Deconstructing banks: how APIs have developed from a mandatory exercise into a most disruptive force

While we’re fixing our gaze on open banking so as not to miss the next milestone, the corporate banking arena is witnessing some major breakthroughs

There is no question that open banking is gathering momentum. According to August 2020’s Banking Scene Report, the UK had 480 million API calls  – the number of third-party providers requesting access to a client’s bank account through application programme interfaces (APIs) – in the month of July alone. Breaking down this figure, however, will paint a more nuanced picture.

API calls are currently used for measuring the uptake of the new open banking regime. But the calls can take place with a view to two rather distinct purposes: gathering account information (AIS) and initiating push payments from the client’s accounts (PIS). The former provides the foundation for account aggregation services that help the account holder save money, while the latter, more disruptive one, cuts out banks, payment cards and concomitant charges from the online payment process by connecting customers and their payees directly.

According to the Banking Scene Report, PIS calls made up only 0.2 per cent of all the requests last July. Explanations for this discrepancy range from lack of confidence in data sharing among customers to the low standard of mandatory bank APIs. One thing, however, is for sure. PIS adoption hasn’t been helped by the delay of the enforcement of strong customer identification (SCA) until 14 September 2021 in the UK, and the act’s full implementation is likely to give payment initiation services a fresh start.

In the meantime, new battle lines between incumbent banks and fintechs have been drawn. Although musings about whether established banks or fintechs and novobanks will come out on top usually end with a reconciliatory conclusion that “partnerships will prevail”, on whose terms such partnerships are forged will make a huge difference.

The ideal scenario for big banks is the kind of platform banking where fintechs join the incumbent’s proprietary platform to extend the latter’s product range and improve the standard of the services they offer to their clients. The state-of-the-art digital financial products here are more like add-ons, making legacy banks look and feel more progressive and improve their market position.

Going beyond open banking

The banking-as-a-service (BaaS) proposition is completely different in nature. It’s arguably nothing new: embedded services have been with us for some time now, in the form of loans we take out from car dealerships, or insurance policies from airlines, or when we pay for a trip via a ride-hailing company’s app, for example.

What makes it different this time, however, is that, being API-driven, BaaS makes the customer experience more seamless and hence lends the provider of the embedded service even less visibility. As they won’t be redirected to an external site or a different interface at any point, the user won’t be aware that they’ve been using the embedded service.

BaaS doesn’t stop at embedding financial services into products and the customer experience, though. Its APIs can also offer access to the different functionalities of a bank, which can be used either to augment existing banking capabilities or even to create a new financial entity.

The functionalities on offer today range across practically the whole banking stack to include the record keeping system of a bank’s financial data (the general ledger), the treasury (the bank’s investment business), compliance (such as KYC and authentication), customer operation, or the renting of the bank’s licence.

By mixing and matching all the banking functionalities available on an as-a-service basis, it will be possible to build a bank from scratch: as Nigel Verdon, CEO of BaaS provider Railsbank put it, “you can’t start a neobank or build another Monzo on open banking.”

This is a kind of partnership that can work both with or without incumbent banks. In the long run, digital native banks and fintechs with e-money licences may be able to cover all the functionalities needed to set up a new digital bank.

Starling, a digital-only UK challenger bank, for example, offers both products and functionalities on its digital marketplace to retail and corporate customers alike. Its commitment to openness may be exemplary for incumbent banks as well. Having launched its open APIs in 2017, it now offers a wide range of financial products from third-party providers. But more importantly, Starling as a BaaS provider sells banking functionalities to its own competitors in the novobank market segment too.

There are also big incumbent retail banks which have decided to go down a similar route and exploit the “first-mover” advantage. A case in point is multinational Spanish banking group BBVA, which opted for embracing BaaS through offering a variety of white label services on its open platform. In this scenario, it’s the fintechs tapping into an incumbent bank’s services – such as customer verification, money movement, account origination and card issuance – in order to enrich their financial offerings, rather than the other way around, while BBVA stays in the background. In this arrangement, the customer interacts with the fintech’s branded experience, who remains unaware of BBVA’s contribution to the service.

This looks like a major step towards the disintermediation of incumbent banks. In an interview on 11:FS’s podcast, Susan French, Head of Product, BBVA Open Platform, concedes to the downside of the white label model: namely, that the bank in such cases is “one level removed from the end customer.” On the upside, however, customer acquisition becomes much easier for banks via partnerships like these.

It remains to be seen whether the benefits can outweigh drawbacks in the long run for BBVA. Incumbents in Europe, who have already dipped their toes in selling banking modules, need to be cautious and explore whether the fully-fledged BaaS model is transferrable to other markets as well. Thanks to less rigorous financial legislation allowing e-money licences in the UK and EU markets, the appeal of creating financial services on the top of a bank’s regulated infrastructure may turn out to be weaker.

If the account information and payment initiation services and the APIs enabling them are disruptive, then APIs opening up banking functionalities will turn out to be far worse. In the case of their wide adoption, regulators will have their jobs cut out for them trying to ensure that a new breed of banks and financial service providers mixed and matched from deconstructed modules of established banks are operated with the same due diligence as they are in their original environment.


by Zita Goldman

© Business Reporter 2021

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