Open APIs and The Death of Retail Banking

The challenge facing legacy banks

The world of finance has faced repeated criticism in recent years for shying away from technological innovation, and now it’s not just commentators who are advocating change. After conducting a scathing report on retail banking this summer, the Competition and Markets Authority (CMA) has ordered the UK’s leading banks to follow a set of new rules by 2018. Banks have been told to develop Open APIs that will make customer data universally accessible. Banks also have to create tools to help SMEs (Small and Medium-sized Enterprises) apply for loans. Looking forward, the CMA wants to encourage the use of a single app to compare banks in one location. The collective initiative has been called ‘Open Banking’, aiming to improve customer experience by creating competition between FinTechs and established retail banks. But what effect will this have on the banks themselves? Could Open APIs lead to the death of retail banking?

Application Programming Interfaces (APIs) are easy to use and cheap to run. It’s no wonder, then, that they’re used in many different areas, and banking is no exception. APIs are key to essentially all software development, letting different applications interact with each other. The main clause of the CMA’s regulations state that big banks should open up their APIs, allowing customer data to be accessed by competitors and third parties. Banks will be able to offer tailored services, and customers will compare them in real time. Third party access, however, is a little sketchy. . . Who exactly will be viewing the data? What will they use it for? There are also security issues with Open APIs, as putting everyone’s data in one universally available location is a recipe for disaster. The next year or so should be spent finding ways to make sure that the APIs are as secure as possible. As well as improving security measures, this will mean a complete overhaul in infrastructures. It’s easy to assume that the CMA envisions a show-down between older banks and new FinTech companies, but it isn’t simply a battle between startups and legacy systems – established banks have clearly embraced technology. RBS, for instance, is developing a human-like AI that will eventually deal directly with customer queries. Barclays has partnered with Topshop to create a ‘banking bracelet’ that lets the wearer make contactless payments. But regardless of existing technological adoption, the industry is still viewed as needing change. In short, the CMA is forcing legacy systems to adopt innovation whether they want to or not.

How will this disrupt traditional banking?
The entire point of the CMA’s requirements is to change the banking industry to improve customer experience and financial processes. Making UK finance more homogeneous will force startups and established firms together, encouraging innovation and technological development. Sharing secure data with other banks using Open APIs could give customers more freedom to explore the services offered by different branches, also intensifying competition. It’s not just competitors that will have access to customer finances – third parties will be able to exploit the information. Retailers, for example, will be able to tap into spending patterns, work out where customers spend the most money and tailor their products to respond to the findings. The creation of a single app will add to competition by making it easier for customers to directly compare banks without swapping from app to app. This gradual move towards online and mobile banking will give people better control of their finances, as they’ll be able to access the information at any time. Ultimately, the CMA’s regulations will change how people organise their savings, perhaps even to the point where physical branches become obsolete. As customers place their trust in innovative startups like Atom and Mondo instead of bigger banks, these large firms will lose their monopolies to the younger companies. It’s unlikely, though, that legacy banks will lose their influence.

The business angle. . .
Whether they’re an established giant or a young startup, financial organisations will experience increased competition. To stay in the game, they will have to follow the CMA’s regulations and throw in some extra innovation to boot. For the most part, encouraging technological adoption in banking will be positive for banks themselves, improving customer satisfaction and making it easier to function using connectivity. Making banks develop tools to help SMEs apply for loans will certainly be beneficial all-round, giving smaller companies the resources they need to grow whilst keeping the banks in business. But then there’s the issue of Open APIs, and the massive security issues they present. If the industry is going to run on shared data and connectivity, there needs to be serious investment in reducing the vulnerability to hackers. Although banking companies will have to deal with the possibility of cybercrime, the need to secure APIs will lead to the continued growth of the API security product market. Third parties will undoubtedly find it very useful to access consumers’ financial data through Open APIs, but it’s the banks that will take the fall if the data is misused.

Facilitating change in the UK banking scene is going to be a long process, but the CMA have accelerated adoption by making it a mandatory requirement to step away from legacy systems and embrace big data. Although the regulations will supposedly improve customer experience, it’s very unlikely that consumers will take kindly to sharing their data (let alone financial information) with third parties. It’s incredibly difficult to imagine a financial sector with absolutely no physical bank branches, as they won’t become obsolete unless the entire population converts to mobile banking. For those that do, however, cybersecurity has to be a main concern. APIs are cheap, easy and accessible, and open APIs are even more accessible which is their biggest flaw. Consumers don’t trust Open APIs, so financial organisations will have to work hard to convince them their data is safe. As disruptive as these new regulations will be, there’s debate over whether the CMA has gone far enough. The financial sector, from corporations to customers, should be prepared for even more change.

Will open APIs lead to the death of retail banking? Has the CMA gone far enough in its new regulations? Share your thoughts and opinions in the comment section below.