When the former Chief Executive of Barclays, Antony Jenkins, proclaimed in November that banking was facing an “Uber moment” due to technological advancement, many sat up and took notice. Not just because of the potential change that he described but because a banker had finally said it. His comments were then echoed in a survey of senior bankers that month in which 27% said that FinTech companies were the biggest threat to their business.
Those of us working in the payments industry are well aware of the opportunities technology can bring and his comments symbolised a step change in the attitudes of the big banks. I’ve talked recently about a change of rhetoric from banks – away from resistance and towards “collaboration” with FinTech providers. Suddenly I’m seeing and hearing that word everywhere but this might be easier said than done.
Last year, a large bank approached us asking if we could provide our Chinese Renminbi payment service to them. We were surprised but the bank explained that they didn’t have the technology resource to develop the service themselves. Unfortunately it transpired that they didn’t even have the technology resource to build the connectivity to us.
This could be one of the biggest challenges to FinTech solutions that interface with core banking data and the key to solving this is for the banks to create standardised APIs into their platforms. For those away from the tech world, an open API is when access to proprietary data is made available to developers through a secure data connection. Instead of using the bank’s software, the connection merely provides the raw data to power the third party company’s service.
If banks were to adopt open APIs and make more data public, external companies like World First would be able to identify and produce new products using this data to provide a better customer experience and potentially more bespoke products. Ultimately everyone benefits. The customer gets access to a new service, the provider gets access to a new market and the bank still gets to make money by monetising the provision of the data.
Taking this a step further, the Holy Grail is that the banks don’t just standardise APIs within their infrastructure (providing a one-to-many connection), but instead provide standard APIs across all banks (providing many-to-many potential). This is by no means a new concept and there is precedent – a FIX (Financial Information eXchange) protocol was devised in the early 90s to enable communication between financial institutions. I was briefly involved when I was at Citibank when the protocol was being extended into foreign exchange. However this feels like a development that has come of age and I think the use of APIs will increase massively over the coming years.
The critical factor which will make or break their future potential is of course adoption by the banks, yet there may be some additional pressure from two external sources: government/regulators and customers.
In 2014, the UK’s HM Treasury commissioned a report on Open APIs for banking, pushing banks to provide access to customer data for external businesses as part of the post-crash drive to expand competition. It has since formed an Open Bank Working Group (OBWG) to ensure standards are created at an early stage and to focus on the inevitably of difficult security and privacy issues, for which it is proposing an independent authority. The group envisages a staged release of standards over the next few years.
Regulatory pressure is also coming from the EU via the second Payment Services Directive (PSD2) which will open up parts of the payment markets to payment institutions and e-money issuers like World First.
The second pressure group on the banks might come from customers. If someone like Apple announces a great new product “but you can only have it if your bank gives us access”, the banks will be driven by their customers to provide or connect to it and will see it not just as a necessity but potentially as a competitive advantage. I think the full-page advertisements taken out by banks when they adopted Apple Pay are a precedent for this.
Even without these pressures it will be very interesting to see how quickly they are adopted by the banks and, specifically in the UK, by the “big four” banking groups. The banks will obviously adopt these at different speeds and some will embrace the idea more than others. When we first started World First we came across banks who would not deal with us because they saw us as competitors. The smarter banks (in my opinion) knew that we were always going to find a source of liquidity and decided they would rather have a percentage of the transactions than nothing.
I think the smart banks will see Open APIs as a golden commercial opportunity too; protecting their IP (providing core infrastructure and the regulation to allow it), whilst enabling others to provide services they simply cannot due to costs, regulation, or legacy systems that hinder innovation. Amazon Web Services have already caught on to this in the retail industry, providing data services to a range of businesses that directly compete with Amazon.
In fact some banks have already recognised the merits of open APIs. Whilst in Copenhagen, I blogged about BBVA’s response to FinTech providers and they’ve already built and released publicly available APIs.
The use of APIs will differ by country and customer group. In the U.S. there is very overdue work underway to improve the speed of ACH payments, which still take at least a few days to arrive. And that’s before you consider the nearly 20 billion cheques still being signed and posted between banks. In the UK people are more focused on price and service with most people feeling high street banks offer poor service and exchange rates to both businesses and individuals. SMEs in particular have felt the pain of using traditional banks for their overseas payments. Our research found over half (52%) of SMEs using a bank say their bank does not understand their business’s FX needs. Meanwhile, 94% of UK SMEs using a specialist FX provider say their proposition is more tailored to their business compared to the banks. If we could connect to the customer’s bank we could make it even quicker, cheaper and easier for the customer and we’re happy to pay the bank for that access.
I really hope adoption is quick. It will kick-start further payments innovation and give real impetus to developing the next wave of financial technology that will make payments and banking (a process almost everyone goes through daily) a better experience. I really think those that embrace that will be winners and the banks and FinTech companies of the future.
Brett Craig’s phrase seems as relevant to the financial services industry as the creative industry he discusses, “Collaborate or Die”.
Jonathan Quin is the CEO of WorldFirst
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