Fidor is a bank without a branch. It does however have a license. Launched in Germany in 2009, Fidor has integrated social media into the heart of its operations (it changes its interest rate on savings based on the number of Likes on its Facebook page) and is implementing the concept of ‘banking as-a-service’ by allowing third parties to take advantage of its services and infrastructure in a controlled fashion. This is done through Application Programming Interfaces (APIs), which enable partners to conduct instant payments, single transfers and direct debits via Fidor’s mandate.
Sensibly, Fidor does not try to build everything in house, having realised it is an unnecessary use of both time and funds, and instead partners with other firms that offer the latest solutions for its specific needs. One example of this, is the cross-border payment platform developed by the B2B international payments engine Currency Cloud, which Fidor took just two weeks to integrate, instead of spending 18 months to build in-house. This collaborative, but forward-thinking model, puts an emphasis on the need for partnering with innovators, provides the confidence to share proprietary data and services and an eagerness to take advantage of the data exposed by others.
Doing things differently
So why does this matter? It matters because Fidor is doing things differently. In an environment where competition is already fierce, and initiatives and regulations such as Open Banking in the UK and the second Payments Services Directive (PSD2) in Europe, are starting to open up the sector to further competition, any differential is an advantage.
The emergence of the digital economy, the explosion of AI and Big Data technologies, and the move towards cloud and Service-Orientated Architecture (SOA) models mean that the world of banking is changing. Competition from new entrants with the ability and knowledge to embrace emerging technologies is putting pressure on the established players who have no choice but to adapt if they are to survive.
Access to data
One of the main stumbling blocks to opening up the market is access to data. Currently the domain of the established players, many small FinTech companies are using various workarounds and ‘hacks’ (not in the malicious sense of the word) or one-on-one partnerships to gain access to the customer data that is heavily guarded and encapsulated by the banks. However, neither of these offer a scalable or robust solution to bring life to the concept of Open Banking.
The elegant solution to the problem is to use standardised APIs across the entire banking industry. In some regions (like the US) the standardisation is being driven by the market and has resulted in a patchwork of clever innovations. In other regions, the regulators have taken it upon themselves to encourage the adoption of APIs with the introduction of PSD2 and Open Banking.
Putting aside the benefits to the customers of opening up the market, it is easy to see why new entrants, and particularly the FinTech sector, is so eager to push the industry in this direction. New entrants in the marketplace can only stand to gain. Banks, on the other hand, seem to be on the losing end: not only do they have to expose their client data and deal with the amassed internal legacy systems, but they also have to devote large amounts of resource to ensuing regulatory compliance across all functions whilst competing with small start-ups, which are by definition agile and cost significantly less to run. In addition, start-ups have the luxury of being able to fail without a major impact, something that big banks can’t risk as reputation is one of the most important factors in the survival of their business.
So, do the established players have any advantages?
Yes, they do. They have:
- Customer data
- A banking licence (with much higher standards than a non-banking one that doesn’t give the right to offer current accounts, for example)
- An already established bond of trust with clients (this is however a fast-waning advantage as more and more young tech savvy people mature and begin to use banking services)
- A global outreach
- Established relationships with regulators and decision makers
- Partnerships with consulting companies that can bring industry best practices
However, the window for banks to use this opportunity is closing fast, and there are already examples of very successful API-based innovations implemented by non-traditional banks such as Fidor.
For the established banks, Open Banking APIs offer an unprecedented glimpse into what their competitors are doing. Banks can now start building dynamic pricing models that react to overall changes in the market and produce the best deal for the client. This increased awareness of the marketplace, and more importantly, the willingness to adapt, will not only contribute to client retention, but also create interest from new clients. It also opens up the idea of automated financial consultants, which draw intelligence from the massive volumes of data that banks have amassed.
The potential is endless
In truth, the potential is endless for all involved. Banks will be able to position themselves as intermediaries for e-commerce merchants and their customer bank accounts. This way they will take a share of the profit and eliminate the need for established intermediaries like Visa and Mastercard. It will also be possible for banks to combine financial service products like pensions, investments and insurance from various other suppliers, ensuring the customers get the best deal.
All these innovations are only now possible with the fast adoption of the Open Banking concepts and APIs. As the market changes, there is no reason why the established banks cannot leverage the new developments themselves and start offering products and services that require the high standard of usability, security and agility expected by the maturing tech savvy consumers. As proven by the successful model employed by Fidor, banks do not have to build everything themselves. They are large organisations with top-down approaches that make it difficult to maintain the pace with the speed of technology change. Instead, the emphasis should be on partnership and collaboration with the industry innovators.
Open banking revolution
To conclude, banks have a number of advantages over their newly-established FinTech competitors which puts them in a good position to take advantage of the Open Banking revolution as it develops. While the exact way the market opens up remains to be seen, one thing is for certain, and that is there is no room for complacency. Now is not the time for business-as-usual. If banks want to succeed in this increasingly fast-paced race to become the financial services provider of choice, then willingness to change and an acceptance of a more open market is the way forward.