In recent weeks, the banking chickens have come home to roost. The leaders of two of the world’s largest banks, Wells Fargo and Deutsche Bank, are staring deeply into the abyss – probably wondering how things got so far off course. The answers seem pretty clear. A lack of transparency, poor management, and complex fraud caused customer revolt, regulatory penalties, and massive stock devaluations.
In such a tumultuous banking environment, consumers are looking for financial institutions that they can trust. They've been nickeled and dimed for years and are frustrated with opaque bank products which offer little value.
One way to deliver more value and deliver transparency to customers is to deploy open API platforms.
Banking as a Platform (BaaP) and Open APIs
Banks have traditionally pushed fee based products in an effort to drive growth and higher return on investment (ROI). Certain products such as mortgages and credit cards continue to perform well, generate growth, and bring in fee income. However, as new financial technologies erode the fees for payments, transfers, and certain types of loans, banks must look to generate revenue from different sources. To do so, they will have to become more transparent and create more value for customers.
Take AirBnb, Uber, and Tesla — current examples of platform based companies. As platforms, these companies provide central clearing house functions, financial processing, legal structures, application/technology, brands, marketing, regulatory compliance, and governance. Platform businesses, as Sudhir Kesavan explains, “Create a demand-side market with a remarkable product/service, then get the consumer addicted to the value the platform around the product/service provides.” Tesla differs a bit from AirBnb and Uber models and may provide a better roadmap for banks looking to transition to a platform model. While Tesla may seem like a traditional product based (car) company, they actually integrate several services into their mobility product (such as music, energy, telecommunications, etc.) and become an integrated service provider in the process.
Similarly, banks that shift to a platform model will tend to look a lot more like service providers and a lot less like a product pushers. Instead of selling low value products to customers, banks will now be in the business of helping customers (whether they be retail or commercial) reach their financial goals using a suite of services provided by their platforms.
Previously, we covered the basics and benefits of using open APIs. Traditionally, banks have operated as a closed suite of products that are pushed externally. Now, open API platforms allow banks to develop modular or unbundled lines of business, inviting customization and innovation by outsiders. Such open platforms will help banks target customers more directly and provide specific services tailored to customer needs and demands. In addition, opening API architectures will allow banks to scale innovation much more quickly, helping them compete with hungry Fintech upstarts.
APIs Must Create Value, Share Value, & Capture Value
In simple terms, if you want customers to use and develop on your open API platforms, then your API(s) need to provide real value to your customers. It is important to note that you will not be able to harvest all of the value that you build — if you harvest 100% of the value you create, no value will flow to the customer and there will be no reason for the customer to choose your service. Instead, allow some of the value to flow to the customer, and as the customer benefits, they will adopt your platform. In this fantastic overview, 3Scale models how best to share the benefits with your customers while harvesting an appropriate return. It's all part of a major shift toward using APIs to find the ROI you're seeking.