Open banking is going to be the next biggest wave in the financial services industry. It will be as instrumental in creating exceptional customer experiences and accelerating business growth as AI or embedded analytics. As per the 2018 Infosys Finacle Efma Innovation in Retail Banking survey, 65 per cent of respondents feel that over the next one year, open banking APIs will have the greatest impact on innovation in retail banking.
The importance of open banking lies in the fact that it has the potential to change the face of banking as we know it today. It paves the way for banks to move from pipeline to platform model. According to Marshall Van Alstyne, a pioneer in the field of platform models and author of the book Platform Revolution, whenever an industry has moved from pipeline to platform business model, it has witnessed unprecedented growth. We are about to witness this inflection point in financial services industry.
As opposed to pipeline model where the value is created by producers and consumed by consumers, the platform model enables the users of the platform (producers and consumers) to create as well as consume value. The platform model works on the basis of two-sided network effects and relies on both producers and consumers to enhance value of the platform.
There are a few key points that need to be taken care of while building an extensible platform bank. Many points are common for any platform business but there are a few specific to banking too.
The single most important decision banks have to make is whether they should create a proprietary platform or become a part of a broader platform sponsored / created by multiple parties including but not limited to other banks, fintechs and industry consortia. A large bank with elephantine market share may try to go the Apple way and create a stand-alone platform, but given that the area is still emerging and there are no proven strategies, it’s wiser to get into some form of collaborative platform. Besides reducing the risk, it also serves to meet a wider standard and hence be more attractive for developers on the platform.
A platform creates value by enabling exchanges between the users of the platform. To this end, there must be a proper governance model in place to regulate such exchanges. We have many well defined regional regulations to govern open banking. These regulations can act as a good starting point for platform governance. They regulate the basic data exchanges and focus on protecting customer data. Banks should follow these guidelines to build their platform business.
There are two aspects to this – external and internal. Externally, the focus should be towards standardization of API. If the platform is part of a bigger consortium, then it is easier to have API standardization. Furthermore, external ecosystem players such as Banking Industry Architecture Network (BIAN) can be brought on board to ensure compatibility.
The internal part deals with getting a bank’s data ready for APIs. Just creating a wrapper over existing APIs doesn’t serve the bigger purpose of Open APIs. Banks need to optimize their processes to make them ready for open APIs.
Banks should also create a developer portal and sandbox in the early stages to ensure building and growing developer communities that create substantial value.
To build something as complex as a banking platform, the underlying technology stack should be highly capable. The infrastructure should be flexible to provide compatibility with the advanced services that are available. Various options such as microservices should be considered before zeroing in on a technology stack.
The development approach should provide banks a quick turnaround. Banks should be highly agile and must churn out PoCs of the platform features quickly. The platform should adapt to the market feedback and that too very quickly.
As with any platform business, banks must find a way to address this issue. Producers gravitate to any platform if it has a high number of consumers. Consumers join a platform only if there is value generated by producers. Generally, in such cases, one of the two parties have to be subsidized to use the platform. In case of banks, one part of the mix is already present in the form of traditional customers. This should be reason enough for developers to join the platform. Still to get a critical mass, banks can deploy various strategies. Investing in select fintechs can be one option. Other options include appathons to generate ideas. Banks can build their own apps as well to demonstrate the power of the platform.
This ideally is the last step once all the other aspects have been taken care of. There is no prescribed playbook for pricing of APIs. But banks must ensure that their API strategy and API monetization strategy are in line with their business and platform strategy. The pricing can be different for different users: partner, fintech or other ecosystem player. Again all usual models apply, be it usage based (pay per API call), subscription based, revenue share based or may even be as a one-time fee. Banks may need to experiment with a few pricing strategies before they finalize the one that best meets their goals and strategic intent.
Building a platform bank nee
ds meticulous attention to detail in all aspects, right from the platform strategy, technology architecture, API strategy and ultimately monetization strategy. Although failing in any of the aspects does not spell doom, it is imperative to fail fast. With evolving API standards and innovation in banking technology stacks, it may be some time before a standard working normal may is established. As is the case with any industry, getting the basics right and keeping pace with change and direction of change in the industry is foundational to building a successful platform bank.