We are witnessing a new era of banking with the emergence of technology powered models that put the customer and their requirements at the heart of the business. Application Programming Interface or APIs are driving this new wave of banking, with significant push from regulators for banks to adopt open banking models. Amidst rising competition, increasing market volatility, and changing customer expectations, API-based open banking models offer banks the opportunity to partner with fintechs, explore new banking strategies, and give customers a hyper-personalized experience. Given the significant regulatory push to adopt open banking models, banks are rushing to move to API-based banking strategies. But most banks today have not considered ways in which they can monetize their APIs. As banking revenues come under pressure banks must consider API monetization strategies that are aligned with their organization goals, as well as partnership models.
The Bank’s Role and Objectives in an API Economy
Oliver Wyman estimates that each bank could add USD 50-75 million to their revenues annually by effectively monetizing their APIs. Banks simply cannot afford to ignore this potential revenue stream. They must now focus on understanding their API strategies and formulating revenue models that work for them. Banks have also been working with API models for a while, and based on their established business models they can consider leveraging some newer monetization strategies. The question now is how they perceive their API strategy and what their long-term goals are. There are one of two possible API approaches they could explore and each one has specific monetization strategies to be leveraged.
- The Bank as a Service Provider
The first API strategy that banks can operate with is using a service provider model. In this they don’t own the customer journey but provide their APIs to third parties to consume for their business. For instance, a bank can open their APIs to a financial technology company that facilitates money transfers across the world and across currencies. Every time the fintech accesses the bank’s APIs they will be charged. Currently, most banks that operate with this model provide their API access and data free of cost, missing out on a significant revenue generation opportunity.
There are a few ways in which banks can monetize this API model. First, they can implement a subscription-based model. Here a fintech that taps into a bank’s APIs regularly can pay a subscription fee for the access. But not all fintechs have a high usage of APIs for their service or product. For example, a fintech company involved in foreign exchange may not require access to the bank’s APIs frequently. In such a case, the bank could use the second monetization strategy of tiered pricing, where the fintech can pay a certain amount of money for a fixed number of API access. If they access APIs more than this fixed number, then they would have to pay more to the bank. A third model is that of the freemium where banks offer free access to APIs for some basic services and charge their partners for more complex use cases.
- The Bank as an Orchestrator of an API Ecosystem
The second API strategy is one where the banks own the customer journey and orchestrate an ecosystem of partners and third-party service providers to meet a wide range of customer requirements. They offer better customer experience, focus on value creation, and increase their own wallet share as well. For example, a bank may have an application where in addition to banking services customers can make investments, buy movie tickets, and order groceries. The application is clearly owned by the bank, and they manage the API orchestration. In this model, banks can monetize the API service on a revenue sharing basis. If a customer buys a certain product or service using the bank’s platform, then the revenue will be split between the service provider and the bank based on pre-determined terms.
The Complexities of a Monetization Strategy
Banks must start by identifying the role they want to play – that of a service provider or an orchestrator of a system delivering value to the customer. This will form the foundation of their monetization strategy. Banks aiming to be an orchestrator of an API-based ecosystem must explore revenue sharing models. But it is important to note that APIs cannot have a standard charge. They must consider differential pricing of APIs based on not just the volume of business done by a partner using them, but also the long-term value of the engagement. Any API monetization strategy is a complex process in which banks must consider several factors such as cost of sale, cost of infrastructure, as well as third-party costs across multiple partners and multiple engagements. Each of these cost factors has a significant bearing on pricing and ultimately on the revenue sharing model agreed upon by all parties concerned.
The Value Delivered by a Powerful Revenue Management Platform
There is no question that banks must focus on monetizing APIs at this point. But it is also fairly evident that this is a complex process, requiring deft and seamless management of various factors such as differential pricing, Service-level Agreement (SLA) management, and partner revenue sharing management. Banks must consider implementing a robust, cloud-powered revenue and ecosystem monetization solution that can manage the entire API ecosystem to ensure monetization strategies are implemented as per the decided model. Such a platform can also ensure comprehensive partner management – onboarding, financial settlements, multi-business model support, automated computation & settlement of revenue share across the ecosystem, and effective monitoring of usage with real time insights on revenue, cost, and profitability. With such a platform, banks can focus on driving innovation and a value-driven customer experience.
Most banks are adopting open banking strategies because of increasing customer demand and regulatory pressure. But as the business of banking gets tougher because of ongoing market disruptions, they cannot afford to ignore the lucrative revenue stream offered by the API economy. The open banking model is no longer unfamiliar, and they must now move to the next stage of monetizing their APIs based on their objectives and vision for their role in this ecosystem.