European banks are increasingly discovering the power of going beyond PSD2 and successfully advancing their open banking projects. Here, Peter Hiekmann, of ndgit, looks at how Middleware and APIs are linking banks and FinTechs to power next generation Platform Banking and accelerate a brave new world of financial services.
PSD2 and Open Banking have been on European bank agendas since the second European Payment Services Directive came into force in early 2018. For the first time, we have a legislature that touches banking’s core products and challenges its sovereignty over bank data.
Owning customer account data has long given banks a competitive edge, for example in terms of pricing and product selection. This competitive advantage is now shrinking as third-parties gain access to bank accounts in order to provide consumers with innovative value-added banking services.
The result? Classic revenue models for banks are breaking away and customer relationships are starting to erode.
Radical departures from traditional banking models
While some banks bemoan the demise of traditional banking, others are embracing change and are showing the first flush of success. This includes using their digital platforms to create ‘financial supermarkets’ for users.
For example, Deutsche Bank, is developing its “DB API” interface program as a one-stop-shop that will provide all services relevant to the customer in a complete 360° view. (Imagine classic networked banking with additional functions like accounting, evaluations, personal finance management, etc.)
A similar approach is being taken by the Dutch ING, the Spanish BBVA and the Northern European Nordea. In addition, almost all Swiss banks, although not “PSD2-liable”, are advancing their implementation of Open Banking.
Middleware freeing up core banking systems
There is no arguing the virtually unlimited opportunities for open banking. The challenge is technically enabling them.
Here, APIs hold the key to linking open financial architectures. They help to overcome the integration challenges associated with connecting core legacy systems’ heterogeneous architecture, creating new pathways for it to be “opened” up to a broader and more diverse product, service and ecosystem.
This is done by adding a middleware layer onto the existing core banking system.
Often provided by technical service providers such as ndgit, this serves to dock, control, and evaluate FinTechs via APIs. (See diagram below)
Delivering faster & easier compliance
For many banks, platform banking is the ideal implementation path to PSD2 compliance. Predeveloped and standardised ‘PSD2 Ready’ software can be installed at the participating bank to ensure APIs are successfully integrated to the secure connection of third-party providers and to automate all necessary reports.
Moving beyond this, APIs can open up the core banking system for the central connection of all digital channels – from e-banking via convenient REST interfaces for third-party providers to internal consultant applications.
Creating easy access and multiplication of services
The central component of this is the API Gateway. The gateway controls the secure access of internal and external partners and manages all accessing applications centrally.
To quickly and easily integrate customer innovations and FinTech services into their API management platforms, banks are either building their own network or leveraging marketplaces provided by bridge builders like ndgit. This helps them create a virtually future-proof platform where various FinTechs and forms can be connected in a self-contained ecosystem that uses the bank as “hub”.
A good use case is using an API platform to digitise the lending process. A car loan could be fully digitally approved in just a few minutes using XS2A PSD2 Compliance, Account Analytics, Credit Ratings, Digital Signature, and Video Legitimation APIs to provide the lender with all the data they need to make a decision on the applicant’s creditworthiness and to sign a legally binding contract. All actioned without creating unnecessary friction for the customer.
Moving from products to platforms
In almost all areas, companies are increasingly switching from products to platforms, thereby changing the entire market, especially for established market participants.
A glimpse into the recent past of other industries, such as telecommunications, shows the significance of this: Nokia and Blackberry are now a shadow of their former glory, their technology and products supplanted by Apple and the Android ecosystems. Here, triumph was less about operating functions than the thousands of different features and programs available from the App Store, where external developers create value for the end customer.
Within banking, the rise of platforms is largely driven by three technologies; the cloud as a permanent storage location; global networking through social apps; and mobile, which brings banking to where the customer needs it.
To transform their products into platforms banks must look really closely at whether their strategy aids development in these key areas:
Connectivity: How easily can services be integrated in the backend?
Attraction: How strong is the attractiveness of the platform for participants – both service providers and consumers
Ecosystem: To what extent does the platform promote exchange and shared value creation?
The following diagram shows how ndgit enables platform based Open Banking and Digital Ecosystems.
Pioneers are already accelerating success
Banks must begin to accelerate their Open Banking technology now or risk getting left behind. Already we are seeing forward-thinking banks coming to market with solutions that will fast track them on the road to success.
A great example of this is Hypothekarbank Lenzburg’s (HBL) Open Banking project, which shows how a platform can be realized in a short time and using an existing IT system. This enables FinTechs and other partners to retrieve their data about HBL’s banking products via standardized APIs and trigger customer-related processes in the bank. HBL has now connected its own digital ecosystem and numerous FinTechs, including Neon and Contovista.
As the first bank in Switzerland, HBL is now able to offer customers attractive added-value services, thus increasing customer loyalty and generating additional revenue through commissions from the affiliated FinTechs. The interface platform, which is based on the core banking system of HBL, comes from ndgit, Europe’s number one provider for API platforms.
This past year has shown that, whether investing in new technology or using APIs and middleware to achieve more with what they already have, more banks are placing Banking as a Platform at the top of their agenda. Signifying beyond doubt that the Open Banking financial revolution is not just gaining momentum but is already accelerating the transformation of banking models and services forever.
This article is an excerpt from the topic dossier “Mit der Plattform ins neue Banking-Zeitalter” (German) of the Bankenforen. Download the complete Bankenforen dossier (German) here.
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