What banks can learn from Amazon

No one knows if Amazon will be buying a bank anytime soon, but more and more, it’s becoming a shining example of how banks themselves should be running their businesses.

Banks have embraced the idea that their own customers want new products delivered by new financial startups — the savings and management apps, authentication and security tools and money movement capabilities — but to truly put the customer experience first (as so many say they do) they should show the customers they’re here to give them what they want. That means instead of collaborating with young startups on building technology, they should make themselves a distribution channel with different financial products — just like Amazon does.

“Amazon opens its platform to hundreds if not thousands of providers of goods and services and makes it available to millions of consumers — they don’t care what you buy or from who as long as you buy it from the Amazon platform,” said Ron Shevlin, director of research at Cornerstone Advisors. “Amazon does have products to sell,” like the Fire TV or the Kindle. “They don’t care if you buy them because they still sell the iPad and everything else.”

It’s probably a little out there for banks. But more and more, changing customer expectations and an increasingly digital world are forcing banks to accept the idea of open banking platforms. But they should also bring that thinking to their actual business model.

Why a platform?
Banks today don’t care where customers buy their products, as long as they buy their products. But considering how many millions of customers they have, they don’t have that many products and services to sell to them — loans, credit cards, accounts.

In a banking context, a successful platform would be one that attracts and matches both producers and consumers. It would give people choice without friction — duplicate data entry, integration, having to paying multiple providers — create new revenue streams for banks and offer opportunities for fintech startups to scale, by reducing acquisition costs through platform participation, according to Shevlin’s report, The Platformification of Banking.

“The platform as a business model is designed to address that problem of enabling a bank to provide products and services without having to go into different partnerships and one-to-one integrations,” Shevlin said. “If you want to sell your stuff on Amazon, you sign up and you’re in. It’s easy to plug into Amazon, and that’s the concept missing in banking.”

Banks that exist today are one sided, they attract consumers and they’re the only provider of services to their customer. When it offers customers a choice of products and services, they’re bank-selected products and services. Fintech companies have trouble reaching consumers and banks have the challenge that they have this base of consumers but aren’t able to provide them with a large base of products and services.

Banks as platforms
If banks are becoming platforms, these are the earliest days of that shift. APIs are nothing new — they’ve been around for decades — but in the last year alone, Citibank, BBVA, Capital One and probably others have made their APIs open to developers in an effort to innovative better and faster.

They should also open additional revenue stream by monetizing offerings that run on those platforms. For example, a payments API that makes it easier for a retailer to do payments with a bank should inevitably bring in more payments. The bank takes a cut, everyone wins. But to be truly customer-first, the platform model shouldn’t stop at technology; banks should move their consumer-facing business to a platform model too, Shevlin said.

“All these API stores are pretty much technology-driven efforts without a lot of thought to how the business model changes,” Shevlin said. “How do we provide an interface to the consumer that shows there’s a choice? The banks aren’t necessarily adopting this or embracing the concept.”

There are some moves. In November, Citi launched its API Developer Hub. Mastercard, Virgin Money and others are already using Citi APIs to create customer solutions.

If banks today are going to stay relevant in an increasingly digital world, their only choice is to become more open. Until now, banks traditionally have been closed off, not wanting to share their secrets of the trade. It’s been an enormous cultural shift for them. Now they’re becoming more open, but it’s important to recognize there’s a fine line between providing open banking as a service and merely outsourcing innovation, said Carey Kolaja, global head of product at Citi FinTech.

“Our move to a developer hub and an open banking strategy is by no means a reflection that we’re outsourcing innovation or that banks will become the dumb pipes on which a transaction sits and not add value to our customers,” Kolaja said. “That being the case, we have to be realistic around why banks, including Citi, need to embrace new strategies with some of the fintech disruptors out there.”

It might seem we’re entering a world where banks become the platforms that fintech startups plug into so customers can use those services more easily, more securely and with more trust — Digit and Qapital for savings, Acorns and Robinhood for investments, maybe a credit monitoring app like Credit Karma or NerdWallet, and of course, the Venmo, Square Cash and other payments services.

