More and more successful companies integrate external APIs and offer their own API in order to scale and sell their services. Uber grew from a start-up to a global business by integrating external partners via APIs and in-turn offering their APIs to their partners. For example, Uber is using the Google Maps API to locate their drivers and customers, Google’s Cloud Messaging API for sending instant messages and Paypal’s Braintree and Card.io APIs for payment and credit card scanning. Salesforce reportedly generates 50% of its revenues through APIs, eBay nearly 60 % and Expedia around 90 %.
Financial institutions also are now moving in the same direction. We see more and more initiatives regarding banking API and Open Banking. In Europe, PSD2 will open up access to end-user payment accounts through XS2A, and this will happen through APIs. In the UK, the scope of Open Banking goes further, offering a broader range of account types and data related services than PSD2.
Empowered through greater openness, data sharing arrangements and most importantly APIs, Banks and Fintechs will be better positioned to offer innovative services to end-users.
Across industry sectors, we have seen many ways to build a business based on APIs, both in terms of publishing APIs to open access to proprietary systems for partners and using external APIs to further enhance the service proposition.
Business models in the new world of API-driven Banking
Without question, this new era of openness and secure data access will usher in a plethora of new business models and marketplace actors. While it is difficult to predict what these new models might look like, or which ones will be most successful, it is clear that much of the focus will be on revenue creation and customer engagement.
One of the primary use-cases for emerging open banking APIs will likely be new customer acquisition:
- Integrating external APIs as a means to build out additional value added services for the end-user, further enhancing their value proposition.
- By opening their own API gateway to third-party providers new services maybe created through partnerships and secure data exchange designed to address broader and more comprehensive needs of end-users.
Beyond acquiring new customers, an API led strategy may enhance other areas of revenue growth including customer retention, upsell and cross-sell.
Open Banking and PSD2 lay the framework for enhanced data sharing through secure exchange and give service providers the ability to consolidate all of their user’s accounts in one place. Once financial information is shared with the service provider, raw data can be augmented and categorised in order to further enhance the data and provide opportunity to monetise it. However, one the of principle challenges with PSD2 is that financial data will be delivered through heterogeneous formats due to the lack on industry-wide standards. While this is likely to complicate but not inhibit the growth of data-driven business models, the challenges of data management should not be taken lightly.
In order to avoid the challenges of managing hundreds, potentially thousands of unique API integrations, third-party services providers and financial institutions are implementing account aggregation API platforms from established vendors. These platforms automatically standardise financial data and make it easy for developers to build financial apps based on a reliable standard. Beyond standardisation and normalisation of the data, the aggregation vendor performs all the heavy lifting associated with maintaining target institution API connectivity across thousands of institutions. As an example of how easy to integrate these platforms can be, watch the video of eWise team during FinDEVr in London explaining how to use eWise Aegis Aggregation hub for PSD2 and a demo of our API.
Once a solid platform for data aggregation is in place, service providers can begin to use the data to drive their business models. To do this, often the data needs to be further augmented to provide richer information to the end-user but also for the service providers analytical systems. For example, financial transactions can be augmented and enriched with categories and sub-categories, merchant name, payment method and currency. This service is very helpful in many cases and can be integrated with any source of financial data. At eWise we are seeing a high demand for this service, particularly in the lending space. The eWise Categorisation-as-a-Service API is used by banks and Fintechs to verify the credit applicant’s income and spending. It helps to highlight risk factors used for a richer credit scoring experience, reducing the risk of default by enabling more informed credit decisions.
I believe that categorisation is the next step of PSD2 XS2A and open banking, the intelligent step that will help to make sense of big data.