API Business Models

The State of Open Banking APIs

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There are regulations in place in 63 countries to encourage open banking and open finance, particularly around mandating the banks to open up account information, payments, and services infrastructure to allow third parties to allow embedded finance. These regulations enable innovation. As a result, since 2020, there has been a 499% growth of banking platforms globally, the majority in Europe because of the second payment services directive.

In Europe, there has been a massive uptake at the start of 2021. That is because all of the major banks have released their mandated APIs. And now it’s all of the cooperatives and the smaller banks fitting in.

The Monetary Authority of Singapore was one of the first to realize the value of open APIs. And they released a guide with a lot of granular level APIs that worked at the functionality level. So banks in the Asia Pacific often built the APIs at that granular level. Then they realized that they were exposing almost microservice level APIs. So they bundled those into more API capabilities, which might have a few functions in a couple of payment functions rather than individually.

The purple bars are those that are mandated. So these are the ones that banks must open up because of regulation in Europe, the UK, Brazil, Australia, and other places, and they’re genuinely required to release payments and accounts APIs. In some locations like Brazil and Australia, they’re also required to release bank products via an API. 

The yellow is what banks are taking on themselves that they want to do. So they seem that there’s a market opportunity in releasing APIs to create embedded finance opportunities. This graph represents where they’re focusing their internal innovation efforts. These yellow or gold bars represent the innovation and creativity coming from banks.

What does an open banking ecosystem mean? We’ve developed a model to look at how value flows through the open banking and open finance ecosystem. 

On the left-hand side, governments tell regulators to set rules for open banking. Banks have to follow those rules and make APIs available. They may use standards to be able to develop those APIs. This will help them conform to regular blueprints, whether that be how currency is described, dates are described, etc. Those APIs are used or consumed by marketplaces, aggregators, FinTech, and distribution channels. They’re the ones who are using the APIs. The quality and the speed with which they can use those APIs will be met and mediated by some value enablers. The quality of the developer experience and the level of security of the APIs will determine how much these API consumers can use an API. Tool providers play a significant role in enabling this tooling that increases the value that can be pushed through an API. They also support the banks in delivering security.

We’ve identified five end-user segments, underserved individuals and households, sole traders, small businesses, and enterprises. They will get the financial health and wellbeing benefits from using these youth-intent FinTech products or embedded finance products built on the bank APIs. You could also put the FinTech APIs with platforms up here and push that through. Banks might even be one of the consumers of FinTech APIs. 

There are indirect beneficiaries as well. Society benefits because everyone doesn’t have to wait in queues at the banks anymore, and they have more consumer choice. Hopefully, the economy benefits because these new players are growing that can contribute their taxes and employ local people. The environment benefits because this is a digital infrastructure. Resource use is optimized, resulting in less waste and reduced costs. There is a growing opportunity to use FinTech and align with environmental and sustainability goals.

Who is being offered new open banking / open finance-related products?

We’re talking about the FinTech built using open banking APIs or FinTech APIs, for example, payments providers APIs. 

We tracked 1200 FinTech that we know are using a bank or open finance APIs. The majority targeted small and medium businesses, followed by individuals and households at 40%, and a smattering of self-employed and enterprise products. 

Open Banking / Open finance trends

Last year, we tested business models for Product-Market Fit and conducted usability research. It gave two possible avenues for the future. The first was Monzo, which had this new premium credit card made of steel or silver or something like that. The idea of product differentiation is a status symbol, this wealth or luxury indicator, rather than anything that truly has value, apart from showing it off. The other opportunity is to look at the individual use cases that could be enabled by open banking APIs.

The Financial Conduct Authority in the UK suggested a range of use cases. One of them was rental recognition. For example, renters can demonstrate and build their credit scores by showing that they’re regularly paying their monthly rent.

I want to look at some of the trends since the last year. We were talking about open banking, open finance, and embedded finance.  

Trend 1: Digital Banks

In 2021, we can see an uptick in digital banking, and it may explode in 2022.

Banks moved; they’ve digitized. They’re using that API-enabled infrastructure to create their digital banks.

Banks advertising rarely has women in banks adverts except as the recipient. It might be a mother with her kids receiving some financial health or health insurance product. For example, there are rarely any women in charge of their finances or taking leadership positions on boards in corporate stock photos. The banks are redoing this, which comes back to the bank-APIs idea. This is why we’re not seeing this huge growth in these gold segments because banks are still focused on wanting to do it themselves with this new API-enabled infrastructure.

Potential banking business models

Open APIs, Partner APIs, and Incubator APIs are required because banks are working with a set of external FinTech who they are comfortable with and who they have a controlling stake in how those FinTech are using those banks’ APIs. 

There are non-competitive products, like subscription services, where you can look at how you manage your subscription from within your bank account, which might not be a direct competition benefit. We’re seeing a little bit of premium, but not that much. Some banks are trying to move into the “banking as a service” and the “marketplace,” offering other apps enabled via API within the customer’s bank website portal.

