Speaker Interview

Paul Rohan - Rohan Consulting

How will the increased use of open APIs shape the financial services landscape, and how will it impact different market players, both in the short- and long-term?

The API Economy is a set of business models and channels based on secure access to functionality and exchange of data between businesses. It looks likely to revolutionise how data and services are distributed in many industries over the long term, including banking. This type of radical change will change business plans, patterns of behaviour and market positions in the banking industry.  In the longer term, the API Economy also seems to be asking bankers to reflect on their core strategic perspective i.e. “what business are you in?”

In the shorter term, banks will struggle to respond to the API Economy. Banking is a mature industry with many monolithic systems and divisional organisational structures. Open APIs are quite different to own-brand products in mature industries. The monetisation goals for Open APIs will have to reconcile with the goals of own-brand products. Mature industries with very established patterns of pursuing profits at divisional level will struggle to see where they will capture value from Open APIs.  Finance teams in mature and profitable industries will prefer specific and tangible revenue strategies from Open APIs rather than strategies that promise market influence and market profile.

Which activities should banks be prioritising, in the wake of open banking?

All mature service businesses need to prioritise investments to develop modular software with a microservices architecture. Under-investment by mature firms in Services Oriented Architecture will act as a constraint to their entry into the API Economy.

To be successful in the technical challenge, banks also need to look at the sociological factors in organisational design. If firms in mature industries ignore these sociological factors, they are unlikely to succeed. Older businesses that were not born in the networked economy can be excessively focused on the downside risk of data travelling out to third-parties.  Non-technical teams in mature industries with a business development responsibility need to be trained in API Product Management and API Monetisation methods. Understanding and managing the relationship with a community of external API Developers is an entirely new discipline for a mature business.  If commercial teams in banks try to repel substitute products from their ecosystem, they will inhibit the development of complement products. Employees in all mature businesses will need role clarity to act and thrive within new organisational directions.

What key opportunities does Open Banking present, and which commercial strategies and organisational structures will thrive in the new environment?

I believe that Open APIs in banking will be a flop if it’s just about routine payments and everyday banking. The core value proposition of banks is centred on deposits and loans. Most of the revenue in mainstream banking comes from interest income i.e. the margin between the interest from loans less the interest paid for deposits. Deposits are lifeblood, as they provide inexpensive and durable funds for longer term lending. Banks will want to understand how an Open Banking Ecosystem impacts their deposit gathering. In terms of using that deposit base, lending at scale is an area where the established banks have a traditional advantage.

It is hard to see how Open Banking can become mainstream banking if key elements in the lending processes cannot harness the potential of Open APIs.  Credit services differentiate banks from other large service providers.  It is a difficult process to structure for the API Economy because evidence that a loan is probably repayable tends to accumulate. Both quantitative and qualitative evidence accumulates to a point where the underwriting lender is happy to lend.  As the business scenarios become more complex and finance becomes larger and more customised, the data and process in the service exchange becomes more variable. To leverage the Open Banking Ecosystem, lending banks will need to be precise about the accumulation of information needed to trigger an underwriting decision. If they become more precise, the commercial possibilities are very significant.

The opportunities in Open Banking could remain theoretical if banks don’t look at their organisations, both in IT and in the commercial teams that use the output from IT. Netflix and Amazon are held up as two companies that have successfully embraced the idea that organisations and architecture should be aligned. Amazon was an early advocate of the benefits of teams owning the whole lifecycle of the systems they managed. It wanted teams to own and operate the systems they looked after, giving that team responsibility for managing the entire lifecycle. Amazon also found that small teams were faster and nimbler than large teams. This approach was notable for the idea of the “two pizza team”, where no team should be so big that it could not be fed with two pizzas. Amazon created tools to allow its teams to be self-sufficient.  Netflix learned from Amazon. It ensured that from the beginning it structured itself around small, independent teams, so that the services they created would also be independent of each other. This ensured that the architecture of the system was optimised for speed of change. Effectively, from the very start, Netflix designed the organisational structure for the system architecture it wanted.
Large and mature banks are now absorbing the evidence that points to organisational structure being a strong influence on the design and quality of the systems they construct. If we see two-pizza teams in banks, centred on Loans and Deposits, I believe that Open Banking will be transformational for the entire industry.

How can firms overcome the security and privacy concerns associated with data sharing?

Open APIs in banks opens new attack vectors for thieves and fraudsters, and the counter-acting security effort has to respond.  For their growth and profitability, banks like to be liked but they absolutely need to be trusted. Banks will try to be very thorough in this arena.  Some commentators have suggested that Open APIs will become ubiquitous in five years’ time in the same manner as company websites became ubiquitous. I think this is broadly true.  In general, banks have been here before and know the drill. Large, mature banks in the mid-1990s were rightly wary of the risks from an immature Internet but they recognised that websites would become an indispensable human-to-machine interface for their businesses. They grasped the nettle, built the interfaces and learned to manage the risks.  Open APis seem likely to become indispensable machine-to-machine interfaces for a business, so there is another nettle to be grasped. Banks may grasp this nettle a bit more slowly.  Non-technical people in banks could understand the utility of a website relatively quickly through being the human in that interface, but they may need longer to understand machine-to-machine interfaces.

Why will you be speaking at ECN’s Open Banking Summit, and what do you hope to get out of the event?

The Open Banking Summit has a good balance between the practical stuff that needs to be considered about implementing Open APIs for PSD2 and the longer term commercial requirement for an API Strategy. In crude terms, the regulators have thrown a big stone into the industry pond with PSD2 and it’s causing an immediate ripple effect in project priorities and systems requirements that cannot be ignored, due to the regulatory deadline.   I think the wider ripples that could start to overturn existing banking business models and organisational structures are far more interesting and far more strategic. I hope to learn a lot from industry colleagues about how they see the wider ripples impacting the industry over the longer term.

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