Regulation generates a lot of strong opinions – some people believe that it is vital while others think that it is an unnecessary intrusion into the free market. The truth, as usual, is somewhere in between these two extremes. For some industries, regulation clearly plays a crucial role – few people would argue against the regulation of new medicines. However, regulation can also turn into an industry of its own – a study of the US Code of Federal Regulations by the Mercatus Centre showed that the number of instances of prescriptive words such as “shall” or “must” grew from 403,000 in 1970 to 963,000 in 2008 and is now over 1.1 million.
Regulation = Protection?
The original intent behind most regulations is to protect consumers – for example Dodd-Frank’s real name is the Dodd-Frank Wall Street Reform and Consumer Protection Act. Regardless of intent, it is clear that complying with regulations requires organisations to change – and those changes are usually costly. Jamie Dimon from JPMorgan Chase reported that “since 2011, our total headcount directly associated with Controls has gone from 24,000 to 43,000 people”. He further reported a 33% increase in their compliance costs to $9bn per annum.
Little wonder that bankers are wary when new regulations are proposed. However, regulation doesn’t have to be all cost and no benefit, all limitations and no opportunities. In the case of PSD2 in Europe – putting aside the complex terms PISP, AISP and ASPSP – one of the basic implications is that banks will need to open up or provide access to accounts through a dedicated interface like an API (application programming interface) that will allow third parties to provide services. These third parties can be other banks or new entrants such as fintechs.
With open banking, financial services data will be made available for use in third party applications which should provide better services to consumers including tools for analysis, forecasting and making more informed decisions. The change should also help banks reduce costs while also increasing the attractiveness of their overall offering to customers. However this will require a mindset change – from “do everything in-house” to “create an ecosystem” to deliver the end to end offering. Fortunately, collaborative partnerships are not new in banking – as banks have used a range of partners and competitors to expand their footprint for many years, and banks have already started to partner with the “outsiders”.
BBVA has partnered with Dwolla (the bank transfer platform) to support real-time payments using Dwolla’s FiSync application programming interface (API). More recently BBVA also launched the BBVA API Market where it is making eight of its APIs commercially available to companies, startups and developers worldwide. The intention is to enable the integration of customer banking data with third party products and services and follows a 12-month project during which 1,500 businesses and developers registered with the experimental portal. In Japan, Mizuho is working with IBM to implement APIs to third party personal financial management apps. Commenting on the project, a representative from the bank said: “instead of competition, Mizuho continues to collaborate with business partners to create and provide innovative, secured services for customers.”
But what about corporate banking?
Most of the “news” or “noise” in the market regarding networks, app stores and APIs seems focused on the retail side of banking but what about corporate banking? With corporate banking clients generating 56% (1) or more of global revenue for banks, clearly it is crucial to ensure that their needs are addressed. Surveys of corporations indicate that 65% (2) feel that banks do not understand their needs and 62% (3) want to re-asses their current banking relationships.
The use of open banking, powered by APIs, could help improve these numbers in many ways – corporate banking customers receive different bank services from multiple banks and seek better integration and harmonisation-something that banks can provide with the use of open APIs. In pursuit of competitive differentiation, banks could also use their ecosystem of partners as a key weapon, helping them become the transaction banking partner of choice. For example, the bank could use these seamless links to provide their customers with a range of value-added services including recommendations for business opportunities, and connections to other customers. Examples of this are already emerging; including HSBC’s recently launched Connections Hub. The hub seeks to connect HSBC’s customers as they grow their international business.
Overcoming the technology hurdle
While there are many challenges in enabling turning this vision into reality, technology will be key. Many banks may be tempted to view the rise of standardised APIs as just another addition to their existing infrastructure but this will miss the point as the rapidly evolving landscape will continue to place demands on that infrastructure. In short, to thrive in this new world, banks need to do more than just bolt on an API integration layer, they need to completely reinvent themselves as digital organisations.
Open banking is being driven, in Europe at least, by regulation. However, the regulation is in response to changing customer needs and evolving technology – which are also the two key drivers for the rise of fintechs. While many banks focus on the cost of complying with regulation, in this case – open banking is a serious opportunity – the banks that get it right will be market leaders. The banks that get it right will reap similar outsized rewards as the tech leaders themselves –and perhaps the next company to break $800bn in market capitalization will be a bank.
1. Leveraging the Digital Potential In Corporate Banking- McKinsey
2. AITE Group
3. 2016 Transaction Banking Survey- CGI
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