Application programming interfaces, which have been available but in a limited manner, are used to let different software applications communicate and exchange data with each other. Touted as the means to innovate, provide additional value to customers and leverage industry collaboration, APIs are becoming more generally available and offer additional capabilities for banking.
Citigroup, for example, appears to be more than willing to share APIs with third-party apps to create supplementary or complementary services to customers. Others like Fidor Bank in Germany are emulating Apple's App Store by creating accounts where third parties can provide apps and services to customers. Still others like Regions Bank and BBVA are in direct partnership with fintech companies to offer digital services like faster payments or online small business loans.
But most banks and vendors have yet to make APIs available for wide use. There's good reason to hesitate even if we ignore challenges with legacy technology upgrades. Although this technology-enabled collaboration sounds utopian, it can be complicated when the goals of the different parties involved are not aligned. It is great for opening up channels to those that provide just a singular service or product, but the strategic issue for banks is when nonbanks seek APIs to expand their relationship with consumers. Banks don't want to lose control of the customer front end and potential business model innovations. The risk of a bank becoming just a back-office service provider by allowing others to control the customer interaction is very real.
However, resisting the API trend is not an option either. Some governments are considering steps to encourage use of APIs just as legacy technology and regulations slow down banks' ability to innovate without collaboration, which drives customers to look at alternative options. The U.K. is an example of a jurisdiction exploring regulations to drive an open banking ecosystem.
The fact that some banks have adopted the new interfaces also puts competitive pressure – in terms of customer acquisition, retention and branding – on banks that have not enabled APIs. Banks not opening up their channels can also feel the pressure from direct bank-fintech collaborations, such as the Regions partnership with Fundation and BBVA's acquisition of Simple.
It's a catch-22. If banks don't embrace collaboration and APIs, they lose out to competition from new technology entrants. And if they adopt them, they risk being pushed to the sidelines of customer engagement.
So before banks leap into making APIs widely available to fintech companies, they should consider three factors to help find the right balance between innovation and relevance.
Opening Channels Doesn't Mean Ceding Turf
As innovation heats up, it is even more important to keep customer engagement in mind.
Collaborating with third parties could jeopardize the extensive view banks have of their customers by pushing institutions into the background of the experience. More importantly, banks are also positioned well to prevent the fragmentation of customer experience. They already have a trusted relationship as well as a 360 degree view of the customer. In addition, beyond losing branding exposure, banks could also lose out on revenue from future innovations promoted by partner firms. The speed with which that can happen is unpredictable.
A third-party-branded partnership with an automated personal financial management app is an example of an API link that could potentially cause a bank to fade into the background. The customer is interacting with the third party for a core need, not with the bank. To be sure, some API partnerships where the fintech collaborator provides a single service put banks less at risk. Those include Dwolla's payment services provided to BBVA Compass customers, as well as crowdfunding firms that need bank access.
The point is that so long as the third party partnership doesn't result in fragmentation of the customer experience and impede the bank's ability to pursue innovative operating models, it's ok.
Make Sure the Benefits of API Go Both Ways
Another way to mitigate the risks of API utilization is to enable the interfaces in a manner that allows banks to promote their products and services to users as well.
The ultimate promise of fintech is an open business landscape in which multiple businesses work together to create contextual experiences that drive commerce, and all parties including the customers can profit. Today, banks already successfully take that approach to some extent with retailers through online shopping marketplaces. But they should aim to expand the concept to compete with mobile payment providers. For example, banks could try to make it so that when a customer is doing a retail transaction, multiple payment options are available. The customer could either make the purchase through a medium such as Apple Pay, or pay the retailer straight through the bank's app. The latter scenario may enable the bank to provide value added offers such as bundled promotions and personal financial management assistance tailored to the individual customer.
A bank can also try to use API access to draw consumers to the bank's online or mobile interface as a one-stop shop to find other bundled businesses, such as retailers, airlines, hotels and fitness centers, among others.
Look to 'White-Label' Partnerships and Acquisitions Too
Banks can make up for the slowdown in their own innovation programs by pursuing quicker active white-labeled partnerships, or collaborations where another vendor does some of the legwork in providing a bank-branded service. An example of this is how Citi and other large banks have been providing identity theft protection services to customers for years, so it's nothing new. But more partnerships and better technology integrations must be made in order to give customers what they want in today's rapidly evolving digital world.
Another alternative for how to innovate and transform over the long term is to acquire emerging fintech companies to accelerate the overall transformation journey. For example, Fidelity acquired eMoney Advisor to make the leap and BBVA acquired Simple.
The benefits of APIs are there for banks to tap into the transition to a new technological universe. They can generate newer revenue models and are already well-positioned to build towards a highly contextual, connected customer experience. But they can't jump into this new space without an understanding of the risks they will face.
Manish Grover is the author of Dancing the Digital Tune: The 5 Principles of Competing in a Digital World. He is engaged in go-to-market planning at Capgemini. The views expressed are his own. Connect with him at www.manishgrover.com.