I’ve spoken to a few people in the last week who are in the financial services industry, and it is striking how regulation of the industry is acting as a massive inhibitor to innovation in that industry. Given the seismic impact of a very liberal approach to regulating banks over the past half decade, this is probably a good thing.
However, it doesn’t prevent innovation from happening, and it puts the traditional financial institutions at a huge risk of being marginalised as services that use their data (but aren’t themselves financial institutions) become our first port of call.
Let me give you an example. In running my business, one service that I use quite extensively is the expenses app Expensify. Expensify allows me to manage my business outgoings, scanning receipts and then reconciling against my spending on my American Express card. Amex provide an API service through which Expensify pulls my data. As a result (and because Expensify provides functionality with which I can actually do things with my data, rather than just look at it), I never look at the Amex site any more. American Express have been intermediated. My needs for an alternative credit card provider now have become their ability to provide open APIs that Expensify can read (interest rates aren’t important to me because I settle the balance every month).
This seems akin to what’s happened to a large extent to, say, mobile phone operators in the age of the smartphone. Whilst once our brand loyalty was to Orange or Vodafone or O2, now our brand allegiance is to iPhone or Samsung or Google. Meanwhile, mobile operators run either a race to the bottom in terms of pricing (see O2’s GiffGaff), or a challenging world of “experiences” to try to keep customer loyalty. The heavily regulated London taxi market is going through similar pain at the moment, witnessed by the furore around Uber.
The pressure for banks and other financial institutions to provide APIs to customer data will be relentless – particularly because their own ability to provide value-added functionality appears to be so hamstrung by the regulators. Opening up data, though, turns underlying banking into a commodity – and if the way in which your customer interacts with your commodity service is through third parties, you ability to build loyalty and retain customers becomes incredibly difficult.