Banks have a nearly one-size-fits-all product model which leaves value on the table. For instance, when a bank releases a new online or mobile banking system, it will often be an identical system, with the exact same interface, for all clients of a particular segment. But oil companies like Chevron have different banking needs than do retail companies like Home Depot, even though they may be the same size. This type of mass standardization and lowest-common-denominator mentality applies even more to the retail customers — usually there are just two online and mobile banking options: one for normal customers and one for private wealth clients.
Technology that is new to banking is ushering in an era where mass customization is feasible, safe, and profitable.
Banks of all sizes have spent the last half-decade cleaning themselves up in the wake of the financial crisis. They have been implementing new requirements from the European Banking Authority, the United States Consumer Financial Protection Bureau, and other regulators, as well as adapting to Basel III and other new capital requirements. Many have built new risk management and compliance frameworks in response to sector-wide malfeasance.
Now, though, banks are refocusing themselves on growing top-line revenue. Many banks have organized new teams focused on revenue growth through “the innovation agenda” and “customer experience”. Technology is understood to be a potential driver of the sought-after revenue growth. One such technology will be “API banking” – a concept that, though it seems to have achieved buzz-phrase status, represents a new and revolutionary way of thinking about bank services and how to deliver them to customers.
API refers to the Application Programming Interface: the standards and protocols which allow outside software developers to build applications on everything from Apple’s iOS platform to Facebook’s social graph. This technology and the attitude of open development that goes along with it are now second-nature at Silicon Valley’s leading companies. Apple, Facebook, Amazon, and others capture the imagination and skill of tens of thousands of software developers through an open platform and simple profit-sharing.
With their new compliance and risk management systems, banks are now positioned to open themselves up just as technology companies have. They can build similar platforms for innovation and customer-facing customization. These financial innovations will not be used to obscure risk (as most innovations of recent years have done) but rather to improve how customers, both commercial and retail, experience banking.
We are entering an era of technologically customized banking. Trusted risk-and-regulation-sensitive financial institutions will provide the core financial services via APIs. Then they will leave many of the last-mile implementation details to trusted partners and software developers. Millennial bank customers could have their customized mobile banking with special tools focused on paying down their student debt, while Boomer customers would have an entirely different online banking suite, which could be focused on either building up or spending down their retirement, depending on individual circumstances.
Developers, and the technology that they bring, can make the unprofitable profitable for the platform provider. Just as it might not be profitable for Apple to build and then acquire customers for a variety of bird-focused games — Angry Birds, Flappy Bird, Tiny Wings, et al. — it is also not profitable for banks to build the skill sets necessary to acquire and optimally serve every potential customer. With API banking, specialized third-party developers can profitably provide services that banks couldn’t afford to build, by giving both banks and the new developer companies access to swathes of the banking market, including the underbanked.
As in the Apple App Store, bank clients will be able to find and experience banking in the manner that makes the most sense for them, in a co-branded and protected environment. Customer satisfaction increases with a more personalized user experience, and revenue increases as banks are able to target and display their offerings more precisely.
Crédit Agricole and Deutsche Bank are the only major banks with APIs and app stores in the market right now. But APIs are one of the best and most talked-about ways to increase top-line revenue in the face of decreasing fee and interest income. Many banks are working toward releasing their own this year.
Amid this renewed focus on innovation and customer experience, using APIs and the mass customization they foster is just the first of many lessons that banks will learn from technology companies in the coming years.
Zac Townsend is the president of Standard Treasury, a silicon valley startup that builds next-generation technology for banks.Like This Post