API banking is a real win-win situation for banks and FinTechs. Many financial institutions in Europe and Germany are approaching the issue with caution, yet at an accelerating pace. PSD2, the EU’s revised Payment Services Directive, is bringing momentum to the banking world since the legal framework for data exchange via banking APIs has now been established.
On the one hand, emerging start-ups that focus on digital transformation and radical customer focus reap the benefits of this. On the other hand, new digital business models with access to new markets and target groups are opening up for established financial institutions.
All players must recognise that the growing dynamic of the market can be attributed to a strong technical basis: banking APIs. We have looked through international studies in great detail for you and want to present some important figures, data and facts that are certainly not yet representative of the European market, but which give an overview of the most important trends in API banking.
Customers use more and more API-based services
API banking enables financial institutions and FinTech companies to develop new banking products together. By exchanging information via banking APIs, customer and account data can be used after customer approval to develop attractive additional services and completely new innovations that are more precisely tailored to a target group.
Customers are already grateful for these services:
- 1. 27 percent rely on a combination of conventional and new providers.
- 2. 52 percent now use three or more services from new providers as a supplement to those offered by their bank.
- 3. Only 3 percent are turning their backs on traditional banks and relying exclusively on new providers.
(Source: World Retail Banking Report, Capgemini and Efma, 2017)
52 percent of consumers worldwide use three or more services from innovative FinTech start-ups in addition to their traditional bank accounts. Click To Tweet
FinTech services are booming, though most customers are choosing to remain loyal to their house bank. This presents a new opportunity for banks to distinguish themselves by providing new supplementary services in cooperation with FinTech providers.
Banks tap into new target groups via API banking
The increasing demand for new FinTech products confirms that customers gladly accept innovative banking services. With the help of banking APIs, a networked ecosystem of banks and FinTechs emerges from which banks primarily benefit thanks to faster access to new customer target groups.
- 4. 78 percent of banks rely on banking APIs to improve customer experience and to generate new sources of income.
- 5. 91 percent of banks plan to work with FinTech providers and want to grant them access to their resources and expertise.
- 6. 75 percent of FinTechs plan to cooperate with banks and provide support in accelerating market access and ensuring a focus on customer experience.
(Source: World Retail Banking Report, Capgemini and Efma, 2017)91 percent of traditional banks worldwide want to cooperate with FinTechs and develop joint innovative banking services. Click To Tweet
Technical innovations for a better customer experience enable, for example, instant loans in real time, multi-banking apps or convenient voice banking – services that neither FinTechs nor banks could provide on their own.
However, collaboration with API banking as its basis accelerates the pace of innovation and particularly attracts a young audience that expects a digital customer experience – something missing in the banking market of the past.
Mobile banking reaches decisive turning point
As one of the biggest generations ever, Millennials (Generation Y) will soon dominate global economic activity because they are both an attractive target group and influential business leaders.
Their preferred interaction channel for almost everything in life: the smartphone. The banking market, which has always lagged a little behind online business in terms of mobile options, has now reached a decisive turning point. This can be seen, for example, by looking at the figures from the US market.
- 7. 52 percent of customers use smartphone banking. The penetration rate exceeded the 50 percent mark for the first time in 2018.
- 8. 69 percent of Millennials prefer mobile banking. Generation Y is the decisive driving force for mobile growth in the banking market.
(Source: PACE Insights, FIS, 2018)
Above all, it is the cooperation between banks and FinTechs that has led to this emergence of new banking services. And of course, the whole process is made technically possible by banking APIs.
Banks remain the number one security provider
Banking is a domain in which trust is of paramount importance. Since it normally involves a long-term business relationship, a customer’s decision to opt for a specific bank is one that requires careful consideration. After all, who likes changing bank? This is why trust and security continue to play a decisive role in the selection process.
- 9. 94 percent of customers are convinced that transactions through their house bank are reliable and secure.
- 10. 48 percent would trust a conventional bank more than a FinTech company.
- 11. Only 3 percent are in the other category: these customers place more trust in a FinTech company than in conventional financial institutions.
(Source: PACE Insights, FIS, 2018)
Customers place a high degree of trust in established financial institutions – a competitive advantage that banks have acquired over decades, but fostering this degree of trust is something that FinTech start-ups seem to struggle with.
At the same time, digital transformation and the arrival of new generations are changing demand patterns. There is a trend towards having a second account, and younger target groups in particular use additional services parallel to their account with their house bank that enhance the customer experience in the banking sector – from separate accounts for leisure activities to multi-banking apps and contract managers.
Banks can build on the high level of trust placed in them by showing customers that API banking is both completely secure and enables them to work with FinTechs to develop innovative banking services that combine the best of both worlds: reliability, security and decades of expertise on the banking side and digital competence, innovative power and unrestricted customer focus on the part of FinTechs.