Cloud-based technology is enabling the cheaper creation and development of businesses via APIs – and regulators are keen for banks to get on board the efficiency bandwagon, writes Chris Skinner.
I’ve recently seen some banks nurturing new businesses that are relevant to their core banking services. Similarly, I’ve seen regulators encouraging fast-track growth for new companies that can bring efficiencies into banking. This is a dramatic turnaround from 10 years ago. So what has changed?
In the past decade, we have seen a lot of new businesses growing from the base of cloud through APIs (application program interfaces) into fast-track growth. This is the difference. Ten years ago, if you were to start any new banking or finance business, you had to invest heavily in technology. This was expensive and would need to be run in-house by a large, internal team. That was a massive barrier to entry for any company looking to start a new service in finance, as it would require millions just to develop and launch the service, let alone scale and maintain it.
It was around this time – 2006 – that cloud-based services began to appear. Beginning with Software as a Service (SaaS) and extending into platforms and infrastructure, it has become common to pay as you go for technology services.
Innovations cut costs
Other innovations, such as APIs, are also driving down costs. APIs are a core part of open-source developments, where you can focus upon one thing you do well and then just plug and play APIs from multiple third parties to build your capabilities.
APIs have become a common technology in finance, for example, to automate a specific function such as a mobile payment. APIs allow this mobile payment to be processed using open-sourced and standardised software codes; in other words, a start-up does not have to hire developers to process mobile payments, they just plug in a third party’s API.
This is how many firms are launching new services. For example, Apple Pay offers its mobile wallet through integration of bank code and the checkout capabilities of Stripe. Currency Cloud offers global currency trading at very low cost through APIs and cloud integrating into banks and fintech start-ups.
These developments are already making a dramatic difference in financial services, with firms such as PayPal and Stripe seeing exponential growth, as well as the emergence of new businesses as platforms, such as Uber and Airbnb. These companies exist primarily because of the scalability of cloud services, which allow rapid growth without the cost of purchasing internal computer systems, and the ease of building the functionality required for growth using APIs.
There are other areas impacting the structure of finance, specifically the simplicity of mobile apps to create device-specific processes that are idiot-proof. I remember presenting at a conference when the iPad came out and postulating that most trade finance and foreign exchange functions in treasury services could be packaged in a few apps so that anyone could perform complex netting and pooling processes with no training. I was laughed out of the conference – and yet today, that’s exactly what some banks offer corporate clients.
All this illustrates the new growth economy – the key point being that anyone can create a powerful product in a start-up company for a few dollars by using the open digital ecosystem.
Regulating for change
The challenge for financial institutions is how to respond. Large entities have invested heavily in technologies that pre-date this open, digital ecosystem, and moving to it is not easy. It means taking a raft of existing structures and redeveloping them for the open-source world. Equally, it takes a cultural change to move from large, inflexible internal structures to small, nimble and open structures. But it will happen, because the regulators see advantage in making it happen.
Between Open APIs in European regulations, such as the Payment Services Directive 2, and the Open Banking Initiative introduced in the UK, the financial world is opening to the internet – whether the incumbent institutions like it or not. How is your bank responding?
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
