A contrarian view of open banking might say it has two negative characteristics: 1) regulatory and technical complexity and 2) a dearth of proven revenue opportunities. Open banking is often hyped as the threshold of a new era for banks and their customers. Yet the use cases for account holders are currently far from clear and not yet revolutionary in vision or reality—a situation that will persist for some time. The application programming interfaces (APIs), which are tools critical to implementing open banking, do not in themselves determine where banks and their customers will find their main open banking value (beyond compliance). Regarding compliance, it is worth repeating that although both the European Union’s revised Payment Services Directive (PSD2) and the United Kingdom’s Competition and Markets Authority (CMA) Open Banking mandates are regulatory interventions intended to bring about market reforms, they are clearly not well aligned with the current business and revenue models associated with banking. The regulations do the following:
- Encourage new competitors to enter the market, including new banks and an array of financial technology companies (fintechs).
- Apply pressure to existing pricing and revenue models associated with bank accounts.
- Cause expenses to increase for existing banks, which find themselves having to compete with venture capital-backed start-ups.
- Improve account holders’ data access and data portability to drive wider use of account aggregation, personal financial management (PFM) services, and easier current account switching, respectively, while ostensibly improving data security even as regulations make the environment much more complex.
The technical and regulatory complexity is taking its toll on banks and their technology partners as regulatory requirements shift and industry deadlines continue to be missed by stakeholders. APIs can be great enablers, but only if they are readily available, widely accepted, and consistent and well understood by participants.
The dominance of the E.U. regulatory agenda has focused the banking industry on APIs as a necessary implementation strategy rather than a business strategy in its own right. What has emerged, however, are business models focused on helping banks and other financial services providers to adapt to the developing regulatory environment, to deploy both required open banking and payments capabilities and new products, and to connect with an expanding array of tech providers, customers, and open banking competitors. 2019 has been a year of high-profile launches, of platforms as a service, platforms that prove the serious commitment of resources by the likes of Mastercard, Visa, and a host of other providers. The emergence of these platforms also underlines the market’s need for turnkey information technology capabilities to help institutions meet compliance deadlines and market demands. The Mercator Advisory Group research report, The Emergence of API Platforms: Open Banking and Payments Drive New Business Models, presents an updated view of E.U. and U.S. market developments and examines the “platformization” business model opportunity emerging in the open banking and payments API environment.