Digital banking is not about enabling embedded APIs through an open API strategy. So what banks are doing is they’re using that whole “product-market fit discussion”, to look at who doesn’t feel like they’re a traditional customer of the bank, the Gen Z,  those who are app independent and happy to do their own finances who were using FinTech. They’re trying to win them back through this digital bank; business owners, travelers, and highly financially independent segments who don’t necessarily have loyalty to any one bank branch.

KBC from Belgium has diversified its APIs and is focusing on particular segments. So they’ve got a green energy loan and a bicycle insurance loan. Normally, when a bank offers an API loan product, it’s a revenue share model where the business sending the new line customer will get some revenue back. But KBC doesn’t need to do that because they can demonstrate to those retailers using these loan APIs products that the merchants will increase their sales by 20% if the customers access credit at the point of sale. So, they haven’t paid for customer acquisition, and the retailer has to integrate the API themselves. So they push that cost across. 

This is a great business model, but I think it falls a little bit because they’re not thinking quite so far, as far as open ecosystems. So they do list all of the retailers who are using this integration, but you can’t click through. So you’ve still got to look up the name, then go to your search engine of choice, put in that name, and then find that one to go there. It would be great if it would be a link.

Trend 2: Buy now, pay later.

Is it a killer use case for embedded finance? Open banking is the first killer use case. In Europe, there is no single standard required for all banks to meet for building their APIs. So across Europe, you’ve got all of the banks, each building slightly different APIs, which has given rise to these aggregation platforms. 

But are we setting up systems for debt collection? In the UK, there are challenges with BNPL. There are worries that regulation might not be able to protect the people. 

In Australia, for example, debt collection buys the debt from a bank or a credit card company. It immediately applies their interest rate, which might even double the size of the debt. So are we setting up open banking and open finance so that after API aggregation, the next big market will be debt collection? I think that’s a worry, and we need to be looking at open banking and open finance, creating the sort of benefits for everyone we expect.

Trend 3: Wealth Management

After the blockchains explosion and Gamestop saga, everyone’s looking to play in this area. So we’ve got a model where we track all of the different FinTech products according to this taxonomy. We are seeing that wealth management is betting over its weight. You can see “payments” is the largest. That’s largely because payments infrastructure is in place because migrants need to send money home. So globally, payments infrastructure has grown because of these remittances.

Financial management is growing because accounts APIs are available. Wealth management is growing faster than you would expect, partly because of trading API products.

 

New ideas and solutions – enabled finance.

Embedded finance is fantastic. It’s at the point of sale; it’s at the point of engagement; you can do your financial transactions simultaneously. 

But, this is moving away from open API,  from open banking and open finance, eco-safe systems, enabling growth and financial health and well being, which was a core part of what the regulations were all meant to be about in the first place, increased consumer choice, increase the opportunities for individuals and small businesses to build their financial health and well being. So how do we get back to that? 

Solution 1: Data-informed thinking. We can map our open ecosystems to identify gaps and opportunities. For example, according to our value model, we can lay out how many APIs are there when we look at the ecosystem. How many banks what’s been developed. If I build my APIs with a high level of developer experience, which is what the API aggregation platforms have done, that will spur through to these API consumers. I’ll see an increase there, which will increase my customer acquisition.

The other way you do the data-informed thinking is you map out your use case. So you map out all your target segments, then map out your use case, and then look at who else is doing some of those.

Solution 2: Target specific segments. This is what the digital banks are now trying to do. I’m not seeing this enough in FinTech products that have been built with open banking APIs. Why wasn’t FinTech looking at women-owned businesses, which are greater revenue generators and more stable than male-owned businesses? Get out there, look at what women-owned businesses have been developed, look at their sales trajectories and look at their FinTech needs. Migrants have been essential in building the global payments infrastructure because they’re the ones who need to support family and friends and send money internationally. Where are products for migrants settling in the new country or having established homes and are looking to buy a property or are repaying loans or building their businesses? I’m not talking about financial inclusion in the sense of let’s address the unbanked, although that’s a huge untapped market. But I’m talking about the fact that these are market segments that have already built up strong examples of economic power for FinTech to build the payments infrastructure globally through their use.

The goal here is to go back to design thinking, do the human-centered design, identify some of those target segments, and work towards building products that fit those niches.

Solution 3: Open sustainability: We are seeing a growth in carbon footprint checks. The opportunity now is to move beyond just carbon accounting. 

So finally, I encourage you to think about how will you build the enabling path? How will your FinTech and bank products enable financial health and well-being to grow for everyone?

Mark Boyd
Mark Boyd is an API industry analyst and writer. Mark is the founder of Platformable and has been responsible for writing many reports on the open banking platforms and other types of platforms happening around the world.

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