Each of these apps uses APIs to plug into banks, that’s what allows users to interface with their bank account and register those details in order to open accounts with these various apps. It’s fun for now, the experimentation phase, but it’s not sustainable, Kolaja said.

“I don’t necessarily believe that in the next five to 10 years we’ll end up in a place where consumers want fragmented financial lives across multiple apps, nor do I believe some of these fintech disruptors will be able to sustain their existence from a financial and capital perspective without broadening their reach into other categories,” she said. “There’s a convergence that’s already starting to happen.”

Banks can only innovate so much
Customers don’t care about that distinction between open banking and outsourcing innovation. They just want what they need and for that service to come as easily and affordably as possible. That banks are becoming more open with each other on a technology level doesn’t mean they’ll apply the same thinking to their business model. Considering the size of their business, the existing organizational structure and the fact that they are making money, it is highly unlikely a bank will adopt this business model.

“When you look at what has prohibited big institutions from being successful — besides process and not being willing to take risks versus being able to take risks – solving for a simple customer experience with minimal friction has been problematic,” Kolaja said.

The more likely scenario is that a tech giant, like Amazon or Alipay, will enter the arena to sell consumers financial services, and existing banks will compete with those platforms, Shevlin said.

“The large bank is simply not going to become a platform,” he said. “They’ll go through all their technology exercises by opening APIs, but they’re not opening up, they’re not selling additional products or services or creating an environment.”

A bank could theoretically offer its own services and be its own banking platform, said Tom Eck, IBM’s chief technology officer for industry platforms. For example, if it were a Chase banking platform, it would expose Chase services and could open all up as APIs, making it easy for developers to consume those APIs on a Chase-specific platform.

IBM has a similar vision for an Amazon-like marketplace. It’s not consumer facing, but it’s a cloud based platform for financial services on which app developers and data scientist can come and build apps. Eck described it as a one stop shop ecosystem that includes fintechs startups, banks and insurance companies.

“A bank could both be a seller of services while it’s also consuming services from some third-party fintech. In addition to IBMs own assets, we’re focused on attracting fintechs, banks credit card processors… You come to ours because you know you can come and access all these insititutions. You see the catalog, can subscribe to these services in one place and then we make it easy for you to build on our platform consuming those APIs.”

It’ll be a significant additional revenue stream when it starts to monetize offerings that run on that platform — effectively a marketplace fee. It will also bring value to the platform itself.

“There’s an economic incentive for the platform operator because it typically extracts the seed for the use of services. IBM is a great new marketing and distribution channel for them, and it takes very little work to get them into the marketplace.”

How to build your own bank

banking apis

With technologies proliferating, many financial institutions see the writing on the wall. Finance has been characterized by the prominence of the institution. Bank brands, worth hundreds of billions of dollars, are powerful and institutions grew to own their value chains.

That’s changing — some financial institutions are taking the step of moving their brands to the background, exposing their underlying technologies to other firms in the financial system so they can build applications. Much like Amazon has done with Amazon Web Services, turning its e-commerce infrastructure inside-out for technology companies to use, a few banks are doing the same in a move some are calling the platformification of banking.

While it may be too early to fully build a bank by mashing up different types of financial services and products, this future isn’t too far away. Large financial institutions are opening up their application programming interfaces (APIs) so that fintech startups and other partners can connect directly to their financial guts. This allows firms to specialize, focusing on what their real value is, while piggybacking on top of existing technologies.

Banks with APIs

The Spanish bank with reach into the U.S. market has been active in adopting new technologies and embracing the fintech firms creating them. In fact, the firm has expressed a goal to become the AWS of banking, comfortable in providing the technology and transactional infrastructure for its competitors and partners. “Shamir Karkal, CFO and cofounder of Simple, has left to become our head of our global, open API platform,” recounted BBVA’s Scarlett Sieber, senior vice president, global business development, new digital business, on the Tradestreaming podcast. “In this case, we’re not directly investing in, acquiring or partnering with outside companies but we’re exposing our banking plumbing to the fintech community at large.”

