other, by means of smart contracts and algorithms.
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The digitization of financial services favored the entry of new players, such as technology companies, Fintechs and digital banks.
Many of these entrants do not carry the weight of certain regulations and the complexity of legacy systems like banks do. In addition, they are able to quickly assimilate new technologies and generate innovative solutions capable of offering convenience, good experience and differentiated financial services to consumers.
By observing this scenario, we can establish some premises:
From these premises, the competitive strategies of Banks and Fintechs need to consider such actions as:
To address these challenges, banks have the resources to position themselves as financial services platforms, such as customer base, capital, brand, regulatory expertise. However, they have some difficulties with the complexity of their legacy systems, longer innovation cycles, more rigid regulations.
In turn, fintechs have a more agile innovation cycle, offer solutions with differentiated experience and master specific technologies. However, they do not have a broad customer base, strong and reliable brands, capital and scale economies, as well as expertise in dealing with complex regulations.
Banks can find, in collaborating with a number of fintechs, a variety of capabilities and services to add to their offerings, expanding revenue streams, engaging customers, working with shorter cycles of experimentation and learning.
On the other hand, fintechs can find a wide customer base in collaboration with banks, as well as the support of a consolidated brand and scale economies.
This collaboration between banks and fintechs enables the delivery of a superior portfolio of services and channels for a consistent customer base with data usage and more effective monetization, as well as stimulating the creation of new products and business models in a more open innovation environment.
To achieve this effective collaboration, it is not enough to just establish a shared business strategy, but to integrate processes and systems that provide agility, security and scalability – and the appropriate way to do this is through APIs.
APIs are a standardized and agnostic means for integrating people, things, applications and ecosystems with agility and security.
This capability that APIs have of offering and combining resources from different elements places them as key enablers for innovation and new business.
In addition to integrating internal systems and ecosystem partners, APIs also:
Want to know more about how APIs can drive the platforming strategies between banks and fintechs?
Be sure to check the next post in the series:
Banks as Platforms: Platform for Banks and Fintechs – part 2 – Sensedia
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