The proliferation of Application Programming Interfaces (API) has opened the doors for greater collaboration between incumbent banks and innovators. To date, fintechs, partner banks and others have leveraged this technology. There is, however, a larger untapped opportunity for banks to collaborate with one another using API technology.
Tapping into each other’s strengths allows financial institutions to more effectively and efficiently meet customers’ expectations, while still adhering to strict financial services’ industry regulations.
This banking-as-a-service model (BaaS) allows any financial institution to make the most of its specialization. The organization can take its strongest banking function and offer its capabilities as a service to other financial institutions through an API, creating a new revenue stream for the organization.
In many cases, banks are now digitally mature enough to partner with each other to fill technological or process gaps. This is especially true in areas where regulations and license requirements have resulted in massive technology investments into processes like Know Your Customer, underwriting and payments.
The largest banks can operate at scale by setting up massive offshore business and knowledge process operations that offer BaaS to mid-sized banks, credit unions and niche banking players that don’t have the same resources. In this case, innovation isn’t limited to the bank that comes up with a new idea or service – other banks can benefit as well.
In the API and BaaS environment, banks can play three primary roles:
Car brands like Ford and Volkswagen have mastered the production and sale of vehicles. Banks, especially larger, resource-rich ones, have an opportunity to do the same with their banking products – be it a payments capability, loan capability or otherwise.
This is akin to the third-party, custom accessories market in the automotive world. A category of fintechs, and potentially banks, will emerge that will primarily rely on products manufactured by others, add a secret sauce to build new product bundles that can wrap around the customer’s interests and lifecycle touchpoints, and then rely on established distributors or go direct to market with embedded offers.
In the retail world, big-box stores like Walmart and Costco make huge profits from providing the vast variety of goods consumers want in one spot. While some banks have had success selling other financial services, such as insurance, API technology makes it possible for them to plug in financial services products into the banking platform. This allows them to distribute their financial products to other banks. These banks just need to ensure the new types of services they are offering comply with applicable regulations.
Let’s look at how these different roles play together. For example, a local credit union is good at taking care of their customers’ accounts, but it may lack the ability to provide digital loans. In this case, the credit union can use an API to aggregate and distribute loan offers from other banks. A customer who may need a car loan still goes through their credit union to secure the loan, while the bank facilitating the loan can collect a small fee.
In this case, the other banks who offer the loan are the manufacturers, while the credit union is the distributor. But keep in mind that banks are not necessarily pigeonholed into just one of these categories. In fact, some banks may be a manufacturer of one product and a distributor of another.
In the future, the distribution of banking products and services will happen not just at the bank, but also at the point of consumption. For instance, a consumer at an electronics store may be looking at buying a TV. Instead of using a credit card to finance the debt, they could use their banking app to scan the item and look for a ‘buy now, pay later’ loan offer.
Banks risk losing customers if they fail to adapt to customers’ needs. Banking services need to be personalized and intelligent, and customers want tangible value. Banks are at a point in their technological evolution where they can help other banks of all sizes provide high levels of service, while at the same time increasing their profits. The banking-as-a-service model, powered with APIs, allows expertise and innovative practices to be shared, which can help cement the industry’s relevance.
Roger Lobo is principal product manager, and Tushar Chitra is VP for product strategy, both at Oracle Financial Services.
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