Kunal Jhanji, partner at BCG, discusses API monetisation and how Open Banking can deliver commercial outcomes for all industry players
As the API economy has gathered momentum across industries and sectors, the financial industry has been a relative laggard. Online retail and bigtech platforms have taken a lead, while banking and other financial organisations have proceeded relatively cautiously, thinking carefully about their strategies for both internal and external deployment and focusing on how best to reap commercial benefits from the API economy. In that respect, regulators have a key role to play - standardisation of open APIs is likely to be a key condition of success. Conversely, a lack of common standards will hinder progress and increase the burden of delivery. Both banks and non-banks have spent significant sums to comply with Open Banking regulatory requirements (PSD2 in Europe). There is now increased pressure, on banks in particular, to deliver returns.
There is also a recognition that if services and propositions are to become attractive to customers, the perimeter of in-scope data and products needs to go beyond that specified by regulation (current accounts, savings, some lending products). As a result, there is growing momentum behind the concept of Open Finance, which would allow products such as mortgages, investments, and pensions to form part of an extended perimeter of data sharing and exchange through dedicated interfaces such as APIs. An expanded perimeter would allow banks to tap into the more lucrative product areas of core lending and investments, boosting commercial returns. Additionally, non-bank players (fintechs and others) would benefit from a broader pool of data to fuel innovation and create new services — a win-win situation for all parties. On the payments side, the work of the European Retail Payments Board (ERPB) on the SEPA API Access Scheme provides valuable insight into the challenges and potential solutions that are likely to play a key role in kickstarting commercialisation.
While the concept may appear simple, implementation is anything but. There are germane concerns around both secure, controlled access to data and its exchange with third parties. Market participants and stakeholders (including regulators) are also mindful of not overheating the system with an unmanageable access load, and have imposed restrictions around how, and how much, market participants can access digital interfaces. For Open Banking/ Open Finance to become relevant, commercially successful, and deliver for regulators and customers, participants need to find ways to benefit from the API economy. API monetisation is the first step in the right direction.
Regulators’ dilemma
Regulators across the globe have taken different views on commercialising APIs. While in the UK and Europe, access is free (though restricted in frequency), Brazilian regulators are exploring a framework of API pricing and restricted frequency for both banks and non-banks. Both models have benefits and challenges:
Markets and regions will determine which regulatory model to deploy, but the market needs to be proactive in creating a commercial solution that works for all. Regulators have a responsibility to enable a working ecosystem, but players must take it to the next level, and API monetisation will be crucial in doing so.
Monetising APIs
APIs can transform the customer experience, business models, and revenue potential, as demonstrated by the payments industry. The growth of the Payments-as-a-Service model (PaaS) has made a huge difference to both merchants and payments players. Software providers are using API platforms to offer payments and related services and are generating an increasing proportion of their revenues from non-software led solutions (payments, value-added services). A BCG survey of leading software vendors (both horizontal and vertical) suggests that 60% of providers believe that their share of payments and value-added services will increase over the next five years. Recent market activity around M&A and partnerships (Visa-Plaid, Mastercard-Finicity, PayPal-Tink) demonstrates that the development of a strong proposition and excellent use cases for businesses and consumers, leveraging Open Banking/Open Data, can potentially boost revenues.
If banks and other TPPs are to benefit from investment in APIs to date, they need to put in place a strategic participatory framework, which is initially more important than monetisation models. That means they should:
The options for API monetisation are almost limitless. Momentum created by Open Banking is a good starting point, but further innovation will be critical to both transform the way customers consume services and to generate incremental (and in some cases significant) revenues.
The editorial was originally published in Global Open Banking Report 2020, which follows the journey from Open Banking to Open Finance and Open Data Economy, and provides key insights about the benefits of Open Finance for different areas of financial service
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