Driving Innovation in the Banking Industry
In my last post, we looked at APIs in fintech and how drastically banking will change in the next decade. Yet some banks fear the implementation of the PSD2 (Directive on Payment Services) and the disruption to come. In a recent FIS survey only 14% of European banks planned to comply with the PSD2 from day 1. However banks and other interested parties in this sector started their digitization before the PSD2, and Gartner expects 75% of banks to expose their own API by 2016. A few banks are already successfully using APIs to drive innovation.
For example, Fidor may be the most innovative mobile-only bank in Europe. Since its inception in 2008 after the financial crisis, Fidor has been able to capture a small (~350MM assets) but loyal customer base. It has differentiated itself from traditional institutions and successfully targeted digital natives through mobile services, new products (bitcoins, mobile payment) and responding quickly to market changes. Fidor built this success on open, adaptable and modular infrastructure, which enables connections with foreign services before wrapping them into web applications or apps and delivering them to customers. Fidor developed a middleware technology called FidorOS, based on a SOAP interface for core banking systems and bank-to-bank communication and REST technology for internal use and interaction with customers.
Fidor has also used its system to address PSD2 requirements. In 2012, when European law started to regulate the time within which a transaction must be realized, it partnered with Ripple, a platform that allows fast and cheap money transfer and currency exchange. The companies have joined their efforts through Fidor’s API. Fidor provided another innovative service with Kraken, which allows Fidor customers to trade bitcoins as easily and securely as with any other financial product. It has also integrated Smava, a German peer-to-peer lending service.
Another interesting example of fintech in Europe is Compte-Nickel’s development of tobacco shop banking terminals. Customers simply fill out a form online, go to their local tobacco shop, scan an ID at the terminal, and deposit money. The shop vendor then gives the customer a MasterCard that they can use immediately, wherever they want. Since this system connects with the French central bank, it’s able to to open and operate accounts. Customers benefit from numerous points of sale at very little overhead cost for Compte-Nickel. As of today, Compte-Nickel doesn’t offer any financial services or saving accounts, however it could connect its APIs with other financial institutions to close this gap.
Finally, Orange has established a successful partnership with mBank in Poland, allowing its customers to pay with an NFC-enabled SIM produced by Gemalto. Orange uses its mWallet service along with individual accounts at mBank to generate transactions through its own API-powered middleware without needing a banking license. To take it a step further, Orange could add services on top of its integration with mBank. Similar models have been successful in Kenya.
APIs appear to be a major pivot point for innovation in the banking industry, allowing different services to interconnect and creating an opportunity for economy of scale. Companies are providing specific services across the industry that cut IT costs for banks. At the same time, other industries such as mobile phone operators are also likely to benefit from enhanced functionalities gained by connecting their products with banks. More importantly, APIs can serve as a foundation for banks to differentiate themselves and get closer to their customers.
Changes coming for the banking industry will be discussed at APIdays London on September 23rd and 24th.