The banking industry is facing new kinds of disruptive systems. For most financial institutions, this has led to decisions on strategic changes and their implementation. A big concern that however persists is how the financial inputs into cost centres can be minimized, or even better, how cost centres can be transformed into revenue generators.
One of the most demanding cost centres financial institutions cannot do without in this age is the IT department. This article explores how the IT cost centres in financial institutions can be transformed into profit centres using the opportunities created by open banking.
In banking, collaboration between the traditional players like banks and the tech savvy Fintechs bringing a slew of new apps to market is key. Increasingly, open banking will underpin that collaboration. Open banking refers to secure and digitised data sharing of bank users’ financial details with financial third-party providers (TPPs) with the permission of bank users. Open banking occurs on online banking or mobile banking platforms through application programming interfaces (APIs) which gives TPPs efficient access to financial information which are used for innovative purposes that better bank consumers’ experiences. Several of these TPPs use this data: to make decisions in terms of giving financial advice, credits and loans; create innovative systems that enhance banking experience; enable payments and money transfers; and complete transactions for online based investments.
In a report jointly written by Microsoft, Linklaters and Accenture in 2019, the authors noted how open banking can be employed by organizations to increase their profitability and even to reduce the financial commitments given to services with high financial costs.
International Banker stated that open banking is rapidly becoming global given its adoption by several countries and the increase for online banking during Covid-19 which led to a wider adoption of open banking. In the first quarter of 2021,The United Kingdom’s Open banking official website recorded 300 Fintechs and providers using open banking.
Open banking offers huge advantages and opportunities that banks can use to minimize their financial commitments to their IT departments and also to turn their IT departments into revenue generators. PWC stated open banking has the potential of creating at least £7.2bn revenue by 2022.
One of the biggest cost challenges in banks with focus on Nigeria banks is connecting with other banks. A bank’s IT department is often heavily funded to maintain connectivity within the bank and with other financial institutions. However, because individual financial institutions use disparate frameworks and interfaces, it is often time-taking and costly to maintain interbank communications. Open banking helps as a cost saver for TPPs, banks and Fintechs in this regard. Open banking makes data across different banks accessible which does not only reduce the cost of communication but also reduces the need to communicate since the pool of data is openly accessible.
The foremost way banks can profit through open banking is creating their own open banking APIs and making it accessible to Fintechs and other TPPs. The increasing demand for open banking brings a surge in the call for APIs. In the UK, the number of API calls increased from 66.8 million in 2018 to 5.8 billion in 2020. IT Departments can generate revenue from their digital assets and APIs in two main ways;
- The direct way. The monetization of APIs is the major direct way revenues can be generated through APIs. Regulators have different attitudes to the monetization of APIs across the world. While some design the system to support only free APIs which fosters competition, others allow the monetization of APIs which encourage developers to optimize the performances of APIs. Banks in environments where the apex financial institutions regulatory body allows monetization of APIs can make the APIs accessible to other banks, Fintechs and any other TPPs on paid basis. In Nigeria, this is being facilitated by Onepipe, whose target is to build seamless API integration for banks and Fintech companies.
- The indirect way. HSBC integrated open banking in their mobile banking application called ConnectedMoney to allow management of multiple bank accounts from different banks owned by a single user in a single application and the application signed up more than 300,000 users in a year which brought HSBC new customers. Permata Bank in Indonesia recorded an annual growth rate of 68% from account creations through their API in the second quarter of 2020. These are examples of indirect profit creation through open banking APIs.
Another way IT departments can serve as a profit centre through open banking is through Bank-Fintech partnerships. People often talk about the competition among traditional banks, challenger banks and Fintechs but with open banking, they do not need to be ‘’enemies’’ after all. In fact, through the seamless integration open banking provides, banks and Fintechs have the opportunity to share highly profitable partnerships.
Investments into IT departments with focus on creating efficient and sustainable open banking integration between banks and Fintechs will have immense returns for both parties. A chief example of this kind of partnership is Wise (previous TransferWise), a fintech’s partnership with German neobank N26. Their partnership allows users of both financial institutions to transfer money to more than 30 different currencies without hidden charges through a mobile application. The benefits for all concerned parties include growth in client base, increased data access and increased profitability.
Beyond profits, the future of banking is open which means financial institutions must integrate open banking to stay in business. In view of this and the advantages of open banking earlier discussed, Nigerian banks, Fintechs and other financial institutions should consider implementing open banking into their systems. This will help them offset some IT department costs and even generate revenue from the department, provide better banking experience for their customers and keep them in business in this age of digital disruption in the banking and financial sector.