BBVA API Market
The bankers of the 21st century no longer look like the ones depicted in 19th-century caricatures, with their suits, ties, paunches and cigars. They now dress casually, they talk about the “mobile experience” and are obsessed with speed, something which would have seemed vulgar to their predecessors many decades ago.
Banks are undergoing radical changes, as can be seen by the almost constant use in their forums of terms such as APIs, blockchain, big data, fintech… This is a new vocabulary for a new age in which we are seeing a new business model. We still don’t know exactly what it will be like but we already have an idea of its general features. That was the theme discussed in much of the Fintech University, a course organized by BBVA in its Innovation Center and attended by several leaders of this global revolution.
First premise: no one is going to replace the banks –banks are going to adapt to a new world; but it won’t be easy, and banks that are unable to do so will simply disappear.
How should they adapt? By placing concepts that traditionally have nothing to do with banking activity at the core of their strategy. Banking began in Mesopotamia around 4000 years ago, but speed and usability are now crucial. These days very few bank customers go to their branch office; very few customers are willing to wait days for a financial transaction. Anyone who can’t make it fast and make it easy via mobile devices should go into another business.
Some of the pillars of the business change, but not all: security and trust continue to be two indispensable attributes for banks. According to Chris Skinner, one of the world’s top financial experts, there is one question behind every financial transaction: “Who are you? Without secure digital identities verified by secure institutions like the banks themselves there is no possible activity”. This is however a new concept of security, “which no longer depends on pistols, but on mathematics”, says Ben Milne referring to encrypted information and the algorithms that sustain the fintech framework.
Milne himself is a good example of where the sector is heading. Born in the United States 32 years ago, nobody would guess his profession from his appearance: jeans, trainers, black T-shirt and a hipster beard. He looks like a graphic designer, and he has the confidence of rockstar, but he works in finance. In 2010 Milne created Dwolla with one very clear goal: to build the best platform for moving money.
Today his online payments company without credit cards, a direct competitor of Paypal, has captured 32 million dollars of investment and expects to process transactions for a volume of 2 billion dollars this same year. Companies like his, he claims “are not going to replace banks, but accelerate their transformation. Banks are at the center of everything, and sometimes we underestimate something that’s really evident, like how money starts off in one bank and ends up in another”.
The financial system will continue revolving around the banks, on a model based on speed, security and ease of use. But what will these banks be like, apart from being more agile? In the opinion of Casey
Kuhlman, CEO of Eris Industries and an expert in the legal implications of blockchain –the technology which serves as the basis for the virtual currency bitcoin–, it will be essential to create ecosystems in their businesses, “because it’s becoming more and more difficult to create value individually. But these ecosystems will take some time to take shape, they won’t just spring up overnight”.
APIs will be key to the development of financial products and services, so much so that some see banks like a type of car manufacturer that will assemble parts (in this case products and services) made by others. This is the view of Mark Mullen, co-founder of the British company Atom Bank, one of the so-called ‘neobanks’: “The banks of the future will be dedicated to assembling and reassembling continually, thanks to technology. The consumer doesn’t care who the products and services come from: when you get into a car you’re not thinking about who made the suspension”.
The banks of the future will be dedicated to assembling and reassembling continually
All this new world must be regulated to avoid systemic abuse and risks. The problem, as Milne highlighted, is that “innovation is global and fast, while regulation is local and slow”. John Collins, an expert in financial regulation who has worked with the United States government, took a closer look at the differences between two worlds that have to understand each other. “Technology deals with short time periods and seeks risk; for governments, the periods are much longer and there is risk aversion”. However, Collins sent an optimistic message: “We’re heading for a much closer convergence between technology, banking and government. They will all work together and I believe that the future involves a global legislation tailored to fintech companies”. For the time being, the most important change in the legislation is the approval of the European directive PSD2 (Payment Service Directive), the second European regulation on payment services which must be transposed to the legislations of the member countries by 2018 at the latest.The regulator aims to advance the creation of a single market for electronic payments and will give the TPP (third-party payment services – payment initiators and information aggregators) access to customers’ accounts. This will allow them to offer their services through the banks’ own infrastructure, a fundamental change that is already becoming widespread thanks to APIs.
The new regulation will eliminate entry barriers and increase competition, which will be an even greater incentive for banks to reinvent themselves digitally: the revolution has begun, and as they say, “If you’re not at the table, you’re on the menu”. The more dynamic banks are in no doubt.
Technology deals with short time periods and seeks risk
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