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In brief
Emerging technologies, changing customer expectations, new competitors and the onset of open banking have given rise to digital ecosystems. These ecosystems, enabled by digital platforms, bring different parties across industries together to seamlessly collaborate and create new value-added products and services.
For financial institutions (FIs), participating in these ecosystems is no longer an option but a competitive imperative. Banks that fail to embrace opportunities to collaborate with others risk more than losing revenue and customers — they will become increasingly irrelevant in a future world where lines between industries are blurred. FIs must determine not if, but how, they will get involved in ecosystems, ensuring that strategies consider the fast pace of technological and regulatory change.
Digital ecosystems are underpinned by Application Programming Interfaces — APIs — which act as the connectors of networks and, in some cases, are highly valued products in their own right. FIs can choose specialized FinTech APIs that enhance customer journeys, improve customer data intelligence and automate back-office processes. Customers don’t notice APIs — that’s the point — but they’re in the background, making sure we can do things most of us now take for granted, including paying safely with our phone, finding the closest ATM or applying for a loan via an app.
Successful participation in ecosystems requires FIs to become experts at using and, in some cases, developing APIs to enable the interaction with ecosystem partners. Those that do will move out of the traditional bank perimeter, embedding themselves in the value chains of other industry domains, and in their customers’ day-to-day lives.
We conducted research into how 30 banks around the world engage with and enable API developers, to get an indication of the scope, size and speed of industry progress towards digital ecosystems. We found approaches differed markedly across banks, with key findings including:
As FIs acknowledge the inevitable shift towards ecosystems, they will have to determine exactly how to participate, and redefine business and operating models to suit. It’s critical they choose their strategy wisely, based upon their strengths, decisions around customer ownership, focus within the value chain and revenue generation model.
FIs should identify and focus on the most important product and service initiatives for future success, with an eye on how increasing regulation may affect these offerings.
Determining which role to play requires a frank and holistic assessment — based on an organization’s assets and capabilities — of how much value it can bring to customers in each role. In the end, an FI may choose to hedge its bets and pursue multiple roles.
One of the big dangers for FIs participating in ecosystems is losing control of their client relationships. To guard against this, they need to aggressively market their services to other ecosystem operators and create “sticky” ecosystems for their own clients.
No matter what business model a company chooses, there are five fundamentals to participating effectively within these ecosystems:
A robust API strategy is driven by clear design principles including being user-centric, incorporating common industry standards, ensuring third parties can easily “discover” the APIs, and incorporating user feedback. It must also embed security using encryption methods; improve documentation so developers can easily adopt, support and maintain the APIs; and include analytics so the business and developer can assess the effectiveness of the API program.
A well-designed API strategy should unlock a range of revenue opportunities for FIs by identifying data streams to monetize, identifying new customers, and by using data to create better insights and underwriting strategies.
FIs need to design and clearly communicate rules of engagement. What types of partnerships — long-term, investments, VC funding, contractual, alliances — will they engage in? How will they manage risk, share rewards, and foster creativity and innovation?
New regulations may give some FIs the opportunity to unlock additional value, although the opportunities will vary greatly depending on the jurisdiction. Some FIs are restricted to offering services only within their charters, and some nonbanks are restricted from providing banking services.
Ecosystems and the changing nature of work mean FIs need a plan for acquiring and training digital talent with the right skill set to work with multiple partners. To attract digital talent and help them thrive, FIs should strive to create a more entrepreneurial culture and agile working environment.
If ecosystems were strictly industry-specific, their value to FIs would be constrained. But, as sector lines blur, the potential for FIs to become core to the future digital marketplace, and to their customers’ lives, is almost limitless. Converging cross-industry ecosystems are currently being developed in many markets, leveraging services from different industries to provide end-to-end value propositions to consumers and corporations. An example of this development is the e-mobility ecosystem, which integrates services from automotive, car sharing, charging, rental cars, travel, public transport and parking into a full-service value chain, covering all needs of a private or business traveller as well as a frequent commuter. Similar examples can be found in the smart city, smart home, digital health or internet of things (IoT) environment.
With the right APIs, banks and insurers can plug themselves into these ecosystems and value chains. In fact, at EY, we expect that the financial marketplaces embedded in other industries’ ecosystems will become significant sales channels for financial services providers. The more standardized the products (e.g., mortgages, payments, consumer loans, savings, property and casualty insurance), the less likely that existing one-to-one client relationships will continue. On the other hand, consuming other organizations’ APIs will give FIs a much broader view of their clients’ needs and risks embedded in the customer relationship.
An organization’s ability to participate fully in tomorrow’s ecosystems depends on embracing a proactive API strategy today — or risk losing relevance as competitors do. This is not a “technology” issue but a board priority. Already, as our research shows, leading banks are moving fast to facilitate and foster the API innovation that will enable participation in the ecosystems that will create long-term value. For those FIs that are yet to set their ecosystem strategy, the time to do so is now.
Digital ecosystems, underpinned by APIs, will be integral to the future of the financial sector. EY research shows that banks vary in their maturity of engagement with API developers, though all agree on the importance of open banking. Succeeding in the ecosystem model will require each bank to first choose a business model appropriate to its own ambitions and then follow five fundamental principles to participate effectively.
How EY-Parthenon can help