BBVA offers an API marketplace for its European and US business units. In the US, the bank’s Compass unity provides connectivity for pre-authorized users to access key account data. It also offers an open security hookup that application developers can integrate to have BBVA clients authorize access to BBVA account information in their name. In Europe, the APIs go further, providing data on card purchases, identify verification, and money transfers.

Silicon Valley Bank
In August 2015, technology industry bank SVB acquired a fintech startup, Standard Treasury. The startup had raised a couple of million dollars and was working on developing APIs for banking and that activity, the technology, and the team that developed it, was brought in-house at SVB.

“We view API banking services as a natural progression in how our tech-savvy clients want to work with their banking partners and service providers,” said Bruce Wallace, chief operations officer of Silicon Valley Bank. “API banking services are a key part of our product delivery and service platform strategy. The Standard Treasury team’s vision for the future of API banking services aligned perfectly with our vision, so it’s exciting that we are now joining forces to deliver that vision to the market.”

This makes a lot of sense for the bank’s technologically-savvy clientele. SVB plans on rolling out its API marketplace in the near future.

APIs for accelerators, partners

Some banks have created APIs for just a select group of partners. They’re not necessarily interested in opening them widely for general use. Instead, they’re a quick and easy way to get vetted entities on their platforms. Barclays’ Developer Network (BDN) is the UK bank’s offering for approved firms to build applications using bank data and infrastructure. Barclays uses BDN in conjunction with the 13-week accelerator it runs together with Techstars. Participating startups in 4 locations (London, New York, Cape Town and Tel Aviv) get access to BDN in addition to working with decision makers at the bank and a group of mentors.

RBS has taken a similar approach to Barclays. The RBS API was made available as part of the Open Bank Project, an open source API and app store for banks. RBS uses its API as part of hackathons the bank sponsors.

Startups in the banking API business

Startups are helping encourage the use of APIs and they’re doing it in different ways. Technology firms like Plaid, which has raised almost $60 million in venture capital, are developing banking APIs to power developers of financial services applications and help them connect with user bank accounts. Developers can integrate to banks using Plaid and get transactional and account data from various financial institution.

Solaris Bank out of Germany takes a different tack than Plaid. It has a German banking license and was built from the ground up with the idea that it would power an ecosystem of financial applications. Solaris developed its banking as a service (BaaS) platform to eventually provide a full range of traditional banking transactional services, from a licensed banking entity.

A proving ground for pilots with fintechs

Not all banks are comfortable exposing their data. This reluctance makes it hard for banks to partner with startups, slowing down the innovation cycle. It’s a catch-22: banks prioritize partnering with proven technology providers but they themselves can’t prove the technology until they’ve negotiated a partnership and created a dedicated testing environment for a pilot.

“Startups need to find a relevant financial institution, convince it that its solution works, and get it to build a dedicated testing environment,” said Toby Olshanetsky, co-founder and CEO of fintech startup, prooV. “In practice, this is extremely difficult and as a result holds back the entire global innovation rollout. “The end result is that in many financial firms, there’s a huge backlog of projects waiting to get off the ground.”

prooV is creating a vibrant, compliant testing ecosystem with its pilot-as-a-service, enabling incumbent financial institutions and financial technology providers to quickly launch pilots together. Using Amazon Web Services, the company runs a remote server to simulate a large firm’s data that technology firms can plug into and use to approximate actual pilot results. The technology comes with predictive analytics to determine how a new solution would perform in a production environment. It’s like a banking and fintech Petri dish.

While prooV is active in various sectors, the company is finding a sweet spot in financial services. IsraCard Group, Israel’s leading credit payment conglomerate, faced a conundrum: it wanted to better tap into the local fintech startup environment but was hesitant given the strain of running multiple compliant pilots. prooV ran one proof of concept project and the bank is now ramping up with more.

“Within less than 3 months Isracard embraced the prooV platform so enthusiastically that it’s now running 32 simultaneous RFPs and is set to achieve in months what could have taken 3 years,” Olshanetsky explained.

APIs and other new technologies have set off an increasingly collaborative partnership environment that enables banks and upstarts each to do what they do best.

Photo credit: SomeDriftwood via Visualhunt / CC BY