Open APIs and PSD2: Banks Can Fight Back Against Fintech

For European banks threatened by new sources of competition, Open APIs can represent a strategy and platform to leverage their strengths in the market and take advantage of fintech innovation by using open APIs and opportunities for payment services that are being opened up by PSD2.

Banks across Europe find themselves facing a difficult double challenge: increasing regulation for consumer protection on the one hand and competitive pressures from fintech companies and other non-bank firms on the other hand. Tech giants like Apple, Google and Amazon are leveraging their brand power to create their own emerging digital financial systems ecosystems--with products like Apple Pay, Google Wallet and Amazon Payment.

Meanwhile the rise in crowdfunding and peer-to-peer lending platforms like LendingClub and Kickstarter are challenging traditional retail banking relationships. And then there is the ultimate threat of Bitcoin looming somewhere on the distant horizon.

But banks should realize they can leverage structural advantages they have: a large base of clients as well as goodwill especially among traditional customers.  Banks also possess hands-on expertise that can generally evaluate credit risk better than non-bank competitors.  Even though the competition might be taking a technology-centric focus to develop analytics that live up to the promise of Big Data, banks may continue to have the upper hand. This is because banks have a great deal of potentially high value information about their clients’ financial histories and profiles. And they have the further advantage of commanding robust payments structures that cross borders.

For banks facing these competitive challenges, enter the “Open Banking API Regulation”, generally known in Europe as PSD2. PSD2 is designed to empower consumers and boost competition. It allows banks to position themselves to participate in the growing market of third party digital services. New technology in the form of open APIs is making this possible and enabling massive growth for banks who can take full advantage of PSD2.

In simplest terms, an open API is a package of publicly available tools that govern how applications communicate and interact with each other. In practice, a digital platform of open services financial apps would resemble an “App store” offering a “supermarket” of verified apps, all of which become a new revenue stream for the banks. These would include: smart budgeting, micro-payments, retailer specific payment for loyalty schemes, even Bitcoin exchanges. In such digital app marketplaces, banks’ competencies and disciplines in risk management and payments infrastructure--bolstered by insights they could get from machine learning from their aggregated customer data--would give their apps a competitive edge.

A great example of this trend is Berlin-based FinLeap. Marketing themselves as a “Fintech company builder”, they have seized the opportunity to build a licensed bank for startups to leverage. The result, called SolarisBank, markets itself as a “technology company with a banking license,” an appellation many banks aspire to these days. Its offering is “banking as a service,” meaning an out-of-the-box solution for fintech companies to plug into.

Every European bank should at least have a strategic research initiative to identify how to leverage its strengths in customer base and credit risk into a strong starting position into what promises to be a robust PSD2 digital marketplace for financial services in Europe.