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

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.

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.