How do Open Banking APIs reshape the value chain of banks?
Open Banking opens up the traditional value chain of financial services. Often it is believed that there is only one way to open up the value chain - in the frontend of the value chain, where banks need to provide APIs for fintechs to use. But this is only half the story. As we highlight in this video, Banks can only open up in the backend of the value chain, allowing them to use APIs and be on the consuming end. So there are at least two possibilities to open the value chain: In the front of the value chain, where banks are API providers, or in the back of the value chain, where banks are API consumers. Let’s look into each of these options.
Opening up in the front of the value chain
Traditionally, the bank delivers its own apps and end-user-facing technology. Instead of that (or in addition to that) the bank becomes an API provider and delivers APIs to its products (accounts, transactions, balances, payments, loans). These APIs are used by Fintechs and other third-parties, who interact with the APIs in the role of an API consumer. They build end-user-facing apps, that call the APIs of the bank. Moreover, in their app, they integrate, orchestrate and aggregate the bank’s APIs with APIs of their own and APIs from other players. The resulting app is provided to the end-user, who typically is also a customer of the bank. Value flows from the bank, via the fintech to the end-user, and compensation opportunities exist in the inverse direction.
An example would be a fintech offering a multi banking app with account aggregation functionality. The fintech would need to get its transaction data and balances from the banks of the customer, via the APIs offered by the banks. Customers will love their bank because it can be easily aggregated in their favorite multi banking app - Thanks to Open Banking APIs.
When banks open up their value chain in the front, the value chain moves left. In this scenario, banks need to be good at exposing APIs, securing APIs, marketing their APIs, and building partnerships.
Opening up in the back of the value chain
As an alternative, Open Banking also allows banks to open up the backend of their value chain. For the particular functionality (e.g. loans), the bank neither needs to build product functionality in their systems nor needs to hold the data in its systems. Instead, the bank simply takes on the role of an API consumer. To use the banking product (functionality and data), it interacts with the fintech, third-party, or another bank that provides that product via API.
An example would be a bank that for historic reasons does not offer unsecured loans as part of its own product portfolio. By opening up the backend of its value chain, the bank can fill the gap in its portfolio quickly, with short time-to-market, and start offering unsecured loans to its customer base.
When banks open up their value chain in the back, the value chain moves right, extending out to BaaS service providers. In this scenario, banks need to be good at consuming, orchestrating, and integrating APIs of third parties. Moreover, they need to become good at building partnerships.
Conclusion
As we have seen, banks have the possibility to change the structure of their value chain with Open Banking and keep their customers happy. Moreover, banks now have the chance to open up the frontend, backend, or both ends of their value chain. Thanks to Open Banking and API technology, banks have more possibilities than ever to adapt to customer needs, and increasingly, customers will also demand this flexibility.
Open Banking and its use of API technology provide a new playing field for banks. Banks need to think strategically when opening up their banking stack, as we will see in the next video.