Banks are probably starting to get a little tired of all the conversation about how fintech companies are going to eat their lunch.
Consultants are repeatedly talking about disruption, the McKinsey annual banking report forecasted non-mortgage lending to reduce by 60 per cent and there’s even several books written on the subject, my own included.
Some sceptics, justifiably, highlight that despite all the hype there hasn’t yet been a company growing at the rate of the likes of Uber or AirBnb. A European regulation on the not-too-distant horizon however has the potential to further ramp the pace of change.
Bank CEOs need to take this regulation seriously which starts with learning what Application Programming Interfaces or APIs are because in two years they’re likely to start playing a significant role in their customer servicing strategy.
APIs are an interface for two computer systems to interact with each other passing data, content and functions between them. Google’s maps are embeddable on other websites because of APIs, retailers can take payments via PayPal because of APIs and soon bank customers will be able to view their balance and transactions in third party applications because of APIs.
The aforementioned regulation is the updated Payment Services Directive act or PSD2 for short. It came into force this year with compliance following in 2017 requiring banks to offer public APIs.
The act is intended to increase competition across Europe by creating a single payments market. Part of PSD2 is something called XS2A or access to account.
This will require a bank to allow a third party organisation, that has been authenticated by their customer, access to that customer’s account information, balance and initiate and manage payments.
I’ll use a personal example to demonstrate the potential impact of this. My company banks with HSBC and uses an online accounting software called Xero to manage our finances.
While we do visit the bank website (albeit reluctantly as the customer experience is bad and the app is even worse!) we very very rarely visit the branch and most of our money interactions on a daily basis are with Xero.
As well as helping us manage our finances, Xero also helps us with lending. Via their marketplace we have the option of using MarketInvoice, which is a new and very good invoice financing service, and there are also services that allow us to, based on our rich Xero data, find us the best funding options from a range of providers including banks but also alternative lending companies.
So because of Xero we don’t have to go to our bank to get access to capital and with the arrival of PSD2 we’ll no longer need to visit the bank to initiate and manage payments either, which is the only reason we visit the bank website today. In this scenario the banks lose the valuable interactions we have with it.
Banks are starting to talk about PSD2 and APIs. There was a recen t conference in London on the topic which was packed. What I hear though is that it’s true potential impact is not fully understood, with a lot of focus on the need to offer two factor authentication around payments rather than thinking about APIs and what this means from a business model and technology impact perspective.
In some respect APIs should be seen as a huge opportunity for banks but I don’t think they’re prepared to consider the position it might put them in.
By properly engaging with the fintech community banks might find they are able to lower the cost of servicing their customers, something many of them are doing by furiously trying to drive people from branch interactions to web and mobile channels.