Will financial services build ecosystems, or just be a participant?

As digital ecosystems redefine the global marketplace, financial institutions must decide what role they will play, or risk losing relevance fast.

In brief

• Digital ecosystems that collaborate to deliver more value to customers are redefining banking.
• EY research found that, globally, banks vary widely in their approach to developing the APIs that underpin these ecosystems.
• Successful participation in these ecosystems demands that financial institutions choose an appropriate business model and follow five principles for interaction.

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. 

Fostering API innovation in financial services

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:

• Banks tend to fall into three categories: leaders that are rolling out new digital products on a monthly basis, those in the middle of the pack, trying to keep up but with limited innovation capabilities, and the laggards doing the bare minimum to stay compliant with regulatory requirements.
• It seems that Asia Pacific and Europe are leading the way regarding the provision of APIs.  Both regions were early adopters: While in Asia integrated services in e-marketplaces and mobile clients have a long and successful tradition, in Europe, countries moved early by implementing a harmonized open banking scheme under regulation imposed by the Payments Service Directive 2, which required API based access to account and payments initiation to go live originally by September 2019.
• Leaders have designed their API portals to make them easy-to-use and appealing to developer communities. They engage with these communities to provide feedback on digital offerings, helping drive targeted innovation.
• Scope of APIs varied across banks but were most commonly deployed in account information and payment initiation. 
• Despite the differences, it’s clear that, while adoption of ecosystem strategies is a global trend and that most banks are moving decisively toward open banking adoption.

Choosing an ecosystem business model

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.

• Product or category leader: These companies leverage customer data to develop new digital products and focus on providing value-added services. The goal, for example, is to provide the best investment product, or the quickest, most seamless credit application so that everyone in the ecosystem will want to use it. FIs may codevelop products with FinTechs, and then sell the products on their own platform or third-party platforms within the ecosystem. The product or category leaders create value on the ecosystem by cooperating and competing with others.
• Infrastructure leader: These FIs are focused on models, such as bank as a service (BaaS), to diversify and generate alternate revenue streams. This includes providing on-demand, faster infrastructure; access to the regulatory framework; and a defined set of API or white-label products. These companies enable other companies that don’t have a license, or that want to get to market very quickly, to launch products and services in the ecosystem. They function almost like Amazon Web Services (AWS) — as the cloud for banking and insurance.
• Stay as you are: These FIs don’t drastically change their business model, and they only offer the bare minimum of access to customer data as mandated by open banking regulations. Given technology developments, the pace of change and customer expectations, this is unlikely to be a winning strategy for the long term.
• Ecosystem orchestrator: An orchestrator operates a marketplace where multiple buyers and sellers connect, interact and transact. It owns and cultivates the customer relationship, is free to strike different deals with partners, works closely with the developer community, decides on access to the ecosystem and connects participants with each other in order to optimize customer value. This is the most attractive role since it monetizes the customer relationship, as well as participants’ access to customers on the platform.

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.

Five fundamentals to guide interacting within an ecosystem

No matter what business model a company chooses, there are five fundamentals to participating effectively within these ecosystems:

1. Robust API strategy

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.

2. Monetization

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.

3. Partnership building

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?

4. Regulatory compliance

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. 

5. Talent recruitment

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. 

Moving toward a new marketplace-based economy

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.