Fintech Trends: API Banking


Categories: Fintech, News

BaaS or Banking as a service is the newest Fintech trend everyone is talking about. But why? In the past, traditional banks enjoyed soaring profits and a great customer base. With the shift in customer consumption behaviors towards online and app-based banking, new entrants in the financial space began popping up to take advantage of the patterns. Thus, consumers got spoiled by the new Fintechs while banks could not keep up.

The change in the banking industry

Fintechs are beginning to become more and more relevant in the banking scene through offering specific, quicker services to consumers. In the past, those companies were forced into obtaining a hard-to-get banking license as a regulation which presented a barrier to the industry. The license often cost so much time and money that sometimes it was impossible for Fintechs to get it in the first place. Nowadays, BaaS banks allow Fintechs to partner – using the bank’s license while complying with regulations. These innovative companies have not only grown tremendously in the past few years, but have gained popularity and success by scaling their business model. [1] Traditionally, banks have the special permission to perform certain activities where a single bank does everything. Fintechs simply offer banking services in an easy-to-integrate bricks for other people to bring to their customers. Therefore, through the use of technology, the new API banks allow Fintechs to have access and development that was previously reserved for traditional banks. Some API models give banks the opportunity to become platforms that connect, curate and manage new services offered by Fintech.[2] The Banking as a Platform (BaaP) model allows API banks to keep “owning” their customers while offering the best financial product possible. As a result, Fintechs are allowed to focus on core activities and international expansion, making their services faster, more precise, and broadening their scope. Fintechs with a banking license are actively emerging. An example is FinLeap’s venture solarisBank which offers a B2B2C banking platform model. It enables digital companies to offer financial services to their end customers. Simultaneously, it puts suppliers on the platform in order to give the partners the best Fintech services through a single API.

The revision of PSD

Payment Services Directive (PSD) is a regulation by the European Commission to regulate payment services and providers throughout Europe. With an aim to encourage innovation in the payments industry, it outlines the criteria and obligations for payment providers and users. [3] Recently, the European Commission has found a way to encourage competition and innovation, enabled by technology. Previously, banks were refusing to allow users to export their data to a third party which made innovation based on financial data difficult. PSD2 forces them in part to open up that data and those services to third parties. It is allowing startups in the Fintech industry to play a more important and active role by extending the scope throughout Europe and allowing the use of APIs to “enable payment by directly connecting the merchant and the bank”.[2] Not only is PSD2 transformational for Fintechs but also for banks. Traditionally, banks do not grant any access to information that is stored into their customer accounts. After the new regulations, banks will have to adapt and “open up” to more technical solutions. PSD2 will begin to be in effect in 2017. [4]

The future

API Banking is a revolution in the financial sector and as such will take time to fully develop and integrate. Just like traditional banks were triggered to create a website which became essential for business, API will become the face of business online.[5] With it, individual services will become more available for people to innovate. In the more near future, API banking will be added into the business models of many banks. By the end of this year 75% of the top 50 banks in the world will open their API and 25% of these banks will have their app stores. Based on the BaaS platforms, Fintechs will become more and more relevant in the banking sector, allowing for the creation of many new partnerships between companies. Maybe one day, API will be a part of everyday life.[6]

References:

[1] Exploring Banking as a Platform Model

[2] Rebundling UK financial services

[3] Directive on Payment Services

[4] PSD2 – What changes?

[5] Want to Pen your Bank to APIs?

[6] Fintech City: Overview of APIs and Bank-as-a-Service in Fintech